author: Phillips :

text:
    E. T. Renfro and Mrs. Inez C. Renfro, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6138.
    Promulgated November 7, 1927.
    1. Under the Revenue Act of 1918, liquidating dividends of a corporation received by an individual are subject to both normal and surtax.
    2. Cost of assets and exhaustion thereof determined.

      A. W. Christian, Esq., for the petitioners.

      George G. Witter, Esq., for the respondent.
    This proceeding arises from the determination by the Commissioner of deficiencies in income tax for the years 1920 and 1921 amounting to $2,741.98 in the case of E. T. Renfro and $2,725.93 in the case of Inez Renfro. The petitioners filed their community property returns for the taxable years involved and the deficiencies are computed by the Commissioner by dividing community income > equally between the petitioners.
    FINDINGS OF FACT.
    1. Prior to May 4, 1920, E. T. Renfro owned two thirds of the capital stock of Renfro Drug Co., a Texas corporation. One L. N. Stanley owned the remaining one third. On May 4, 1920, a certificate of dissolution of said corporation was filed in the office of the Secretary of State of Texas. All of the assets of said corporation were taken over by Renfro and Stanley, subject to the debts of the corporation, and the business was thereafter operated by them as a partnership.
    The paid-in capital of such corporation on March 1, 1913, and at the time of dissolution, was $10,000. The earned surplus of such corporation on March 1, 1913, was $16,886.64. The earned surplus of such corporation at the time of dissolution was $30,107.74. The Commissioner determined that the fair market value of the stock on March 1, 1913, was $26,886.64, that on dissolution the partners received assets of the value of $40,107.74, and that there has been a distribution in liquidation of $13,221.10. Two-thirds of this amount, $8,814.07, he included as income to the petitioners, subject to both surtax and normal tax.
    2. During 1920 E. T. Renfro was a stockholder in E. T. Renfro Co., a corporation, and in Renfro Drug Co. No. 5, a corporation. During 1920, said Renfro withdrew from the E. T. Renfro Co. $9,800 in cash, which amount was debited to him on the books of said company, and during 1920 he withdrew from the Renfro Drug Co. No. 5, $9,000 in cash, which amount was debited to him on the books of said company. The stock of both of said corporations was closely held and at the end of the year each stockholder’s share of the earnings was credited to the individual. In 1920 there was credited to said Renfro on the books of the E. T. Renfro Co. $6,783.62, and on the books of the Renfro Drug. Co. No. 5 there was credited to said E. T. Renfro $5,922.85. The differences between the amounts withdrawn and the amounts credited were carried on the books of account of the two corporations as accounts receivable from said E. T. Renfro. In computing the deficiencies here in question the Commissioner has included said $9,800 and said $9,000 as dividends from the E. T. Renfro Co. and the Renfro Drug Co. No. 5, respectively.
    3. Prior to April 20, 1920, one Eastham operated a drug store at 101 North Exchange Avenue, Fort Worth, Tex. On April 20, 1920, the petitioner, Renfro, and one Wrenn, as partners, purchased said business from Eastham, paying therefor $17,750. The petitioner had a two-thirds interest in said partnership. A lease which Eastham held upon the store in which such business was conducted was assigned to Renfro. Such lease provided for a rental of $200 per month and expired on December 31, 1920. It contained an option permitting the lessee to renew such lease at its termination for a period of three years at a rental of $225 per month. Prior to the expiration of the lease on December 31, 1920, the partnership exercised such option to renew. The rental reserved in such lease was a reasonable rental for said property for the term thereof and for the renewal term thereof.
    The Commissioner determined that $6,699.50 of the purchase price should be allocated to furniture and fixtures, $6,050.50 to merchandise and $5,000 to the value of the lease. He further determined that such $5,000 should be exhausted over the life of the lease, including the renewal period, and computed the deficiencies accordingly.
    The reasonable value of the furniture and fixtures purchased from Eastham was $6,699.50 and the reasonable value of the merchandise so purchased was $10,000.
    4. For 10 or 11 years prior to 1920 the petitioner, either individually or in partnership, had conducted a drug store on the northwest corner of Main and 11th Streets in Fort Worth, Tex. He enjoyed a prosperous business at this store. The premises in which the business was conducted were occupied under a lease expiring in 1920, under which a rental of $350 a month was paid. Some three months before such lease expired the lessor notified Renfro that the rental would be advanced to $1,250 per month. The business could not be profitably operated at such an increased rental. There were no other available store properties in the same block. On March 13, 1920, Renfro and one Moseley, as partners, purchased the drug store business of one Reeves, paying therefor $38,303.46. The Reeves store was at the other end of the same block, being on the southwest corner of Main and 10th Streets. Business had been initiated at this location by Reeves on April 15, 1915. The furniture and fixtures purchased from Reeves had a fair value of $8,829.13. The merchandise had a fair value of $10,000.
    At the time of such purchase Reeves had a lease upon the store property for five years from May 1, 1915, to April 30, 1920, at a rental of $300 per month, containing an option to renew such lease for an additional five years at $350 per month. Such lease further provided against the assignment thereof without written consent of the lessor. Such lease was not properly executed under the laws of the State of Taxes and the original lessor was dead. Her heirs refused to consent to the assignment thereof. After some negotiations Renfro and Moseley paid $1,800 to such heirs and secured from them a consent to the assignment of the original lease and a renewal of said lease for a period of five years from May 1, 1920, at a rental of $350 per month, subject to the conditions and provisions of the original lease.
    The Commissioner determined that $8,829.13 of the purchase price was paid for furniture and fixtures, that $10,000 was paid for merchandise and that $19,474.33 was paid for the ¡lease. He further determined that the cost of such lease should be exhausted over the period thereof, including the renewal period, and computed the deficiencies accordingly. The petitioner, Renfro, had a three-fourths interest in the partnership purchasing such business.
    5. During 1920 and 1921 the petitioner, Renfro, was a member of a partnership known as Bowers Oil Co. In determining the deficiencies the Commissioner allowed the petitioners deductions for the losses of such partnership of $311.62 for 1920 and $1,737.93 for 1921. During 1920 the petitioners sustained a loss of $1,659.60 by reason of their interest in such partnership and sustained no loss therefrom for the year 1921.
   OPINION.

