author: Saiith:

text:
    Appeal of R. A. BARTLEY.
    Docket No. 2623.
    Decided September 18, 1926.
    1. The taxpayer entered into an agreement with his wife, on March 10,1900, which declared that each was an owner of an undivided one-half interest of all of the property and assets connected with a wholesale grocery business conducted- in the taxpayer’s name and provided that the net profits and losses thereof should be equally divided between them, which agreement continued in full force and effect during the years 1918 and 1919. Held, that a partnership existed between the parties for the years 1918 and 1919.
    2. The partnership included in its inventory at December 31, 1919, certain merchandise which was afterwards found to be .worthless. Held, that the inventory may.not be reduced by the amount of the goods discovered to .be worthless in 1920.

      Homer Bullivcm, Esq., and P. J. MeOumber, Esq., for the petitioner.

      Ellis W., Mamving, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax of $772.08 for the year 1918 and $31,494.74 for the year 1919.
    The points in issue are (1) whether the wholesale grocery business conducted by the taxpayer in his own name was a sole proprietorship or a partnership, and (2) whether the inventory at December 31, 1919, should be reduced by eliminating therefrom the cost or market value of certain merchandise included in the inventory which was found in 1920 to be worthless as of the date the inventory was taken.
    FINDINGS OF FACT. '
    During the years 1918 and 1919, and for approximately 35 years prior thereto, the taxpayer was engaged in the wholesale grocery business in Toledo, Ohio. The business was always conducted under the name of R. A. Bartley. Some time prior to 1890, the bookkeeper was a woman who later became the taxpayer’s wife. For many years prior to 1900, an agreement existed between the taxpayer and Ms wife whereby she had an interest in the business. On March 10,1900, a written agreement was entered into between.the parties which reads as follows:
    MEMORANDUM OF AGREEMENT made and entered into this 10th day of March, 1900 by and between RUDOLPH A. BARTLEY of the first part, and HARRIET BARTLEY, his wife, of the second part, WITNESSETH:
    WHEREAS, the parties hereto have been, and are now jointly interested in the wholesale grocery business and all the assets thereof carried on under the name of R. A. Bartley, the party of the second part having acquired her interest therein by her contribution to said business by services and otherwise, and also by the terms of a post-marital agreement had between the parties hereto:
    For the purpose of definitely declaring the several interests of the parties hereto in said business and the assets thereof, and to specifically provide the terms and conditions for the continuance thereof, it is now agreed between the parties as follows, to-wit: •
    First: That each of the parties hereto is the owner, in his and her own right, of the undivided one-half of all of the property and assets of every kind, nature and description connected with said business, including the stock of merchandise, accounts and good will thereof, together with all of the accretions heretofore or hereafter to be made thereto, and all other accounts, charges or indebtedness from either to the other are declared to be fully settled and adjusted to this date, and upon the basis hereof.
    Second: That the said business shall be continued, as heretofore under the name of R. A. Bartley, and under his direction and personal supervision, the net profits and losses thereof to be equally divided between the parties hereto.
    Third: The party of the first part shall be allowed, as compensation for his personal services in the conduct of said business, the sum of Eight Thousand ($8000.00) Dollars per annum, to be charged as expenses of said business.
    Fourth: The party of the second part is to be allowed to draw the sum of Three Thousand ($3000.00) Dollars per annum or more, payable monthly, provided said sum does not exceed the proportion- of net profits accruing to her for such year; if her proportion of the net profits are less than the sum herein named, then she is to be allowed to draw only such sums as would represent the net profits for such year.
    Fifth: This agreement shall continue in force for a period of Twenty-five (25) years from the date hereof, unless sooner terminated by the mutual consent of the parties hereto.
    Sixth: It is specifically agreed and made an essential part hereof, that this contract and agreement shall not terminate by the death of the party of the second part, except upon the option of the party of the first part. In the event of the death of the party of the .second part prior to the termination of this agreement, then it is understood and agreed that the party of the first part is to continue said business, at his option, and under his sole personal supervision .and control until the expiration of the term herein provided for, and without being in any manner required to account to or with the heirs, de-visees or legatees of the party of the second part until the expiration of the term herein provided for. Upon such expiration, however, then the heirs, devisees or legatees of the party of the second part or her personal representatives shall receive such interest as would have belonged to. the party of the second part had she still been living.
    Seventh: In the event of the death of the party of the first part prior to the death of the party of the second part, the party of the second part" will relinquish all her right, by way of dower or otherwise, in and to the interest of said party of the first part in the property and assets of the business herein provided for.
    This agreement was signed by R. A. Bartley and “ Hattie’’ Bart-ley, and was witnessed by Charles T. Lewis, the attorney who drew the instrument, and an employee in his office. The original of the agreement had been lost or destroyed but a copy of it satisfactorily identified is in evidence.
    Although this agreement states that Harriet Bartley acquired her interest in the business “ by her contribution to said business by services and otherwise,” she did no work at the place of business of the taxpayer within the knowledge of the bookkeeper since about 1890. The existence of this agreement was known to but few persons. The books of account do not show that Harriet Bartley ever had any interest in the business. When the business was incorporated on January 1, 1921, certain employees were permitted to subscribe for and acquire a number of the shares of stock. The balance of the stock was first issued to R. A. Bartley, and under date of April 29, 1921, an agreement was entered into between R. A. Bartley and “ Hattie ” Bartley, which provides in part as follows:
    THIS AGREEMENT made this 29th day of April, 1921, by and between R. A. BARTLEY and HATTIE BARTLEY, husband and wife, of Toledo, Ohio, WITNESSETH:
    (1) The written agreement between the parties entered into on the 10th day of March, 1900 and evidenced by written contract of that date and also the agreement between the parties entered into on the first day of March, 1921, and evidenced by written contract of that date, are and each of them is hereby cancelled and all rights and obligations thereunder are cancelled and released.
    (2) The business referred to in said contract of March 10, 1900, as carried on under the name of R. A. Bartley is now being carried on by The R. A. Bartley Company (an Ohio corporation). Common stock of said Company to the amount of $805,400 par value has been issued to and is now held by R. A. Bartley; and the parties hereto are desirous of making an arrangement whereby a beneficial ownership of said Hattie Bartley, in one-hálf of said stock shall be effected and secured to her, subject, however, to the right of said R. A. Bartley during his lifetime to vote said stock for all purposes and exercise all other rights incident thereto; and to make certain other arrangements with reference to their property rights.
    (3) In consideration of the premises, it is agreed that said The R. A. Bartley Company shall issue to said R. A. Bartley, as Trustee for said Hattie Bartley, certificates for the full one-half of said stock now held by said R. A. Bartley, viz, — for the amount of $402,700.par value of stock, to be held by said R. A. B.artley upon the trusts following viz:—
    (a) Said R. A. Bartley will account'for and pay over to said Hattie Bartley when and as received, all cash dividends paid on said stock so held in trust by him, and will receive and hold in like trust any and all stock' dividends which may be declared in respect- of- said stock so held by him in trust ; said trust shall continue "during the lifetime of said R. A, Bartley- and upon his death shall cease and determine, and thereupon said Hattie Bartley, if she survives him', shall have the right to have stock .certificates for the stock so held-in trust by R. A. Bartley issued to her directly by said The R. A. Bartley Company. If she does not so survive, then said right shall vest in her legal, representatives, which term “ legal representatives ” as herein used, shall include the executors, administrators, heirs or testamentary beneficiaries of the said Hattie Bartley. .
    (b) During the continuance of said trust said R. Á. Bartley shall have complete and absolute power and right to vote all of said stock at any and all meetings of stockholders of said company in like manner and with like effect as if the same belonged to him absolutely, and exercise all other rights incident thereto; and said Hattie Bartley will not, during the lifetime of. said R. A. Bartley, do any act or thing which may in any way interfere with the full exercise of such power by said R. A. Bartley. . ■
    (c) Said Hattie Bartley further agrees that if she should die before said R. A. Bartley, said trust shall continue as hereinabove provided, and it is agreed that in such case all cash dividends received by said R. A. Bartley subsequent to the death of said Hattie Bartley shall be paid to her legal representatives.
    Prior to 1921, Harriet Bartley was charged upon the taxpayer’s books of account with the $3,000 advanced each year to her. At the close of each year the account was closed into -.the profit and loss-account the same as the $8,000 paid each year to B. A. Bartley. The profits of the business for each year were credited to what the bookkeeper called a “ stock account.” Any loss sustained for any year was debited to that account1. No profits were drawn from the business during 1918 and 1919, and for many years prior thereto,except such amounts as were drawn by the taxpayer and his wife as per the agreement made in March, 1900; that is, $3,000 paid .each year to Harriet Bartley and $8,000 paid each year to B. A. Bartley. In statements to banks and in commercial transactions there was never any statement made to the effect that anyone had any interest in the business other than B. A. Bartley. ... ■
    Income-tax returns for the years 1917, 1918, and 1919 were made up for the taxpayer by an accountant whom he believed to be qualified to make such returns. No partnership returns were filed for any year. In his individual returns the taxpayer reported the profits of the business and paid surtaxes accordingly. In his return for 1918, he stated that his wife, Harriet Bartley, was filing a separate return. She filed such a return but did not include therein any profits from the grocery business and the return showed no tax due. In his income-tax return for 1919, the taxpayer did not state whether Harriet Bartley was filing a separate return or whether he was including in his return any income that was received by or which accrued to her. Harriet Bartley made no income-tax return for 1919, as she was advised, after consultation with the collector of internal revenue of the district in which she lived, that she had no taxable income and, accordingly, that no return was required to be filed.
    The taxpayer’s inventory at December 31,1919, was taken upon the basis of cost or market whichever was lower. Shortly after the close of the year there was a slump in the market prices of merchandise and the inventory was reduced in the amount of $43,559.14, which represented 5 per cent of the total. In February or March, 1920, the taxpayer discovered that certain items of merchandise inventoried at December 31, 1919, were worthless. The worthless merchandise was dumped during the year 1920. The merchandise thus dumped was all purchased during the war period or within from one to five years prior to January 1, 1920, and the amount for which such merchandise was inventoried totaled $12,884.95.
   OPINION.

Saiith:

Section 218(a) of the Bevenue Act of 1918 provides:

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

Section 224 of the Act requires partnerships to make partnership returns each year. The partnerships contemplated by the taxing statute are “ ordinary partnerships.” Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110.

The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. Meehan v. Valentine, 145 U. S. 611, 618. See Ward v. Thompson, 22 How. 330, 334.

Did the agreement, which was entered into between the taxpayer and his wife on March 10, 1900, create an ordinary partnership between the taxpayer and his wife? We think that it did. The statutes of the State of Ohio provide:

Section 3112. (May contract the same as if unmarried). A husband or wife may enter into any engagement or transaction with the other, or with any other person, which either might if unmarried; subject, in transactions between themselves, to the general rules which control the' actions of persons occupying confidential relations with each other. Approved March 19, 1887— Bates Annotated Ohio Statutes, Second Edition.

The basis of a partnership is a contract, and a generally accepted test for determining whether a partnership exists between two individuals is whether they have entered into a contract for the sharing of profits and losses of a business enterprise. . The taxpayer and Harriet Bartley undoubtedly entered, into such a contract. This was a subsisting valid contract existing between the parties during the years 1918 and 1919. This is shown by the fact that Harriet Bartley was paid each year $3,000 by the wholesale grocery business conducted under the name of R. A. Bartley during each of the years 1918 and 1919, in pursuance of the contract entered into in 1900. It is immaterial that the existence of the partnership was not generally known. Harriet Bartley was, nevertheless, liable as a partner to the same extent that R. A. Bartley was liable. In our opinion the taxpayer and his wife were each required under the Revenue Act of 1918 to file individual income-tax returns of their shares of the profits of the partnership for the years 1918 and 1919.

The second point raised by the appeal is the right of the partnership to reduce its inventory taken upon the basis of cost or market whichever is lower at December 81, 1919, to the extent of certain spoilages discovered of the inventoried goods shortly after the inventory was taken. Upon its books of account, the taxpayer reduced the inventory in the amount of $43,559.14, which represented 5 per cent of the total. At the time the reduction was made, it was apparently the intention of the partnership merely to take care of the decline in prices which had taken place between December 31, 1919, and the date the books were closed for that year, which was some time in February, 1920. The partnership now claims the right to reduce the inventory only to the extent of $13,688.83, of which amount $803.88 represents a reduction in the value of four items of merchandise, namely, Folgers lard at the rate of 2 cents per pound; lima beans at the rate of 75 cents per hundred weight; coffee at the rate of 2 cents per pound; coffee (R. A. B. Special) at the rate of 1 cent per pound; and $12,884.95, the inventory price of certain merchandise found in February or March, 1920, to have spoiled. The spoiled goods consisted principally of cases of canned salmon. At the time the inventory was taken no inspection was made of the particular cases inventoried and the worthlessness of the goods was not discovered until they were prepared for shipment or actually had been shipped. The evidence does not disclose just when these goods were purchased. The evidence is to the effect, however, that they were acquired during the war period and within from one to five years of the-date of the determination that they were worthless.

Although the taxing statute permits the deduction from gross income of losses actually sustained during the taxable year, we are of the opinion that the evidence in this appeal does not clearly show that the loss from spoilage claimed for the year 1919 Avas actually sustained during that year. All that it does show is that the goods were ascertained during the year 1920 to be worthless and had to be dumped. The goods may have spoiled prior to the year 1919. Indeed, some of them may have become worthless subsequent to December 31, 1919. In the circumstances, we think that the proof of loss within th'é year 1919 is inconclusive and for this reason the action of the Commissioner in disallowing the reduction in the inventory with respect to the lard, beans, and coffee' in the amount of $803.88, and in respect of spoilages discovered during the year 1920 in the amount of $12,884.95 is sustained.

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


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Appeal of REMINGTON TYPEWRITER COMPANY.
    Docket No. 2788.
    Decided September 22, 1926.
    Upon tbe evidence, held, that debts owing to petitioner by certain foreign subsidiaries which it charged off during the year 1918 were worthless and constituted proper deductions from gross income for that year; also that petitioner’s investments in corporations in Germany and Austria-Hungary were worthless on December 31, 1918, and were deductible as losses sustained within that year.

      L. P. Mattingly, Esq., Rolland L. Nutt, Esq., and James M. Gifford, Esq., for the petitioner.

      P. S. Crewe, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1918 in the amount of $513,064.95, arising from the disallowance of deductions claimed on account of worthless debts charged off and loss of investments in foreign subsidiary companies.
    FINDINGS OF FACT.
    The petitioner, is a New York corporation engaged in the business of manufacturing typewriters and typewriter supplies in the United States and the sale of its products throughout the world, with principal office in New York City.. It rendered its returns and kept its books of account on the accrual basis.
    Prior to 1918, as a part of its sales plan, petitioner caused the organization of certain foreign sales ¿companies in Germany and Austria-Hungary and acquired their entire capital stock by purchase as follows:

      Smith Premier Typewriter Company of Berlin_$85, 713. 29
    Remington Typewriter Company of Berlin_ 9, 522. 81
    Remington Typewriter Company of Vienna_¿,_ 204, 000. 00
    Remington Typewriter Company of Budapest_ 100, 000.00
    Total- 349, 236.10
    The investment in stock of the Smith Premier Company of Berlin was made prior to March 1, 1913, and had a fair market value on that date of $35,713.29. The investment m the stock of the other three above-mentioned companies was made in October, 1914. Partial liquidation of the Remington Typewriter Company of Vienna and the Remington Typewriter Company of Budapest was effected prior to 1918, leaving the taxpayer’s investment in the stock of these corporations in 1918 as follows:
    Smith Premier Typewriter Company of Berlin_!_!._$35, 713. 29
    Remington Typewriter Company of Berlin_ ■ 9,522.81
    Remington Typewriter Company of Vienna_•_ 99, 695. 64
    Remington Typewriter Company of Budapest_ 25, 809. 69
    Total —'__ 170,741.43
    In 1918, two of the above-mentioned foreign corporations were indebted to the petitioner on open accounts for money advanced and for merchandise as followTs:
    Smith Premier Typewriter Company of Berlin_$245,180. 04
    Remington Typewriter Company of Budapest_ 397, 940. 83
    Total- 643,120.87
    The above indebtedness to petitioner was created through advances or loans of money to these subsidiary corporations necessary to their organization and operation, and through the sale of merchandise to them on account at prices and on terms charged any dealers in its product, whether subsidiary or independent in character. All of these foreign corporations were organized for the sole purpose of selling the taxpayer’s product.
    Owing to the World War and the consequent blockade of the Central Powers, the petitioner was unable to supply these foreign sales corporations Avith their stock-in-trade after the year 1915. In April, 1917, yvhen the United States entered the war,, communications by the petitioner with these foreign corporations were suspended and the last financial reports received were under date of about April 1, 1917, disclosing greatly depreciated inventories. The four foreign corporations operated 56 sales offices prior to April 1, 1917, and had on hand a total supply of 8 new typewriters for sale for all their sales offices. The stock of typewriter supplies, parts and accessories was also low. The other assets consisted of a small amount of cash and accounts receivable of questionable value. From this information the petitioner believed that these assets would be wiped out by operating expenses and that the corporations would become insolvent in a very short time.
    During the year 1918, the petitioner availed itself of every means at its command to determine the real conditions confronting its foreign subsidiaries in Germany and Austria-Hungary. It sent its vice president and comptroller to Europe for personal investigation and report as to the probability or possibility of the payment or collection of the indebtedness and the recovery of its investments. He spent several months investigating conditions relating to accounts due it and to its investments. He visited London, Paris, Italy, and Switzerland and came in contact with those who were best informed as to conditions in Germany and Austria-Hungary. He returned in August, 1918. Upon the information obtained by him, petitioner concluded that the accounts due it and its investments in the foreign corporations were worthless. At the close of the year 1918, the petitioner had information that the Government of Germany maintained an embargo on the importation of typewriters, thus prohibiting these sales corporations in Germany from continuing the business for which they were organized.
    As a consequence of the war the resources of Germany and Austria-Hungary became partially exhausted. Having conceded defeat after four years of war in which they had drawn their male population up to the age of 50 into the armies, they were faced with the certainty of having to pay large indemnities. Defeated armies returning to their homes and finding women and children starving, promptly overthrew their respective governments and engaged in a factional struggle for control. Both countries were torn by revolution, their industries were paralyzed, and their supplies of materials and food were exhausted. They had no buying power. They attempted a reorganization of industries to produce and resell their own products to the world. Germany had long been the principal competitor of the American typewriter manufacturers in the European market and hence could produce typewriters for her own needs. The German corporations above-mentioned were under the control of a sequestrator for the German Government who took charge of their business in January, 1918, and continued in control until July, 1923. Upon reassuming control of its business in July, 1923, the Smith Premier Typewriter Company of Berlin began to liquidate as required by the provisions of section 64 of the German Private Limited Companies Act, hereinafter mentioned.
    These foreign subsidiary corporations were insolvent at the close of the year 1918. Under the commercial laws of Germany and Austria-Hungary, upon becoming insolvent a corporation must immediately be liquidated. Section 64 of tbe German Private Limited Companies Act, in force during 1918, provides as follows:
    The managers must apply for an adjudication of bankruptcy as soon as tbe company becomes insolvent or its liabilities are shown to exceed its assets by tbe annual or by an interim balance sheet. Tbe managers are liable to indemnify tbe company in respect of all payments made by them from this time on. Tbe provisions of section 43, paragraphs 3 and 4, apply mutatis mutandis to tbe company’s claims to indemnity arising out of such liability.
    The sequestrator’s control of these corporations prevented their liquidation as at the end of the year 1918.
    During the war these foreign subsidiary corporations, being unable to get supplies from the parent corporation, purchased old machines locally and rebuilt them for sale. A substantial part of their assets consisted of typewriter supplies of war quality, unsalable after the close of the war, typewriter parts and accessories of no value in liquidation, and of accounts receivable, payable in a depreciated currency. The indebtedness to the petitioner was payable in United States currency.
    From the information obtained and the financial conditions existing in these foreign countries, the petitioner determined in 1918 that the sale of American manufactured typewriters in Germany and Austria-Hungary would be impossible for many years, that the enforced liquidation of these corporations was imminent, and that the proceeds of liquidation would scarcely cover liquidation costs, leaving nothing for creditors or stockholders. It therefore caused the debts owing to it by its foreign subsidiary corporations to be written off as worthless in the year 1918.
    In 1922, owing to the depreciation of the mark to a point where business organizations in Germany made their computations of currency in figures of extraordinary magnitude, an unlooked for demand was created for the Wahl adding machine, the sale of which the taxpayer controlled. The Wahl adding machines readily made these computations, whereas no machine produced in Germany could satisfactorily do so. For this reason its importation into Germany was permitted. German banking houses and other business organizations having need of this machine ordered it through the Remington Typewriter Company of Berlin, and the petitioner supplied the Remington Typewriter Company of Berlin with these machines so ordered only on the condition that the Remington Typewriter Company of Berlin collect and send to this petitioner in the United States 50 per cent of the purchase price with the order, and that the remaining 50 per cent of the purchase price be paid on delivery.
    Notwithstanding these terms, the need for these machines was so great that large numbers were sold in 1922 and 1928, thus enabling the Remington Typewriter Company of Berlin to avoid enforced liquidation. This unlooked for demand for the Wahl adding machine could not be foreseen in 1918, and, but for the fact of control of the Remington Typewriter Company of Berlin by the sequestrator, it would have been forced into liquidation long prior to 1922.
    .At the close of the year 1918, the industries of Austria-Hungary were demoralized. The kronen had depreciated to a small fraction of its normal value. The Socialist party was in control of the government and laws had been enacted and were being enforced prohibiting industrial organizations from reducing the salaries or discharging any employees, and were compelling them to employ men who were employed prior to the time they entered the army, regardless of whether or not they had sufficient work or employment for them. On account of such conditions petitioner determined that it would be impossible to reenter Austria-Hungary for the purpose .of carrying on its business without subjecting itself to further losses.
    The petitioner claimed as a deduction from gross income for 1918 losses on account of its investment in the stock of these foreign subsidiary corporations and debts owing to it by these companies in the amounts set forth in these findings of fact. The Commissioner disallowed these deductions from gross income for the year 1918, claiming that the losses were not sustained, and that the debts were not ascertained to be worthless within the year.
   OPINION.

Littleton:

There is no controversy with respect to the correctness of the amount of the investment in foreign subsidiary companies, nor the amounts owing from them on account of money advanced and merchandise sold. The questions presented are: (1) Was the Remington Typewriter Company of New York entitled to a deduction from gross income for 1918, on account of debts owing to it by certain of its foreign subsidiaries, which it alleges were charged off during that year ? (2) Was the Remington Typewriter Company of New York entitled to a deduction from gross income for 1918 on account of claimed losses on investments in certain of these foreign subsidiaries?

In respect of the question of deductibility of debts owing to this petitioner, only two of these foreign subsidiary corporations are involved, one being the Smith Premier Typewriter Company of Berlin and the other the Remington Typewriter Company of Berlin. There were no debts due the home office by the Austria-Hungary Company. Section 234 (a) (5) of the Revenue Act of 1918 provides as follows:

(a) That In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(5) Debts ascertained to be worthless and charged off within the taxable year.

The statute prescribes .three conditions precedent to the allow-ability of deductions for worthless debts — (i) debts must be owing to the petitioner; (2) they must be ascertained to be worthless within the taxable year; and (3) they must be charged off within the taxable year.

It is admitted that on December 31, 1918, the petitioner was creditor on open account of the Remington Typewriter Company of Berlin, in the sum of $391,940.83, and of the Smith Premier Typewriter Company of Berlin, in the sum of $245,180.04.

In the Appeal of Alemite Die Casting & Manufacturing Co., 1 B. T. A. 548, the Board said, in respect of the ascertainment of worthlessness of the debt, “ That determination must be based on facts.” The president of the petitioner corporation testified that after making every possible investigation, he determined that everything the petitioner had in Germany and Austria-Hungary was a total loss in 1918. Germany had, by embargo, prohibited the importation of typewriters into Germany. Article 1 of the Embargo Act provides that “ The importation of goods or merchandise of any description across the borders of the German Empire, shall only be permissible with the consent of competent authority.”

The embargo has continued in force since 1918 and is still in force. In January, 1918, a sequestrator for the German Government seized and assumed absolute control of the subsidiary corporations located in that country. He was in control at the close of the year 1918 and continued in control until July, 1923.

The foreign corporations were known to be insolvent and it was also known that their stock of merchandise was exhausted, with the exception of a small stock of parts, accessories and such supplies as could be purchased locally. The last shipment of merchandise had been made by the petitioner to these sales corporations at the end of the year 1915. Financial statements received indicated a state bordering on insolvency as at April 1,1917. The vice president and comptroller of the petitioner company spent several months in Europe in 1918, investigating the financial conditions of the subsidiary companies. The reports received confirmed petitioner’s belief that the debtor corporations in Germany were insolvent in 1918 and that they would be required to liquidate under the provisions of the commercial laws of that country, but, owing to the fact that the sequestrator had taken control, bankruptcy proceedings could not be instituted according to section 64 of the German Private Limited Companies Act. The taxpayer knew that the principal asset of the subsidiary corporation consisted of accounts receivable, payable in a depreciated currency. The collection of these accounts could not be enforced and by the time payments on the accounts were eventually made the currency had depreciated to such an extent as to make them of practically no value.

The Commissioner contends that the information upon which this petitioner’s determination that these debts were worthless was based, was received indirectly. The petitioner based its action upon the most reliable information available, and this information was of the character upon which business men of sound judgment and prudence base their action in business matters. Petitioner knew that the stock-in-trade of these subsidiary corporations was exhausted, that Germany required the immediate liquidation of corporations upon their becoming insolvent, that the German embargo*, which was published in 1917, affected all countries trading with Germany, and further, it knew of the seizure of its German companies by the seques-trator of the German Government in January, 1918. Petitioner also had information in regard to the industrial conditions, and the effect thereof on the subsidiary corporations. Upon this information, it was forced to the conclusion that the debts were of no value and that it could not under the circumstances, in good faith, carry these accounts in its financial statements as assets, in the face of such knowledge of their worthlessness. If in the exercise of sound business judgment a taxpayer concludes, after making every possible effort to determine whether there is a reasonable likelihood of payment or recovery of the debt, that the debt is of no value, deduction on account of such debt should be allowed. Appeal of Egan & Hausman Co., 1 B. T. A. 556; Selden v. Heiner, 12 Fed. (2d) 474.

In connection with the deduction claimed on account of bad debts, the Commissioner contends that petitioner sustained mr deductible loss prior to the adjudication of its claim against the German Government by the Mixed Claims Commission. The claim to which the Commissioner refers is a claim against the German Government, growing out of the sequestration of the property of the subsidiary companies in Germany, by the German Government, but no such claim existed prior to 1922, when the Mixed Claims Commission was organized, and further, that the petitioner had no enforced property right whatsoever in the claim when it came into existence, or to the award made thereunder. This matter will be discussed more fully in connection with the next question. We think the debts were ascertained to be worthless ,g,nd charged off within the year and were a proper deduction from gross income for 1918.

The second question involved in this appeal is with reference to the deduction from gross income for 1918, on account of claimed losses on investments in certain of its foreign subsidiaries. Section 284 (a) (4) of the Revenue Act of 1918 provides as follows:

(a) That in computing the net income of the corporation subject to the tax imposed by section 280 there shall he allowed as deductions:
$$$$$$$
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise.