Phillips :

Five assignments of error were alleged, one of which was settled by stipulation at the hearing.

1. Counsel for the petitioners argues that the Commissioner erred in determining that any taxable gain resulted upon the dissolution of the corporation, Renfro Drug Co., and the taking over of its assets by the partnership and, in the alternative, contends that any gain which resulted constitutes a distribution of profits of the corporation accumulated subsequent to February 28, 1913, and therefore, is subject only to surtax. Upon the first point counsel urges that the interest of the petitioner in the assets as a partner was the same as the interest which he held as a stockholder; that he had nothing more after the dissolution of the corporation than he had before, and that under the decision of the Supreme Court in Eisner v. Macomber, 252 U. S. 189, no taxable gain or profit resulted. The distinction between the interest which the taxpayer had in the assets of the corporation before dissolution and the ownership which he enjoyed after dissolution and distribution thereof to the stockholders as partners seems so clear as to require no comment other than the citation of our decision in the Appeal of E. C. Huffman, 1 B. T. A. 52, where the legal question now urged was decided adversely to the contentions of the petitioner.

Whether the difference between the value of the assets distributed and the value of the capital stock on March 1, 1913, all of which is represented by earnings of the corporation accumulated subsequent to February 28, 1913, is subject to both surtax and normal tax or subject only to surtax depends upon the proper construction of subdivision (a), (b), and (c) of section 201 of the Revenue Act of 1918, and subdivision (a) of section 216 of that Act. We have heretofore had occasion to consider this question in the Appeal of John K. Greenwood, 1. B. T. A. 291, where it was held that liquidating dividends were subject to both normal and surtax under these provisions of the Revenue Act of 1918. Since that decision was adopted, the Circuit Court of Appeals of the Sixth Circuit in Langstaff v. Lucas, 13 Fed. (2d) 1022; 5 Am. Fed. Tax Rep. 6125, has reached the same conclusion. The Circuit Court of Appeals of the Eighth Circuit in Hellmich v. Hellman, 18 Fed. (2d) 239; 6 Am. Fed. Tax Rep. 6633, has recently reached an opposite conclusion. Certiorari has been granted and this case is now pending before the United States Supreme Court. The petitioners reside in neither of these circuits. After a careful consideration of the decisions of the District and Circuit Courts in these cases we reach the same conclusion that we did in our previous decision cited above and hold such liquidating dividends to be subject to both normal and surtax.

2. During 1920 petitioner, E. T. Renfro, was a stockholder of the E. T. Renfro Co. and Renfro Drug Co. No. 5, both corporations. During that year he withdrew $9,800 from the first corporation and $9,000 from the second corporation, all of which amounts the Commissioner has treated as dividends. It appears that the stock of such corporations was closely held and that the stockholders treated them substantially as partnerships. No formal declaration of dividends appears to have taken place, the profits for the year being credited to the stockholders without any such formal action. All amounts withdrawn in excess of the earnings were carried forward as accounts receivable. In such circumstances we are of the opinion that the Commissioner was in error in treating as dividends any amount in excess of that credited to Renfro. See Appeal of Albert Bettens, 2 B. T. A. 535, and Appeal of Kate C. Ryan, Executrix, 2 B. T. A. 1130.

3. In 1920 Renfro and a partner' purchased the drug store business then being conducted by one Eastham. Upon such purchase they received furniture and fixtures which both parties to this proceeding value at $6,699.50, the stock in trade, and a lease. The petitioners allocated the difference between the purchase price and the value of the furniture and fixtures $11,050.50, to cost of merchandise. The Commissioner' determined that the lease had a value of $5,000 and allocated only $6,050.50 to cost of merchandise. The testimony discloses that the merchandise in stock was of the reasonable value of $10,000. We are satisfied from the testimony that the lease as such had no fair market value and also that the business conducted by Eastham, which had been in operation for only one or two years, had no good-will value. The problem is to determine the proper treatment to be accorded to the difference between the price paid and the value of the tangible assets.

. Through various corporations and partnerships the petitioner was conducting a chain of drug stores in Fort Worth in the year 1920. It would seem that he was desirous of locating one of his stores in the neighborhood in which Eastham was located. His willingness to pay for such business an amount in excess of the value of the furniture, fixtures and merchandise is not to be attributed either to any good will acquired from Eastham or to any inherent value in the lease, but rather to this desire to locate a store in this neighborhood. The Eastham Pharmacy appears to have been suitably located. The price paid for the Eastham Pharmacy was arrived at by negotiations between the parties in which no particular value was assigned to any of the assets of the business and it is, therefore, impossible to determine what factor it was that caused the partners to pay an amount in excess of the value of the tangible assets unless it be a value attached to location, their assumption being that they could pay such price and still conduct the business at a profit. Such value may exist independently of any value in the lease itself, yet may bear a definite relationship to the lease, for without the lease the value of the location ceased. The Commissioner has determined that that amount of the purchase price in excess of the value of furniture and fixtures and stock in trade should be exhausted ratably over the period of the lease, including the renewal period. We are satisfied that this is a proper period over which to permit the partners to recover such amount, for during the period of the lease they were sure of the opportunity of conducting their business in this location. The computation of income must be adjusted, however, to reflect the changed amounts.

4. For several years prior to 1920 the petitioner, Renfro, had been conducting a drug store at the corner of Main and 11th Streets in Fort Worth. The lease expired in 1920 and the demands of the lessor for a renewal thereof were such that the business could not be profitably operated. The petitioner was faced with the necessity of securing another location nearby, or losing a valuable business. On the corner at the other end of the same block of Main Street was a pharmacy which had been in operation some five years. This business the petitioner and his partner purchased, paying therefor $38,333.46. Of the purchase price the Commissioner has assigned $8,829.13 to furniture and fixtures and $10,000 to merchandise. The value assigned to furniture and fixtures is not disputed by the petitioners and there is no evidence before us which would indicate that the merchandise had a value different from that assigned to it by the Commissioner. The balance of the purchase price, $19,474.33, the Commissioner determined to be the purchase price of the lease and held that this amount should be recovered by the petitioner as deductions from income over the period thereof, including the renewal period.

At the time the business was purchased the original term of the lease had only one month to run. The lease, however, contained an option providing for a five-year renewal. It is evident that if the lease had any substantial value it was because of the renewal privilege and if the Commissioner is correct in his determination of the value thereof, such value must properly be exhausted over the full period, including the renewal term. It is contended by the petitioners, however, that such lease was not properly executed, was void, and was, therefore, of no value, and that it was only by virtue of a new lease subsequently negotiated at a cost of $1,800 paid to the heirs of the original lessor that the petitioner continued to occupy the store. Whether the lease was void, voidable, or valid seems to us immaterial, for it does not appear that any question as to its validity was ever raised by the heirs of the lessor. The lease covenanted against assignment without consent of the lessor. This consent the heirs of the lessor refused to give without the payment of a bonus. Such bonus was paid to them and they executed an agreement consenting to the assignment of the original lease and renewing the same for a period of five years. The transaction with the heirs of the original lessor did not result in a new lease, as contended by the petitioners, but merely in a consent to the assignment and renewal of the old lease. In such circumstances there is no validity in the contention that the petitioner did not secure the benefits of the lease which he purchased and is entitled to deduct the cost as a loss in 1920.

There might be some question whether the amount paid for the Reeves business in excess of the value of the tangible assets should properly be assigned to the lease, or is made up in part of a value attaching to the lease, in part by the desire to preserve the good will of the business which the petitioner had built up, and in part by the desire to eliminate a competitor. The Commissioner, however, has assigned the full amount to the value of the lease and, while at the hearing his counsel questioned the soundness thereof, the record is not sufficient to permit us to make any other allocation than that made by the Commissioner. For this reason we must approve the action taken by him in allocating the cost of the busi-. ness purchased from Reeves and in exhausting the portion of such cost which can not be assigned to the cost of tangible assets.

5. The findings of fact with respect to the loss arising from the operation of the Bowers Oil Co. was made in accordance with the stipulation of the parties.

Reviewed by the Board.

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


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Adnah McMurtrie, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19740.
    Promulgated November 7, 1927.
    A dividend payable on December 31, 1923, but not received until January 2, 1924, is 1924 income to stockholder making an income-tax return upon a cask receipts and disbursements basis.

      Adnah McMurtrie pro se.

      W. F. Gibbs, Esq., for the respondent.
    In this proceeding a redetermination is sought of a deficiency in income taxes for the year 1923 in the amount of $126.94.
    It is alleged that the respondent erred in including in 1923 taxable income a dividend declared by a corporation, of which the petitioner was a stockholder, on December 22, 1923, and payable December 31, 1923, for which checks of the corporation were mailed to the petitioner on December 31,1923, and received by him on January 2,1924. The appeal is submitted upon a stipulation of facts.
    FINDINGS OF FACT.
    The petitioner is an individual with offices at 63 Yesey Street, New York, N. Y. During the year 1923 the petitioner was a stockholder in the Thomas & Betts Co., a corporation having offices at 36 Butler Street, Elizabeth, N. J., and was such a stockholder on December 31, 1923.
    At a meeting of the board of directors of said corporation held at 2 p. m., December 22, 1923, the following resolutions were adopted:
    On motion duly made, seconded and unanimously carried it was Resolved that a dividend of $7.00 a share be paid at 5 o’clock P. M., December 31, 1923, to the holders of record at that time of the First Preferred Stock of the Company,