The conditions precedent to the allowance for deductions on account of losses, are (a), the assets lost must be those of the petitioner, (b), the losses must be sustained during the taxable year, and (c) must not be compensated for by insurance or otherwise. There is no controversy over the amount of the investment that it had in the year 1918. The only question is whether or not the losses were sustained on such investment during the taxable year. Under the statute, losses are deductible within the year in which sustained. Since we have already decided that the indebtedness due petitioner by the German corporations was worthless at the end of the year 1918, we believe upon the same evidence that its investment in these German corporations was likewise worthless as of that date and that a loss was sustained within 1918-

Special Regulations, paragraph 84, with regard to limited liability corporations, in force in Austria-Hungary, provides:

When the balance sheet shows that one-half of the capital has been lost, the manager must immediately convene a general meeting and inform the members of the position of the company.
As soon as the assets of the company do not cover the debts the manager must, on his own responsibility, request the court of law to open bankruptcy proceedings.

The Austria-Hungarian monarchy was dismembered at the close of the war, reducing the territory from 115,000 square miles to 32,000 square miles, and its population from 50,000,000 to 14,000,000. That which remained was divided into two separate nations. Both countries were torn by revolution, creating a laxity in the enforcement of business laws that still existed. The evidence discloses that at the end of the year 1918, these corporations operating in Austria-Hungary did not have sufficient assets to meet their liabilities. Such assets as they had were of war-time quality and accounts receivable payable in a depreciated currency. These corporations, in order to secure funds upon which to subsist during the year 1918, had contracted for the sale of approximately 500 typewriters for delivery within 60 days after termination of the war, and collected on account of such sales 25 per cent of the sales price and spent it. These sales contracts called for the payment of the purchase price in kronen, the depreciated currency of Austria-Hungary, based on a value of 20 cents in American money, whereas, at the time called for by the contract for the delivery of the machines, a kronen was worth less than five cents and was further depreciating. The stock in these corporations, at the close of the year 1918, had no value and the investments in these companies were a total loss to the petitioner.

The Commissioner argued that this petitioner has sustained no loss because it still has its investment, with the exception of the Smith Premier Typewriter Company of Berlin, which was dissolved in 1923, and assumes that, in order to claim a loss on account of its investment, the corporations must have been liquidated or the stock disposed of. The law does not in every case impose such conditions precedent to a deduction on account of losses, nor has the Treasury Department placed such a construction upon the law. Regulations 45, article 144, provides as follows:

* * * However, if stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made as in the case of bad debts.

The fact that the shell of a worthless corporation continues in business is no bar to the deduction of an investment in that corporation’s stock when all facts clearly indicate the stock to be worthless. The evidence establishes the fact that no compensation whatsoever has been received by this petitioner on account of these losses. In the fall of 1922, this petitioner filed a claim with the German Mixed Claims Commission on account of damages claimed by it through sequestration by the German Government of the German subsidiary corporations, in 1918. Prior to the proclamation of the treaty of peace between the United States and Germany, November, 1921, the United States had no right to a claim against the German Government on account of such loss, and at the close of the year 1918 there was no agency in existence with which the petitioner might have filed a claim on account of damages suffered at the hands of the German Government. The issue in this case, however, is whether the citizen or corporation, a national of the United States, as distinguished from the United States, a sovereign power, would have a claim. Upon the authority of the decisions of the Supreme Court in United States v. Weld, 127 U. S. 51, and Williams v. Heard, 140 U. S. 529, and a long line of consistent decisions and the evidence of record, we are of the opinion that no individuals or corporations had, as a matter of strict, legal, or equitable right, any lien upon any award or diplomatic settlement made on its behalf by the Mixed Claims Commission. There was, undoubtedly, a moral obligation on the United States to pay the funds received, if any, to the individuals who had suffered losses at the hands of the enemy. There was, however, only a possibility of payment — an expectancy of interest in the fund, that is, a possibility coupled with an interest. This expectancy of interest was not in existence in 1918 when the losses were sustained.

The loss sustained by the petitioner aves a deductible loss during the year 1918, within the meaning of the statute, and comes within the rule laid down by the court in White Dental Mfg. Co. v. United States, 61 Ct. Cl. 143, decided November 9, 1925, and by the Board in the Appeal of Midland Coal Co., 1 B. T. A. 311, and Appeal of George Leavenworth, 1 B. T. A. 754. Because the petitioner now has a claim which may or may not be paid, does not alter the fact that it suffered a loss in the year 1918. Petitioner should not be indefinitely held to account upon the idea that something may happen in the future, which will change the existing conditions. There can be no doubt that the debts OAAÚng to this petitioner by certain foreign subsidiary corporations were ascertained to be worthless and charged off its books in 1918 and that a loss on its investments in the capital stock of certain foreign subsidiary corporations Avas sustained within the year 1918.

Judgment for the petitioner.


author: Teussell

text:
    Appeal of RAYMOND-HADLEY CORPORATION.
    Docket No. 5128.
    Decided September 22, 1926.
    Deduction of accrued but unpaid expenses. — The petitioner during the year 1919 in accordance with its regular method oí accounting accrued and set up on its books, as a charge against 1919 business, items of interest, collection expenses, and selling-commissions. Meld, that all such items as finally adjusted were proper charges against 1919 gross income and lawful deductions for that year.

      Arthwr W. Rinke, Esg., for the petitioner.

      M. N. Fisher, Esg., for the Commissioner.
    The petitioner brought this proceeding for a redetermination of an alleged deficiency in income and profits taxes for the calendar year 1919, asserted by the Commissioner to be in the amount of $9,617.35, only a part of which is here in controversy. The errors complained of are (1) the proposed addition to income of alleged “ anticipated cash discount ” in the sum of $17,953.27, and (2) the disallowance of a deduction for commissions credited to Raymond-Hadley-Toomey Co. in the sum of $9,422.65.
    At the hearing the petitioner waived its claims as to anticipated cash discounts except as to the amount of $4,191.99.
    FINDINGS OF FACT.
    The petitioner is a domestic corporation doing business in the City of New York in connection with several affiliated companies and some foreign, agencies.
    One of these foreign agencies is a corporation known as the Raymond-Hadley-Toomey Co., incorporated under the laws of the State of New Jersey with its legal principal office in the City of New York, but whose business activities are carried on in Great Britain and other foreign countries. The petitioner is the beneficial owner of all the stock of the Raymond-Hadley-Toomey Co. The business activities of the latter company are under the management and control of M. A. Toomey with an English associate. During the year 1919 the petitioner had a large volume of foreign business. One transaction which was a part of this foreign business was a sale of a cargo of flour intended for the Government of the Kingdom of Greece. This transaction was consummated on or about December 3, 1919, and amounted in dollars to the sum of $526,224.85, and the collection of this amount was placed in the hands of the Irving National Bank on December 3, 1919. The petitioner’s account with said bank was on that date credited with the sum of $475,000. The petitioner then became obligated to pay to said bank interest at the rate of 6 per cent on $475,000 from December 3, 1919, until the full amount of $526,-224.85 was collected in the due course of business, and to pay to said bank the further sum of % of 1 per cent of $526,224.85 as a collection charge. The petitioner thereupon caused to be entered in its books of account charges against this selling transaction as follows:
    Anticipated discount_$7, 901. 27
    Collection charges_ 5, 925. 26
    And a second entry to take care o£ other possible collection charges in the amount of_ 4,126. 04
    Total_ 17, 952. 57
    There was also made at that time an entry more directly in connection with the said transaction in which the petitioner charged itself with interest on $475,000, accruing between December 3 and December 31, 1919, in the amount of $2,370.38, and collection charges in the amount of $1,975.32.
    Thereafter, in January, 1920, in connection with said flour transaction, the petitioner paid to the Irving National Bank the sum of $4,591.66 interest from December 3, 1919, to January 30, 1920, and a collection charge upon the amount of the sale in the sum of $1,-975.32. Thereupon the Irving National Bank remitted to the petitioner the sum of $48,156.07, after having deducted the two prior-mentioned items of interest and collection charges. In the adjustment of said interest it was found that of the total amount of interest for the period from December 3, 1919, to January 30, 1920, $2,216.67 was the true amount earned and accrued during the period from December 3 to December 31, 1919, and that the balance of $2,374.99 was earned and accrued in the year 1920. Thereupon the necessary and proper accounting adjustments were made upon the petitioner’s books, reducing the interest liability for the year 1919 from $2,370.38 as originally posted to the corrected sum of $2,216.67. After the above journal entries for anticipated discount had been set up to take care of items of interest and collection charges, the bookkeeper reversed the prior entry which had been made to show the possible liability to the Irving National Bank, knowing that this anticipated cash discount included the item for which he had already set up the specific liability, thus making the books show only the actual liability — collection charges $1,975.32 and interest $2,216.67, totaling $4,191.99.
    The relationship between the petitioner corporation and the Baymond-Hadley-Toomey Co., so far as relates to the latter’s business activity, is in the nature of agency. When the Baymond-Hadley-Toomey Co. negotiates sales of flour for the petitioner it gets the same commissions that it earns when it does the same kind of business for other flour mills which are competitors of the petitioner. The Baymond-Hadley-Toomey Co. is the exclusive representative of the petitioner in England and the British Isles. From the inception of the organization of these companies Toomey received a salary equivalent to 50 per cent of the net profits of that business and the balance was regularly paid or credited to the Bay-mond-Hadley Corporation as dividends on the stock, and it has carried on the business of flour commission merchants in London since that time, representing not only the Baymond-Hadley Corporation but also its principal competitors in the American market, on the same basis on which they represented the Baymond-Hadley Corporation. Under these agency arrangements, in the month of September, 1919, the Baymond-Hadley-Toomey Co. was credited on the books of the petitioner with $8,905.34, and in the month of December, 1919, there was a similar credit item of $9,939.96, a total of $18,845.30. This amount was not remitted to the Baymond-Hadley-Toomey Co. during the year 1919. On December 20, 1920, petitioner’s journal showed a credit to income of $16,868.98 and Toomey was debited $16,868.98 as compensation, the same being one-half of the amount credited in the years 1919 and 1920, representing the petitioner’s one-half share of the earnings of the Raymond-Hadley-Toomey Co. and Toomey’s one-half share as his salary compensation. Instead of transmitting this whole sum and having 50 per cent of it returned, which would entail considerable expense, it was credited on the books of account and that showed 50 per cent of the earnings of the Raymond-Hadley-Toomey Co. received by the petitioner as in the nature of a dividend. Due to the close business relationship between the petitioner and the Raymond-Hadley-Toomey Co. there is always an account current standing on each company’s books, and when settlements are made instead of remitting the amounts due remittances are made only of the difference between the debit and the credit balances. On September 21, 1920, a transfer of pounds sterling was made to Raymond-Hadley-Toomey Co. in an' amount equivalent to $6,499.08 and another transfer of pounds sterling equivalent to $9,514.07, and later a further transfer of pounds sterling equivalent to $762.82, applying against the balance then standing to the credit of said company upon the petitioner’s books.
   OPINION.