      On motion duly made, seconded and unanimously carried it was Resolved that a dividend of $7.00 a share be paid at 5 o’clock P. M. December 31, 1923, to the holders of record at that time of the Second Preferred Stock of the Company.
    On motion duly made, seconded and unanimously carried it was Resolved that a dividend of $6.00 a share be paid at 5 o’clock P. M. December 31, 1923, to the holders of record at that time of the Common Stock of the Company.
    Pursuant to said resolutions the petitioner became entitled to receive dividends as a stockholder in said corporation in the amount of $3,124. The check, or checks, in payment of said dividend were mailed to the petitioner on December 31, 1923, after the hour of 5 p. m., and were received by the petitioner on January 2,1924.
    Said checks were orders to the corporation’s bank of deposit to pay to the petitioner or his order upon presentation of the checks the amounts specified, but having been issued after banking hours December 31,1923, they could not be presented at the bank until January 2, 1924. The corporation did not have sufficient cash on hand at its office at or after 5 p. m., December 31, 1923, to redeem any one of said dividend checks, and had the petitioner called at the office of the corporation, demanded, received, and endorsed said checks and asked for cash, he could not have obtained it.
    The petitioner duly filed an income-tax return for the year 1923 upon a cash receipts and disbursements basis, in which said dividend of $3,124 was not reported as income. The respondent determined the said dividend payable on December 31, 1923, was unqualifiedly made subject to the petitioner’s demand on that date and was, therefore, income for the year 1928.
    It is stipulated that the appeal is submitted upon the pleadings and stipulation filed and that the sole question for decision is whether or not said dividend of $3,124 is income to petitioner for the year 1923 or 1924.
    It is further stipulated that if said dividend is taxable income for the year 1923, the deficiency in tax for that year is $126.94, and that if said dividend is not taxable income for the year 1923 there is no deficiency.
   OPINION.

Van Fossan:

The facts in this case bring it squarely within the holding of the Board in Robert W. Bingham v. Commissioner, 8 B. T. A. 603, promulgated October 8, 1927. Following the reasoning of that decision it is held that the dividend was not income until actually received on January 2, 1924. Under the terms of the stipulation of the parties there is no deficiency.

Eeviewed by the Board.

Judgment will be entered for the petitioner.


author: Littleton:

text:
    Mechanics Bank of Brooklyn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9755.
    Promulgated November 8, 1927.

      H. A. MiMUs, O. P. A., for the petitioner.

      J. E. Marshall, Esq., and H. D. Thomas, Esq., for the respondent.
   OPINION.

Littleton:

The first point presented relates to losses claimed on the sale of certain real estate. In the petition, errors were assigned on account of seven pieces of property, but at the hearing petitioner abandoned its claim with respect to five of the properties, thus leaving only the Scliermerhorn and Rockaway Avenue properties for consideration.

As to the Schermerhorn property, we have found that it was acquired by the petitioner in 1916 when a customer defaulted on a loan of $2,826 which was secured by this property. The property when taken was subject to a mortgage of $9,500 which the petitioner assumed. Its cost, therefore, was $12,325. The difference between the selling .price of $8,392.38 and the foregoing cost, less accrued depreciation of $166.67, represents a deductible loss in 1919 when the sale was made.

With respect to the Rockaway Avenue property, the evidence we have as to its cost is that it was taken over in 1914 at its book value when the assets of the Nassau Trust Co. were acquired through a merger in -which stock of the petitioner was issued for the stock of the Trust Company. We have no segregation, showing the cost applicable to the various assets. Nor do we know anything as to the value of the various assets at this time. We regard the foregoing evidence insufficient to establish cost to the petitioner and, therefore, any loss on account of the sale of this property must be denied.

The next issue relates to the status of the accounts which the petitioner had with the Union Rank and the Lafayette Trust Co. when these banking institutions were placed in receivership in 1912. We are satisfied from the evidence that the petitioner’s practice of charging “slow” accounts to a suspense account, which was the method pursued in these instances, was not because of a determination of the worthlessness of the accounts and that so long as the petitioner retained one dollar in the suspense account it indicated that the petitioner did not consider the accounts worthless, and had not effectively charged them off. The evidence is also conclusive to the effect that the accounts with the Union Bank in the amounts of $26,853.37, $5,069.17, and $1,919.93 were not determined to be worthless until 1924 and that in 1921 the petitioner was justified in considering an estimated future recovery of only 3 per cent thereon. The balance remaining in the accounts, after taking into consideration prior recoveries and this estimated future recovery, is deductible from gross income in 1921 under the provisions of section 234 (a) (5), Revenue Act of 1921. Since these accounts had not been determined to be worthless in their entirety prior to 1921 and since under the revenue acts prior to the Revenue Act of 1921, a partial write-off of a debt is not permissible (Steele Cotton Mill Co., 1 B. T. A. 299, and Murchison National Bank, 1 B. T. A. 617), the balance remaining in these accounts, after considering prior recoveries, should be restored to invested capital for each of the years on appeal. We are likewise satisfied that the account with the Lafayette Trust Co. in the amount of $8,769.79 was not determined to be worthless until 1921, at Avhich time the remainder then outstanding, after considering prior recoveries, was a proper deduction from gross income. Invested capital should also be adjusted in a manner similar to that outlined for the accounts with the Union Bank. In view of the above conclusions, it was obviously erroneous for the Commissioner to treat recoveries on the foregoing accounts as taxable income for the years on appeal.

In the next place the petitioner contends that the respondent has made an erroneous reduction of its invested capital to the extent of $13,489.96 on account of certain debts owing by P. J. Murray & Co., which were partially written off prior to 1918. The entire loans were determined to be worthless in 1918 when a loss on the entire account was claimed. In claiming the loss in 1918, petitioner made no restoration of the amounts previously written off, and petitioner’s balance sheet at December 31, 1918, contained no part of this account.

A reduction of petitioner’s surplus on this account as it appeared in the balance sheet at December 31, 1918, was erroneous, since it meant a reduction which had already been effected. The petitioner’s contention on this point is, therefore, sustained.

The final issue arises on account of a reduction of petitioner’s surplus because of an alleged insufficiency of depreciation taken in prior years. Prior to 1918, petitioner made no provision for depreciation as such on its books of account. The evidence shows that at least major capital items with respect to buildings were properly capitalized, but that in the case of furniture and fixtures many items of a capital nature were charged to expense which should have been capitalized. The evidence fails to show that repairs and maintenance tended to offset depreciation sustained on buildings or that the building account was understated on account of a failure to include therein proper capital items. On one occasion — in 1914 — a reduction was made in the value of assets as they appeared on the books, but this was done for reasons of conservatism and applied largely to properties recently taken over which, one of petitioner’s witnesses stated, was valued in this way, in order to make the property more salable. Petitioner’s vice president, upon being cross-examined in regard to depreciation, made the following statements.:

Q. Why didn’t you write the bank buildings down from year to year for depreciation purposes?
A. We did not write them down, but our bookkeeping methods were wrong.
Q. You do not deny the fact that depreciation occurred on these buildings from year to year?
A. Appreciation?
Q. Depreciation?
A. Depreciation did occur on the buildings, but we did not change our book value of buildings by charging depreciation. We have not done that.

At the hearing petitioner presented a schedule with costs and dates of acquisition of buildings and equipment as shown by its books, in which depreciation to December 31, 1916, was computed at the same rates as used by the revenue agent whose examination formed the basis of the respondent’s reduction. This showed certain errors on the part of the revenue agent as to dates of acquisition and otherwise, with the net result that instead of accrued depreciation on buildings and equipment to December 31, 1916, of $289,962.09 as claimed by the respondent, there is shown an amount of $197,248.50.

On a consideration of the evidence, we are of the opinion that petitioner’s surplus for the years on appeal should be adjusted by considering accrued depreciation on buildings and equipment to December 31, 1916, as $197,248.50 and the depreciation allowed the petitioner in determining taxable income for 1917 and subsequent years. In addition, the adjustment should take into consideration an amount of $16,108.96 which was deducted by the respondent as depreciation to December 31, 1917, on outside real estate which was sold in 1918 and, therefore, was not an asset subject to reduction in 1919 and subsequent years. The Commissioner concedes that his adjustment was erroneous in this respect, and the reduction computed above of $197,248.50 does not take into account this item. To the extent, therefore, that depreciation allowed the petitioner for 1917 and subsequent years does not take into account this item, adjustment should be made therefor in a determination of petitioner’s invested capital for the years on appeal.

With respect to the reduction made in petitioner’s surplus on account of depreciation accrued on furniture and fixtures to January 1, 1917, in the amount of $34,207.99, the evidence shows that the petitioner followed a policy of charging many items of this character to expense which should have been capitalized, and that in the case of safe deposit boxes rentals therefrom were credited to the asset accounts and thus served to reduce the cost as shown by petitioner’s books. We are convinced that a true statement of the furniture and fixture account at January 1, 1917, would not show an asset value less than that reflected by petitioner’s books and, therefore, the action of the Commissioner in making a reduction of $34,207.99 on account of alleged accrued depreciation to January 1, 1917, is reversed.

The remaining issues relate entirely to the reduction of invested capital for payment of taxes within the taxable periods for preceding periods and as to these the petitioner admits that proper adjustment should be made therefor under the provisions of section 1207, Revenue Act of 1926.

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

Considered by Smith, Tkhssell, and Love.


text:
    Greenfield Brothers Clothing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6912.
    Promulgated November 8, 1927.

      Bernard Greensfelder, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   OPINION.

Littleton:

The complaint of petitioner is evidenced by earnest insistence, ably presented by counsel, that the sum of $92,001.92 should be added to the Greenfield Clothing Co.’s invested capital for the year ended January 31, 1918, and the sum of $96,001.82 should be added to said company’s invested capital for the year ended January 31,1919. Tiie two amounts represent totals of balances of withdrawals from the surplus earnings of the company by stockholders, as of January 31, 1918 and 1919.

The petitioner contends that as there was no formal declaration of dividends for the years involved, such amounts can not properly be considered dividends or distributions of surplus, but should be considered indebtedness of stockholders to the company in the nature of loans by the company and, therefore, constituted invested capital of the company as bona -fide accounts receivable. It is further insisted that as withdrawals were not always on an exact equal basis and according to the respective holdings of stock, they were not dividends, but wore assets of the company and should be treated as invested capital.

The evidence shows, as was stated by one of the brothers, Milton Greenfield, that the brothers in their business relations considered themselves “ more or less of a family corporation ”; and the business as a family affair. It appears that the business of the corporation was treated throughout as a family affair. The contract entered into by the brothers was with a view, in case of the death of any of them, to keep the stockholdings and the interests of the decedent in the surviving brothers, and this is illustrated by what occurred between them when Gus Greenfield died and his entire holdings and credit balances were taken over by the remaining brothers. There is evidence that no notes were ever given to the Greenfield Clothing Co. for any of the withdrawals. No interest was charged or paid, and no payments were ever made on the principal so as to indicate that the withdrawals were bona fide loans. The moneys withdrawn were not for the purpose of carrying on the business of the corporation, but were for the personal use and benefit of the individual stockholders. The withdrawals produced nothing for the corporation, not even interest.

A number of cases are cited by petitioner in support of its claim that the debit balances of the stockholders should be included in invested capital, but these cases do not in the opinion of the Board justify the conclusion that such withdrawals were tona fide loans by the corporation to the stockholders, ro as to warrant their inclusion in invested capital of the corporation. Every case must be decided on the application of the law to the particular facts of such case.