Teussell

: 1. When in December, 1919, the petitioner made a sale of a cargo of flour for foreign account in an amount of $526,-224.85, and having placed that account in the hands of the Irving National Bank for collection and received a credit of $475,000, the petitioner assumed the obligation of paying to the bank interest upon the credit at the rate of 6 per cent, and a collection charge of % of 1 per cent on the amount involved in the transaction. The amounts due under these obligations were capable of exact' computation and the petitioner in accordance with its regular accounting method eharged itself with the collection charge in the amount of $1,975.32 and interest in the amount of $2,870.38. Later this interest item was readjusted as finally settled in the amount of $2,216.67. We are of the opinion that both of these items were properly accruable obligations against petitioner’s business for the year 1919, and, having been set up on the petitioner’s books in accordance with its regular method of accounting, must be allowable deductions from gross income for the year 1919. (Cf. United States v. Anderson, 269 U. S. 422.)

2. The record shows that during the year 1919 the petitioner’s London agent for the sale of flour earned commissions in the aggregate amount of $18,845.30; that that amount was set up on the petitioner’s books of account according to its regular method of accounting as commissions earned and owing to the London agent; and that in the ordinary course of business the petitioner would during the year 1919 or thereafter have paid to the London agent the total amount of $18,845.30 and would have been entitled to a deduction from gross income for the year 1919 in that amount.

It is not important whether this method of accounting is peculiar to this petitioner or whether it is a generally recognized method of accounting between principal and agent. Section 212(b) of the Revenue Act of 1918, under which this controversy arises, provides, among other things, that “ The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer,” subject, however, to the qualification that such method of accounting must “ clearly reflect the income.” In view of the accounting methods plainly set forth in the findings of fact relating to the transactions here involved, we are of the opinion that the petitioner’s method of keeping its books of account does clearly reflect its annual income, and that the portion of the commission deduction disallowed by the .Commissioner must be allowed.

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


author: Aeundbll:

text:
    Appeals of JOSEPH Z. MUIR and GEORGE LEWIS.
    Docket Nos. 6500 and 6502.
    Decided September 22, 1926.
    1. Shares of stock valued as of March 1, 1913, for determination of gain or loss on liquidation of corporation.
    2. On January 12,1921, one partner sold his share of the partnership assets to the other partner, pursuant to an oral agreement reached in 1920, and thereby sustained a loss. Held, the loss is not deductible from 1920 income as it was not sustained until the sale was completed.

      Theodore B. Benson, Esq., for the petitioners.

      Arthur H. Fast, Esq., for the Commissioner.
    These áppeals are from determinations of deficiencies in income taxes for the calendar year 1920 of $8,510.30 for Joseph Z. Muir, and $11,365.98 for George Lewis.
    In both appeals there is presented for determination the question of the March 1, 1913, value of the capital stock of a corporation and the consequent gain realized by the petitioners on their shares upon liquidation of the corporation. In the appeal of George Lewis there is also the question whether a loss sustained on the dissolution of a partnership is deductible in the year 1920.

      FINDINGS OF FACT.
    The petitioners are individuals residing in Philadelphia, Pa.
    In 1882 Eobert Lewis began the business of manufacturing tapestry. In 1888 his son, George Lewis, one of the petitioners, entered •his employ with the promise of the right to acquire an interest in the business. In 1893 or 1894 the petitioner Joseph Z. Muir entered the employ • of Eobert Lewis under a similar arrangement. The petitioners continued in the employ of Eobert Lewis until the business was incorporated in 1906, at which time George Lewis purchased 150 shares of stock and Joseph Z. Muir purchased 120 shares, both on the basis of par value, the stock in both cases to be paid for out of dividends as earned. Subsequently, and prior to March 1, 1913, the petitioner Lewis acquired 48 additional shares and the petitioner Muir acquired 36 additional shares on the basis of book values. Of these latter shares Lewis acquired 18 on January 1, 1913, and Muir acquired 32 on the same date, all on the basis of the then book value of $200.36 per share.
    With the exception of a few shares issued to other .employees all of the stock of the corporation was at all times owned by the petitioners and Eobert Lewis. No sales of the stock were ever made in the open market.
    In September, 1913, the corporation had an appraisal of its equipment made by an appraisal company. The appraisal report was rendered on the basis of the new reproductive cost as of September, 1913, of the machinery and equipment.
    The books of the corporation show average annual earnings for the five years, 1908 to 1912, inclusive, in the amount of $31,252.65, and average tangible assets for the same period of $132,673.38.
    The corporation was dissolved on December 31, 1919, and liquidating dividends were paid the stockholders in 1920. In determining the taxable gain realized by the petitioners from the liquidating dividends the Commissioner fixed the March 1, 1913, value of the stock at $200.36 per share.
    After the dissolution of the corporation the business was conducted by the petitioners as a partnership under the trade-name of Eobert Lewis Co. In the summer of 1920 the health of the petitioner Lewis failed and it appeared that it would be necessary for him to retire from the partnership.
    About November or December of 1920 he reached an agreement with Muir whereby Muir was to purchase his interest for cash on the basis of book value, less an amount of about $29,000 to cover depreciation, and less a further amount to be determined by the inventory to be taken at the close of the year, which was finally fixed at about $50,000. The total deduction from book value, amounting to over $79,000, is not involved here. On December 31, 1920, the partnership had on deposit and on hand cash in the amount of $150,192.81. On that date Lewis retired from the business and, beginning January 1, 1921, Muir took over the assets, including cash, and assumed the liabilities and began the operation of the business as an individual. The agreement reached by the partners in 1920 was not reduced to writing.
    On January 12, 1921, Muir paid Lewis for the interest of the latter in the partnership the sum of $138,807.40 by two checks, one drawn on the Oxford Bank of Frankford in the amount of $80,000, and one on the Frankford Trust Company in the amount of $58,-807.40. On the same date, January 12, 1921, Lewis acknowledged in writing the receipt of $138,807.40, and in the same instrument, in consideration of the payment received, assigned his interest in the partnership assets to Muir and gave Muir power to collect debts due the partnership.
    On this sale of his interest in the partnership Lewis sustained a loss of $31,747.12.
    Lewis filed his returns on the basis of cash receipts and disbursements.
   OPINION.

Aeundbll:

The Commissioner has determined the March 1, 1913, value of the shares of stock in the Robert Lewis Co., Inc., owned by these petitioners to be $200.36 per share. This figure not only represents the book value of the shares as of the basic date, but also the price paid for a portion of the holdings of these petitioners on January 1, 1913. The contention is now made that the sales were not representative and that the book value does not represent the fair market value on March 1,1913, of the shares of stock.

Petitioners seek to increase the value of the shares by finding that the Robert Lewis Co., Inc., had a valuable good will which was not reflected on its books. They assert that this value may properly be determined by capitalizing at 10 per cent all earnings in excess of a return of 8 per cent on the tangible assets.

The only evidence offered in the attempt to prove good will was the average annual earnings and the average tangible assets as shown by the books of the years 1908 to 1912, inclusive. These figures, standing alone, are not sufficient evidence of the existence of good will to warrant our disturbing the Commissioner’s finding. Appeal of Rock Spring Distilling Co., 2 B. T. A. 207. Furthermore, the position of the petitioners is obviously inconsistent in asking that we compute good will on the basis of the book figures submitted while at the same time alleging that the books were improperly kept.

The Commissioner admits that the petitioner Lewis sustained a loss on the sale' of his interest ,in the partnership. The dispute arises as to whether the loss was sustained in 1920 or 1921. The petitioner claims it as a deduction from income for 1920, whereas the Commissioner has allowed it as a deduction from 1921 income.

The petitioners contend that a contract had been entered into by the partners prior to December 31, 1920, and that all that remained to be done at the close of the year was the mechanical task of taking an inventory. While it appears that there was an agreement between the partners prior to December 31, 1920, it is clear from the evidence that the transaction was not completed until January 12, 1921. In Appeal of A. J. Schwarzler Co., 3 B. T. A. 535, we said, at p. 539:

We think that a loss is sustained, within the meaning of the law, only when it is a realized loss and is evidenced by a completed and closed transaction.