The facts in the case of Eaton v. English & Mersick Co., 7 Fed. (2d) 54 (C. C. A. 2d Cir.), relied on by petitioner, are not parallel to the instant proceeding. In that case, though there had been a resolution passed looking to a division pro rata among stockholders of the net profits, there was in fact, no withdrawal or distribution of such surplus, but the same was already invested in machinery and equipment of the company. Under such circumstances, the court held such surplus could not be considered “borrowed capital” from the stockholders, as they had never in fact owned or received it and under such circumstances it was held “ invested capital.” In this proceeding the amounts sought to be included as invested capital did not remain with the Greenfield Clothing Co., but were withdrawn and not invested in the company’s business or for its benefit. There appears to have been no formal declaration of a dividend to effect a distribution of the so-called “ family corporation,” the close relation of the stockholders and their manner of doing business over a period of years making the declaration of a dividend unnecessary to accomplish their purpose of a division or distribution of profits and capital among themselves.

In the case of Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 187, also relied on by petitioner, the money credited to the shareholder on the books of the corporation “still remained under the control of the corporation and was tied up in its corporate property and used for its corporate purposes, as fully as before and was, therefore, ‘invested capital.’”

Another case, Appeal of Kate C. Ryan, Executrix, 2 B. T. A. 1130, is cited in behalf of petitioner. The withdrawals were by only one stockholder out of sixteen. None of the others .ever withdrew or borrowed any money from the corporation. This one stockholder considered himself indebted to the corporation and the corporation so considered him and the amount was carried on the books of the corporation. Cash dividends were credited to such stockholder’s account and cash was paid thereon from time to time, and after the death of such stockholder the entire balance of withdrawals was paid by his executrix. Under such circumstances, this Board held such withdrawals were not dividends, but loans by the corporation. At the same time we held:

We recognize that a formal resolution is not essential to a dividend and that there may* be an informal dividend where payments or withdrawals are made under circumstances which will constitute them dividends.

In Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982, affd. 17 Fed. (2d) 79, it was held that to be a “ dividend ” for the purpose of income tax, a distribution by a corporation need not be called a dividend and there need not be any formal declaration. To the same effect, see Spencer v. Lowe, 198 Fed. 961, and Smith v. Moore, 199 Fed. 689.

In Appeal of Walle & Co., Ltd., 1 B. T. A. 1064, this Board approved the determination of the Commissioner in refusing to permit the taxpayer to include in its invested capital amounts withdrawn by stockholders and carried on its books as accounts receivable, holding that such withdrawals were payments in anticipation of dividends.

In Appeal of Feist & Bachrach, Inc., 2 B. T. A. 1228, this Board held that withdrawals by the sole stockholders of a corporation, which withdrawals were not even in proportion to their holdings of stock, were never intended to be paid back, but were intended to be, and were, distributions of profits and should be excluded from invested capital of the corporation.

The Appeal of The Pictorial Review Co., 5 B. T. A. 416, is also cited and relied on by petitioner. In this case notes were given for withdrawals and certain payments were made thereon. In that case we said:

There are of course situations where a full consideration of all of the attendant circumstances requires that a withdrawal from the assets of a corporation, by a stockholder should serve to reduce invested capital because there is in fact no genuine asset left or intended to be left in the corporation. The bona tides, the intention as disclosed from the direct and circumstantial evidence, and the value of the alleged debtors’ credit are matters to be considered.

In Cadillac Automobile Co. of Illinois, 5 B. T. A. 604, we held that an amount withdrawn from a corporation by its sole stockholder as a loan and carried on the corporation’s books and balance sheets as an account receivable upon which credit had been secured, there being t o evidence of a dividend, is within its invested capital, and cited Pictorial Review Co., supra, as being in accord therewith, but neither case, when all the facts and circumstances are considered, sustain petitioner’s contention here.

In Comey & Johnson Co., 8 B. T. A. 52, this Board held that certain amounts withdrawn by an officer of the corporation represented bona fide accounts receivable and a part of invested capital of the corporation. Comey was the president and principal stockholder of the corporation and early after its organization began the practice of withdrawing moneys as he might need from time to time for his personal use. The amount of such withdrawals varied. At regular monthly periods the xvithdrawal account of Comey would be credited Avith the amount of his authorized monthly salary which was fixed at $25,000 per annum. Statements submitted by the corporation to the bank from which it obtained credit, showed by notation that the commercial paper of the corporation was endorsed by Comey. Payments to the corporation by Comey were included among the corporation’s assets and also in statements submitted to the county taxing authorities. Comey acknowledged his indebtedness to the corporation. No other officer or stockholder of the corporation withdrew any amounts in excess of salaries or dividends credited to their account. Comey promised to repay the amounts he withdrew and acquiesced in crediting to the account salaries and dividends to him until he had paid the balance of the account in 1924. The withdrawals were not to be counterbalanced merely by subsequent dividends. All the facts, taken together, convinced the Board that the amounts withdrawn by Comey were not distributions of profits, but represented bona fide indebtedness to the corporation. The amount, therefore, was treated as invested capital of the company.

In the case of P. Garvan, Inc., v. Robert O. Eaton, 20 Fed. (2d) 422, the court rendered a very interesting and able opinion on the questions here involved to which some reference may be appropriate.

This was a suit to recover income and profits taxes claimed to have been erroneously assessed and collected from the plaintiff corporation under provisions of the Revenue Acts of 1911 and 1918. The entire stock of the corporation with the exception of four shares was divided equally between two brothers, each of whom drew very substantial salaries and was allowed $10,000 a year for expenses. At the end of each year a 7 per cent dividend was declared. In addition to their salaries, expenses and dividends on their stock, each withdrew various amounts from the corporation during the years in question. If the salaries, expenses and dividends for the year were less than the amounts withdrawn, each would execute a demand note to the corporation, bearing no interest, for the difference. These notes, upon which no payments were ever made, were, by the corporation in its tax returns, included as invested capital. The facts of that case and the instant-case are so similar and the reasoning of the court so applicable to both alike, we quote briefly as follows:

The plain fact is that reserves of surplus are not built up by the process of extracting the funds from the corporation. To physically pay out corporate funds and to substitute therefor noninterest bearing promissory notes, upon which, for a period of years not a single payment has been made, is indeed a curious method of building up a reserve.
It will serve no useful purpose to discuss the question as to whether the amounts withdrawn by the Garvan brothers ever constituted cash paid in or paid-in surplus. The gist of the problem consists in the determination of the status of those amounts after they were corporeally segregated from the rest of the corporate property. The contention of the plaintiff is that these notes are corporate assets and that because they are corporate assets they constitute “ invested ” capital within the meaning of the revenue acts. With this suggestion I find ihyself unable to agree.
The practicalities of the situation at bar indicate the existence of a copart-nership in the guise of a corporation, a copartnership composed of two individuals haying equal interests. That these gentlemen could in fact withdraw the corporate funds and still continue the status of these funds as invested capital seems to me to be clearly inconsistent.
The notes which were substituted for the funds which were withdrawn I find to be pro forma, obligations only. The fact that ten years have elapsed in the first instance and six years in the last instance and that not a dollar has been paid to the corporation on account of the notes, when viewed in connection with the personnel and organization of the corporation, is quite conclusively indicative of their real nature. It serves not to say that they have been carried as assets on the corporate books of account and that corporate credit statements have been rendered in which they are so declared. If corporate creditors have been led to believe that these notes are active assets it does not follow that a court must trail along with them.
The spirit of the revenue act is replete with the idea that invested capital is capital employed in the corporate business. It is true that a promissory note may be regarded as invested capital, but it will be found that wherever it has been so regarded, it constituted a current exigent obligation, and represented an actual undertaking to pay for corporate stock, or that it was discountable paper given in regular course in payment of corporate property. The notes in question belong to neither class. I find them to be nothing but a transparent device for distributing surplus funds without appearing to do so.

In the instant case the Board is of the opinion that the withdrawals by the stockholders now claimed as invested capital by petitioner are, in the light of all the facts and circumstances, not bona -fide loans by. the petitioner to the stockholders, but in the nature.of dividends or distributions of profits to the stockholders, and should not be considered as invested capital of the petitioner. The action of the Commissioner in refusing to so allow same is therefore approved.

Judgment nmll be entered for the respondent.

Considered by Smith, Tkussell, and Love.


text:
    Henry Monk, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11396.
    Promulgated November 8, 1927.

      Philip D. Beall, Esq., for the petitioner.

      Joseph Harlacher, Esq., for the respondent.
   OPINION.

Sm:ith:

Petitioner claims that he is entitled to have his excess-profits tax for the year 1917 computed under section 209 of the Revenue Act of 1917, which imposes a flat-rate tax of 8 per cent upon a trade or business having “no invested capital or not more than a nom'.nal capital.” Respondent has determined that the petitioner’s trade or business js one which requires more than a nominal amount of capital and has computed the excess-profits tax under the provisions of section 210 of the Act. The sections referred to read as follows:

Seo. 209. That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.
Sec. 210. That if the Secretary of the Treasury is unable in any case satisfactorily to determine the invested capital, the amount of the deduction shall be the sum of (1) an amount equal to the same proportion of the net income of the trade or business received during the taxable year as the proportion which the average deduction (determined in the same manner as provided in section two hundred and three, without including the $3,000 or $6,000 therein referred to) for the same calendar year of representative corporations, partnerships, and individuals, engaged in a like or similar trade or* business, bears to the total net income of the trade or business received by such corporations, partnerships, and individuals, plus (2) in the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000.

On beginning the business in 1917 the petitioner had no money except borrowed money and no capital or materials except a few small tools of negligible value. The contracts with the Government had been obtained upon open bids without cost. It is clear that there was no invested capital employed in the business as the term is defined in section 207 of the 1917 Act. See Cartier v. Doyle (C. C. A.) 277 Fed. 152; Gus Sun Boohing Exchange Co. v. Deane, 10 Fed. (2d) 378; Empire Fuel Co. v. Hayes, 295 Fed. 704. It is admitted that the $25,000 of borrowed money was used in the business and was perhaps necessary to its existence in the beginning. In Empire Fuel Go. v. Hayes, supra, the court found that a corporation which had borrowed all of the money used to purchase and operate a mine had no invested capital and was, therefore, subject to be taxed under section 200. In Cartier v. Doyle, supra, it was held that a partnership engaged in buying and selling timber and lumber products which conducted its business entirely on borrowed money in considerable amount had “ nominal capital ” but not “ invested capital ” and Avas entitled to have its excess-profits tax computed under section 209. The facts in these cases are not distinguishable in any material respect from those in the case at bar. Those businesses can not be said to require any less use of capital than the one in which the petitioner Avas engaged.