■ Applying this principle to the present appeal, we are of the opinion that the loss was not sustained in the year 1920.

The deficiency for the year 1920 in the case of Joseph Z. Muir is $8,610.30 a/nd in the case of George Lewis $11,365.98. Orders will be entered accordingly.


author: Green:

text:
    GRACE T. MYTINGER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3592.
    Decided September 22, 1926.
    installment sales provisions held not applicable to transactions where improved real estate is sold for a consideration paid by a cash payment of approximately 25 per cent and notes secured by mortgage for the balance which notes are in the same year sold for cash.

      B.wry G. Weeks, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $879.09 and $4-56.25, respectively.
    The controversy between the parties is as to the amount of the net income of the two partnerships in which the petitioner’s husband owned an interest. The husband’s distributive share of the partnerships’ net income was reported by both the husband and the wife as income of the community, The Commissioner increased the amount of the net income of both partnerships with the result that the husband’s distributive share of the partnerships’ net income was increased as was the community income and the wife’s portion thereof.
    EINDINGS OE EACT.
    The petitioner and her husband were, during the years in question, residents of Wichita Falls, Tex. The husband was a partner in the firms of Staniforth, Mytinger & Walker, and the Wichita’ Falls Lumber & Building Co. In 1919 he owned a one-fourth interest in the first of such partnerships, and in 1920 he had the same interest as to a part of its earnings and a one-third interest in the remainder of its earnings. In the second partnership he had a one-fourth interest in 1919 and a one-fifth interest 'in 1920; The first partnership was engaged exclusively in the business of buying'unimproved residential lots in Wichita Falls, Tex., building residences-thereon, and selling the improved properties. The Wichita Falls Lumber & Building Co. engaged to some extent in the same business. It is the profit from the sale of residences- resulting in income to the partnership which is in controversy.
    The partnerships, by small initial cash investments supplemented by bank loans, purchased residential lots and erected residences thereon for the purpose of sale. The sales were made for part cash and the balance was represented by deferred payments evidenced by the notes of the purchasers. The notes were secured in each case by vendor’s lien upon the property sold and in some cases by a deed of trust. The cash payment received-at-the time of sale averaged about 25 per centum of the sale price. The notes of the purchasers bore 8 per cent interest. The notes as a general proposition were three or more in each case and matured over a period of from three to five years. All the notes received by reason of the sale of residences during the years in question were sold during the years' 1919 and 1920 for their face value with no discount whatsoever. All notes so sold were endorsed and guaranteed by the partnerships. This latter security which the purchasers of the notes received was in addition to the primary liability -of the makers of the notes and the properties so sold. During the years 1919 and 1920 the partnerships suffered no losses by reason of their endorsement of any of the notes sold. For the years 1919 and 1920 the partnerships reported as income the difference between the cash payment received, together with the sum received from the sale of the notes, and the cost of the property.
   OPINION.

Green:

If the notes which the partnerships received from the purchasers of the. residences and which it sold in the same year are to be treated as the equivalent of cash, then by stipulation of counsel for the taxpayer there is no controversy as to the correctness of the computation of income for the respective years in question. Counsel for the taxpayer contends that the deficiencies for the years in question have been incorrectly determined and in support of the same submits three alternative arguments, — first, the monies received by the partnerships from the sale of the notes were advances to the partnerships upon their own credit and should not be considered as sales of the notes in the sense that a profit or loss was ascertained therefrom at the time the transactions took place; second, all sales in which one-fourth or less of the sale price was received in the year of sale were installment sales and should be included on the installment basis in arriving at the net income of the respective partnerships; and, third, the notes, without the partnership endorsement, could not have been sold for more than 80 per centum of their face value and a 20 per centum discount should be applied when determining income.

We think none of the contentions of counsel for the taxpayer are controlling by reason of the facts in this appeal. The respective partnerships sold residences during the years in question for which they received certain cash payments and notes of the purchasers of the residences secured by vendor’s lien or deeds of trust — the partnerships sold the notes during the years in question for their face value. For example, if a residence was sold for $5,000, the partnership receiving $1,000 in cash and notes for $4,000, and if it sold the notes for $4,000 cash, it thus received full payment, for its property and should report as income the difference between the amount received and the cost of the property sold. Under such a state of facts, the cash received on the sale of notes can not be disregarded and the installment sale provisions of the statute applied, or a discount value allowed for the notes in question.

It is true that when the partnerships sold the notes they were also endorsers thereon, and no doubt their endorsement was the reason for their receiving the face value of the notes, but during the years in question no losses were sustained by reason of endorsement of the notes and their liability would only arise when the purchasers of the residences defaulted in payment and execution was had under the vendor’s lien or deed of trust, neither of which contingencies occurred during the years in question.

Judgment for the Commissioner.


author: GReen

text:
    Appeal of ACTON FARMS MILK COMPANY.
    Docket No. 4683.
    Decided September 22, 1926.
    Action of the Commissioner in denying a deduction for bad; debts, approved.

      J. K. Richardson, Esq., for the petitioner.

      J. W. Fisher, Esq., for the Commissioner.
    This proceeding has been brought for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $4,636.08. The proposed additional tax results from the disallowance of a deduction claimed on account of bad debts in that year of $16,365.13.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation with its principal place of business at 534 Boston Avenue, Somerville, and is engaged in the sale of milk and cream at wholesale and retail. The taxpayer delivers its product on 23 or 24 regular routes and each route has an average from 250 to 300 customers. During 1915, 1916, and 1917, the taxpayer had not been attentive to the collection of accounts. of its customers for milk and cream delivered. On November 1, 1917, the taxpayer discharged its former bookkeeper and employed another to carefully check its accounts and install such new system of accounting for the milk and cream accounts as might be found necessary. The bookkeeper employed subsequent to November 1, 1917, had the drivers of milk wagons interview the customers who were delinquent in the payment of their accounts and, based upon the reports given him by the drivers but without any investigation or ascertainment on his own account, determined that $16,365.13 represented bad debts in 1918, and made appropriate entries on the books charging them off. In some instances the amount of some of the accounts charged off had not been included in the gross sale account or other account to the end that the profit therefrom would be included in the taxpayer’s net income.
   OPINION.

GReen

: There is no evidence as to the facts or data obtained by the drivers upon which the bookkeeper determined the debts were worthless. There is no evidence before us as to the years in which the debts were contracted, name and address of the debtors, or the amoimts of the debts owed by each, or that any definite steps were taken to verify the accuracy of the charge-off.- Proof that debts were charged off in a particular year raises no presumption that they were ascertained to be worthless in that year.

Judgment for the Commissioner.

Smith dissents.


author: Geeen:

text:
    Appeal of BAINBRIDGE W. BURDICK.
    Docket No. 2966.
    Decided September 22, 1926.

      Louis F. O'Neil, Esq., for the petitioner.

      Bruee A. Low, Esq., for the Commissioner.
   Geeen:

For the years 1920 and 1921 the Commissioner determined deficiencies in income tax aggregating $3,392.51. There is in controversy in this appeal only so much of the deficiency for 1921 as arises from the disallowance of bad debts claimed as a deduction.

FINDINGS OE FACT.

Bainbridge W. Burdick, the petitioner herein, was, during the year in question, the president of the O. H. Stacy Amusement Co., of Albany, N. Y., in which company he held 70 per cent of the issued capital stock.

On July 8, 1920, the Empire Real Estate & Theatre Co. leased to the Stacy Company a certain theatre building in the City of Glens Falls for a term of ten years from the first day of August, 1920. It was provided that- for the first five years the lessee should pay in advance a rental of $500 per month and for the remainder of the term a rental of $600 per month. There -were also additional covenants by the lessee to be paid, kept and performed with respect to maintenance, repairs, redecorating, etc. The petitioner at the same time, as an additional assurance of the performance of the terms of the lease,' executed a, written agreement which contained the following clause:.

If any default shall be made therein I do hereby promise and agree to pay unto Empire Keal Estate & Theatre Company any deficiency and fully satisfy the conditions of said agreement.

The Stacy Company procured a lease of the Majestic Theatre at Albany. .The evidence does.not disclose the term or rental of this lease. The petitioner executed as to it an agreement similar to that above quoted.

The Stacy Company operated at a loss and the petitioner during the year in question advanced to it out of his own funds the sum of $47,525.12. The money so received by the company was used by it in the payment of rentals, salaries, current expenses, and the cost of repairs and redecorating.

So far as the record discloses the company was never successful. The petitioner, at the time he advanced the money to it, expected that at some time in the future it would be able to repay him. Finally, in February, 1925, the company ceased operations entirely. One lease was taken over by one Buckley and the other by O. II. Stacy, a stockholder in the Stacy Company. In neither instance did the company receive any consideration for the assignment of the leases. At the cessation of operations the company was involved in'litigation over claims against it aggregating over $5,000.

Separate books of account were kept for each of the theatres and these were produced at the trial. There is no evidence that the petitioner kept any books or that, during the year in question, he made any sort of charge-off of the amounts advanced, nor does the evidence disclose an ascertainment of worthlessness in that year.

Judgment for the Commissioner.


author: Smith

text:
    NESBITT COTTON COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1207.
    Decided September 22, 1926.
    In the absence of evidence that the action of the Commissioner in failing to reduce the excess-profits tax for the fiscal year ended July 31, 1919, under section 32S of the Revenue Act of 1918, was erroneous, his determination must be approved.

      James L. Respess, C. P. A., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the fiscal year ended July 31, 1919, in the amount of $1,151.43. The petitioner claims that it is entitled to have its tax liability determined in accordance with the provisions of section 328 of the Revenue Act of 1918, on the ground that there was an abnormality in its invested capital which worked upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without the benefit of the section and the tax computed with reference to representative corporations.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation with its office and place of business at Cordele, and is engaged in the business of buying and selling cotton. It filed an income and profits-tax return for the fiscal year ended July 31, 1919, which showed a net income of $29,253.84 and an invested capital for the year of $44,263. The income and profits tax assessed upon the return was $11,291.52. As a result of minor changes, the Commissioner has determined a deficiency in tax for the year of $1,151.43.
    In a letter addressed to the petitioner by the Commissioner under date of September 19, 1924, the petitioner was advised that after careful consideration and review by the Commissioner the petitioner’s application for assessment of its profits tax under the provisions of section 328 of the Revenue Act of 1918, was denied “ inasmuch as an audit disclosed no hardship evidenced by gross disproportion between the tax computed without the benefit of the above section and the tax computed by reference to the representative corporations specified in section 328.”
    The petitioner required large amounts of money for the conduct of its business during the taxable year in question and certain individual stockholders obligated themselves as surety on the company’s notes in the borrowing of such money. The overdraft of the company at its bank on July 31, 1919, was approximately $230,000. The average amount of borrowed capital for the entire year, as shown by an average of the amounts borrowed at the close of each month within the taxable year, was $352,390.43.
   OPINION.

Smith

: The petitioner alleges error on the part of the Commissioner in determining that it is not entitled to any reduction of tax liability for the fiscal year ended July 31, 1919, “inasmuch as an audit disclosed no hardship evidenced by gross disproportibn between the tax computed without the benefit of the above section and the tax computed by reference to the representative corporations specified in section 328.”

The Commissioner has determined the net income of the taxpayer for the fiscal year in question at $31,130.32. He has determined that the tax due is $12,442.95. At the hearing of this case counsel for the petitioner claimed that the average invested capital for the year was $22,704.20 and that upon such average invested capital the income and excess-profits tax claimed to be due was 54 per cent of such average invested capital, and that by reason of such fact and by the further fact that the business was largely done upon borrowed capital it should be entitled to relief under section 328. The petitioner has, however, furnished no evidence as to the amount of tax paid by representative corporations and this Board can not deter,mine that the petitioner has not received the consideration to which it is entitled under the relief provisions of the statute.

Judgment for the Commissioner.


author: Tkammell

text:
    THE METAIRIE CEMETERY ASSOCIATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 437.
    Decided September 22, 1926.

      Held, under tbe evidence, that amounts received by the taxpayer under perpetual-care contracts were received in trust and are not taxable profits.

      George O. E. Kernion, Esq., for tbe petitioner.

      Ward Loveless, Esq., for the respondent.
    This is an appeal from determinations of deficiencies in income and profits taxes for the fiscal years ended April 30, 1918, 1919, 1920, 1921, and 1922, in the net amount of $3,795.30.
    The deficiencies arise on account of the action of the Commissioner in,treating as income to the taxpayer amounts received by it under contracts for the perpetual care of cemetery lots.
    FINDINGS OF FACT.
    The taxpayer Is a corporation organized May 25, 1872, under the laws of Louisiana, and having its principal place of business in New Orleans. It was organized for the purpose of owning and operating a cemetery. Its original charter provided for an existence of 99 years. A special act of the legislature, however, was passed March 22, 1873, amending the original act of incorporation dated May 25, 1872, which, among other things, granted to the taxpayer perpetual existence.
    In 1908 the Legislature of Louisiana passed Act 190, which is as follows:
    AN ACT in relation to tbe conveyance, devise, use and preservation of burial lots and tombs in cemeteries.
    Section 1. Be it enacted by tbe General Assembly of the State of Louisiana, That any burial lot or tomb in any cemetery controlled by any company or association incorporated for cemetery purposes under any general or special law of tbe State of Louisiana, may, by the owner or owners, be conveyed or devised back to and held by such company or association in perpetual trust for the purpose of its preservation as a place of burial, and shall thereafter remain forever inalienable by act of the parties, but the right to use the same as a place of burial of the dead of tbe family of tbe owner and his descendants shall descend from generation to generation unless tbe deed of conveyance in trust shall provide that interments in such lots or tomb shall be confined to tbe bodies of specified persons, in which case such lot or tomb shall be forever preserved as the burial place of tbe persons specified in the deed and shall never be used for any other purpose whatever; provided, however, that in all cases where in addition to the cemetery corporation there is a special corporation or board of trustees created for the purpose of taking and preserving an improvement fund or funds for the respective cemetery, then and in such cases such conveyance in trust of burial lots or tombs to be beld in perpetuity may be made to and beld by sucb special corporation or board of trustees, upon tbe same trusts, provisions and conditions as are above provided in case of conveyances to cemetery companies ; provided further, however, that no conveyance in trust authorized by this Act shall be made without the consent of the cemetery company or association in whose cemetery such burial lot or tomb is located.
    From December 4,1896, the taxpayer began to make contracts with lot owners in the cemetery to perpetually upkeep and maintain certain burial places in its cemetery. These contracts were known as contracts in perpetuity. On May 12, 1891, the board of directors passed a resolution at a meeting duly called, at which a quorum was present, with respect to the funds donated by owners in the cemetery for such purpose. That resolution is as follows:
    Your Finance Committee, charged specially with the duty of “ formulating some plan or agreement to govern this Association in receiving donations or bequests for the care of tombs” respectfully recommends the following for adoption:
    Whereas, there is manifest a disposition on the part of tomb-owners to make money donations to the Metairie Cemetery Association, in consideration of which the said Association shall obligate itself to keep in perpetuity the tombs and surrounding grounds of such owners in good order, the usual wear and tear of material excepted, therefore
    Be it resolved: That all sums heretofore donated, or that may hereafter be donated, for the above purposes shall be recognized as TRUST FUNDS, and shall be invested from time to time in such manner as the Finance Committee, subject to the approval of the Board of Directors may direct, the income accruing therefrom to be alone expended.
    Be it further resolved: That the obligations to be assumed by this Association shall be held to mean such proper care of the grounds and tombs, as is commonly understood should be rendered by the Superintendent and his assistants, and do not apply to any usual wear and tear of material, or to damage to the property resulting from forces beyond their control.
    Be it further resolved: That all receipts for donations of this character shall distinctly state the amount given, clearly define the property to be cared for, and embody this preamble and resolutions as explanatory of the contract made.
    Subsequent to 1908 the types of contracts in perpetuity in use by the taxpayer were as follows:
    THAT FOR AND IN CONSIDERATION of the sum of Three Hundred Dollars $300.00 in lawful money of the United States, paid by the said Mrs. Joseph Yoegtle at these presents, unto the Metairie Cemetery Association, the receipt for which is hereby acknowledged and full acquittance therefor granted by the said Simon Pfeifer, Vice-President and Samuel H. Bell, Secretary, of said Association, THE METAIRIE CEMETERY ASSOCIATION does hereby covenant, contract and binds itself, its successors and assigns, at all times and in perpetuity from the date of these presents, to take care of and maintain in good order and condition in the manner and to the extent hereinafter stated the coping of Mrs. Jos. Voegtle, known as Plot 3, in Section C, located in the Metairie Cemetery, so designated on plan of said Cemetery, drawn by Helmuth Holtz and on file in the office of the said Cemetery Association in the said city of New Orleans: To repair the stone-work, to keep the joints pointed, to keep the stone-work washed down, to keep the mound filled to grade, to keep the grass cut and renew same when necessary, to keep the palms or plants in good order should there be any and replace same should they die from any cause, to resurface the Schillinger side-walk should it at any time become necessary, and not to use any acid or other substance upon said coping that may tarnish, deteriorate or in any manner injure same.
    THAT FOR AND IN CONSIDERATION of the sum of Five Hundred Dollars $500.00 in lawful money of the United States, paid by the said Herman Weil at these presents, unto the Metairie Cemetery Association, the receipt for which is hereby acknowledged and full acquittance therefor granted by the said Samuel H. Bell, Secretary of said Association, THE METAIRIE CEMETERY ASSOCIATION does hereby covenant, contract and binds itself, its •successors and assigns, at all times and in perpetuity from the date of these presents, to take care of and maintain in good order and condition in the manner and to the extent hereinafter stated the coping of Herman Weil, known as Plot 1, Section 39, in the Metairie Cemetery, so designated on plan of said Cemetery, drawn by Helmuth Holtz and on file in the office of the said Cemetery Association in the said city of New Orleans: To keep the coping in repair, to keep the joints pointed, to keep the stone-work washed down, to keep the mound filled to grade, to keep the grass cut and renew same when necessary, to keep the plants or shrubbery in good order and replace same should they die from any cause, to plant winter seed annually, to repair or resurface the Schillinger side-walk should it at any time become necessary and not to use any acid or other substance upon said coping that may tarnish, deteriorate or in any manner injure same.
    It is understood and agreed that the amount of $500.00 received as above acknowledged is deposited by Herman Weil and will be held in trust by this organization for him and his heirs and the income only of the above stated deposit is to be used and shall cover as recompense for the services to be rendered in the upkeep of the above stated plot and in accordance with the manner as above described. Further, that the agreement of payment through this income shall be accepted as fully covering all charges and that this agreement shall continue perpetually.
    The above copies of contracts are given as illustrations of the two kinds of contracts. In one of the contracts there was a specific provision to the effect that the amount received by the taxpayer was received in trust for the lot owner and his heirs and that the income only of the amount deposited was to be used for the purpose of upkeep of the cemetery lots and in accordance with the terms of the contract, and that such agreement should continue perpetually.
    During the taxable years involved in this appeal these same forms of contracts wrere used. The contracts for perpetual upkeep of burial places are separate and distinct from contracts for the sale of the lots themselves.
    From the date of the organization of the corporation up to April 30, 1922, the taxpayer had entered into 411 perpetual-care contracts for a total consideration of $131,377.50. Of this total, thirteen contained a clause or provision to the effect that the money received by the corporation for the perpetual care of lots was received in trust and that only the interest therefrom should be used and could only be used for the specific purposes provided in the contract. The total consideration received by the taxpayer under these thirteen contracts was $6,625.
    Up to December 31, 1917, there had been paid in on these perpetual-care contracts a total amount of $61,863.50. Of this amount $3,700 represented the amount paid in on the contracts which contained the specific provision with respect to the trust character of the fund.
    Total contracts of perpetual care were entered into during the taxable years involved as follows:

    Of the above-mentioned contracts the following number and amounts were of the type which contained no specific provision with respect to the trust character of the funds:

    The remainder of these contracts and the amounts paid in thereunder were paid in under the contracts which contained no specific provision with respect to the trust character of the funds received.
    The consideration received by the Metairie Cemetery Association under all these perpetual-care contracts was entered on the taxpayer’s books and records under accounts headed. “ Bequests (perpetual care).”
    The basis for determining the consideration expressed in the contracts for the perpetual care of the lots was to approximate the cost of the upkeep of the respective lots per annum and then require the plot owner to pay to the taxpayer an amount which, placed in bonds bearing 4 per cent per annum, would yield that amount to the taxpayer annually. The amount of the cost of caring for the respective lots varies in accordance with the size, location and character of the tomb or tombs on the lots.

      During the taxable years involved the Commissioner treated as income taxable to the taxpayer on account of these perpetual-care contracts the following amounts:
    Four months ended April 30, 1918- $3,101.00
    Fiscal year ended April 30, 1919_ 11, 345. 00
    Fiscal year ended April 30, 1920- 17, 560.16
    Fiscal year ended April 30, 1921- 21, 361.34
    Fiscal year ended April 30, 1922- 16, 437. 00
    The Commissioner of Internal Kevenue also included in the computation of the taxpayer’s invested capital for the following years the following amounts of perpetual-care funds:
    Four months ended April 30, 1918_$61, 863.50
    Fiscal year ended April 30, 1919_ 64, 873.50
    Fiscal year ended April 30, 1920_ 76, 218. 50
    Fiscal year ended April 30, 1921_ 93, 579.16
    Fiscal year ended April 30, 1922_ 114, 940. 50
    The cash investments and reserve for perpetual-care bequests appearing on the taxpayer’s books and records were as follows:

    On October 10, 1924, the board of directors of the Metairie Cemetery Association, at a special meeting at which a quorum was present, adopted the following resolution:
    Whereas the Metairie Cemetery Association, by virtue of an Act conferring upon it certain additional powers and privileges, approved March 22, 1873 by William P. Kellogg, Governor of the State of Louisiana, was granted, under Section 4 of said Act, perpetual existence.
    Whereas, by virtue of the perpetual existence granted to this Association by the above-mentioned Act, this Association since December 4, 1896 has been making written contracts with owners of burial places in Metairie Cemetery, known as Contracts in Perpetuity, whereby, in consideration of certain amounts deposited with the Metairie Cemetery Association in trust by said owners of burial places, this Association has agreed to perpetually take care of said burial places:
    Whereas these Contracts in Perpetuity made by this Association were authorized by the Board of Directors of this Association at a meeting duly held at its office in the City of New Orleans on May 12, 1891, at which a quorum was present, when a resolution was passed authorizing the receipt by this Association from owners of burial places of certain amounts for the perpetual care of said burial places, and providing that all sums so paid sliall be recognized as trust funds, shall be invested in such manner as the Finance Committee, subject to the approval of the Board of Directors, may direct, and that the income alone accruing from such sums shall be expended by this Association:
    Whereas at the time that all such Contracts in Perpetuity were made by this Association it was distinctly stated and understood by all contracting parties thereto that all amounts paid by owners of burial places to the Metairie Cemetery Association on such Contracts in Perpetuity was received by this Association in trust for the said owners paying same and their heirs forever:
    Whereas, however, in most of the said Contracts in Perpetuity it was not stated in writing that the amount paid by the owner of a burial place to the Metairie Cemetery Association is received by this Association in trust for the said owner and his heirs forever, and that the income only of said amount deposited with this Association will be used by this Association to cover the cost of perpetual upkeep of the burial place of said owner making said Contract in Perpetuity:
    Whereas the omission of this express stipulation in the written contract, which stipulation, however, had been made verbally by the parties to such contracts at the time such contract[s] were made, has given rise to a question on the part of the United States Internal Revenue Department of the fact that such amounts received by this Association on such Contracts in Perpetuity were really trust funds:
    Be it resolved, that in order to settle finally and unequivocally and for all time past and to come the question that all amounts received by this Association from December 4, 1896 to the present time and all time thereafter, on such Contracts in Perpetuity were received and will be received by the Metairie Cemetery Association in trust from the owners of burial places, making or having made such contracts, and that the income accruing on said amounts would be used by this Association to cover the cost of perpetual upkeep of burial places, as stated in such contracts, this Association hereby authorizes its Secretary, Mr. Numa V. Bertel, to address in his official capacity and under the seal of this Association, to all owners of burial places who have made since January 1, 1916 to the present time, such Contracts in Perpetuity with this Association, a copy of these resolutions, by registered mail, at their last known address, if living, or at the last known address of their legal representative, if now dead, with the request that this resolution be attached by them to their Contracts in Perpetuity as evidence of the fact that at the time all such Contracts were made it was distinctly understood and stated verbally, if not in writing, that the principal of all amounts paid to this Association on such contracts was received by this Association in trust for the owners of burial places so paying, and their heirs forever, and that the income accruing from said funds alone would be used by this Association to cover the cost of perpetual upkeep of said burial places:
    Be it resolved further that the Secretary of this Association, Mr. Numa V. Bertel, is also authorized to give due publicity to the above Resolution by notice printed in the Times-Picayune, the Item and the Daily States, daily newspapers of New Orleans, so that all parties who at any time since December 4, 1896 to the present time made such Contracts in Perpetuity with this Association understand what their rights under said contract [s] were at the time said contracts were made.
    Under date of October 18, 1924, a letter was addressed by the taxpayer corporation to all lot owners who had entered into perpetual-care contracts, with which letter a copy of the resolution of the board of directors set out above was enclosed.
    Under date of October 21, 1924, the taxpayer had published in the Times-Picayune, New Orleans Item, and New Orleans States, a special notice to all persons who had at any time made contracts in perpetuity with the Association to call at the office for a copy of the resolution of October 10, 1924.
    While there were only thirteen of the perpetual-care contracts entered into during the taxable years involved which contained a specific provision to the effect that the funds received under such contracts were received in trust by the taxpayer, the other contracts entered into during the taxable years, as well as all of the contracts of perpetual care, were entered into with the specific understanding on the part of the corporation and the lot owners that the funds received by the corporation under such contracts would be held in trust for the specific purposes mentioned in the contract. The fact that the funds were received in trust was specifically explained to the lot owners by an officer of the corporation when the contracts were signed and it was definitely understood by all concerned that such funds were to be held in trust.
   OPINION.

Tkammell

: The Commissioner concedes that if the Board finds as a matter of law that the amounts received by the taxpayer under the perpetual-care contracts were received in trust, then the amounts are not taxable to the taxpayer but that the case would then be controlled by the decision of the Board in the Appeal of Los Angeles Cemetery Association, 2 B. T. A. 495. If the amounts received under the contracts were not received in trust, the cáse is controlled by the decision of the Board in the Appeal of Springdale Cemetery Association, 3 B. T. A. 223.

The great weight of authority is to the effect that the statute of frauds does not extend to trusts of personal property and that such trusts may be created and proved by parel. Chew v. Brumagen, 13 Wall. 497; Allen v. Withrow, 110 U. S. 119; Trubey v. Pease, 240 Ill. 513; 88 N. E. 1005; Coyne v. Supreme Conclave, 106 Md. 54; 66 Atl. 704; Bork v. Martin, 132 N. Y. 280; 30 N. E. 584; Pittman v. Pittman, 107 N. C. 159; 12 S. E. 61.

There is no conflict in the evidence here with respect to the contracts. The evidence is that at the time the contracts were entered' into it was agreed that the money would be held in trust for the specific purposes of the contract. This being true, we are of the opinion that a valid trust was created by parol in those contracts where there was no specific provision to that effect. The only reason that certain of the contracts contained that express provision was the fact that those lot owners insisted upon the agreement being included in writing in the contract. The same agreement, however, was actually made with all of the lot owners verbally.

The funds received by the taxpayer from the lot owners having been received in trust for the specific purpose of caring for and maintaining burial places gave rise to no taxable income to the taxpayer. See Appeal of Los Angeles Cemetery Association, supra.

Judgment for the petitioner.