The .petitioner’s total expenditures for the year were $601,404.78. He Avas not required to complete his contracts before receiving any remuneration from the Government. A part of the contract price Avas paid as soon as the material Avas delivered upon the job and another part paid when the Avork was completed. These funds, together with the $25,000 borroAved money, the petitioner kept in a general account out of Avhich all the expenses of operation were paid. In Park Amusement Co. v. McCaughn, 14 Fed (2d) 553, a corporation conducting an amusement park had a capital stock of $2,000. Gross expenditures of approximately $150,000 for the year were made out of current receipts. It had a net income for the taxable year of $30,000. The court held that the corporation had not more than a nominal capital of any kind and was subject to excess-profits tax at the flat rate of 8 per cent under section 209. With respect to the expenditures made by the corporation out of current earnings, the court said:

In a sense, of course, expenditures may be said to be capital, but not in the sense in which the word is employed in any taxing laws, and not in the sense which is commonly ascribed to the word. The sum total of expenditures lias usually a direct relation to the volume of business done; but it does not necessarily bear any relation to capital, because a concern with a small, although ample, capital may do a large business in one line, when the same volume of business, measured in money, may require a much larger capital in another line. To call the aggregate sum of all tlm money employed in buying and selling capital, when the same dollar may have been used any number of times, is to make “ ducks and drakes ” of words.

See also Railroad Stevedoring Corporation v. Bowers, 7 Fed. (2d) 781; Appeal of Clarence Whybrow, 1 B. T. A. 725; Appeal of J. J. O'Connor & Co., 1 B. T. A. 1021; Appeal of W. Wiley Wahl, 2 B. T. A. 1106.

The weight of legal authority is that in a case where no invested capital or only a nominal capital is actually invested in the business, even though the business is conducted upon a financial plan which calls for the use of a large amount of money, as Avas the case here, there can not be set up a theoretical capital for the purpose of effecting an harmonious application of the taxing statutes. Gus Sun Booking Exchange Co. v. Deane, supra. We think that the petitioner has proven his right to have his excess-profits tax for the year 1917 computed at the flat rate of 8 per cent, as provided in section 209 of the Act.

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

Considered by Littleton, Teussell, and Love.


author: Siefkin:

text:
    George L. Stone, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10756.
    Promulgated November 8, 1927.

      Oscar E. Waer, Esq., for the petitioner.

      Alva 0. Baird, Esq., for the respondent.
   OPINION.

Siefkin:

As to the amount of $6,200.01 earned commissions in 1920, the evidence is clear and uncontradicted that the petitioner had no right to the amounts credited to him on the books of the partnership except as the business warranted and it is equally clear that the business did not warrant. See section 218 (a), Revenue Act of 1918.

The year 1921, for which a deficiency is asserted by the respondent, is not placed in issue. The respondent’s determination as to that year is approved.

Judgment will be entered wpon 15 days' notice, u/nder Bule 50.

Considered by Trammell, Morris, and Murdock.


author: Sieekin :

text:
    Estate of A. F. T. Cooper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12634.
    Promulgated November 8, 1927.

      A. W. McCullough, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   OPINION.

Sieekin :

The pertinent provisions of the Revenue Act of 1918 are as follows:

Sec. 210. * * * There shall he levied, collected, and paid for each taxable year upon the net income of every individual a normal tax at the following rates * * * (b) For each calendar year thereafter [after 1918], 8 per centum of the amount of the net income in excess of the credits provided in section 216: Provides,, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum.
Sec. 216. That for the purposes of the normal tax only there shall be allowed the following credits * * * (e) In the case of a single person, a personal exemption of $1,000 * * *.
Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including — (1) Income received by estates of deceased persons during the period of administration or settlement of the estate * * * (c) In cases under paragraph (1) * * * of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary * * *. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
Sec. 1. * * * The term “ taxpayer ” includes any person, trust or estate subject to a tax imposed by this Act * * *.
Sec. 200. * * * The term “fiduciary” means * * * administrator * * * or any person acting in any fiduciary capacity for any person, trust or estate; * * *

We have no doubt that the Revenue Act of 1918, applicable here, indicates a clear intent by Congress to treat an estate as a separate taxable entity. When we further consider those cases in the Federal courts in which diversity of citizenship has been held uniformly to depend upon the status of the trustee, executor, administrator, guardian, etc., rather than the status of their principals, whether decedents, heirs, or other beneficiaries (as City of New Orleans v. Whitney, 138 U. S. 595; Mexican Central Ry. Co. v. Eckman, 187 U. S. 429, 434; Susquehanna & Wyoming Valley Railroad & Coal Co. v. Blatchford, 11 Wall. 172) we have no hesitation in holding that the petitioner, in this case, is not a nonresident alien of Great Britain and Ireland and that the deficiency asserted on that basis must fall. See also Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509, 516, which holds, under the Acts of 1916 and 1917, that in the case of trusts or estates the trustee, administrator or executor is the taxable person.

Judgment will he entered for the petitioner.

Considered by Trammell, Morris, and Murdock.


author: Siepkin :

text:
    John Lutz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9075.
    Promulgated November 8, 1927.

      Bal'pK B. Mayo, Esq., for the petitioner.

      P. J. Bose, Esq., for the respondent.
   OPINION.

Siepkin :

The sole question is whether petitioner is entitled under section 214 (a) (7) of the Revenue Act of 1918, to deduct from 1920 gross income certain indebtedness due from the Bar D Cattle Co. It appears that the books of the debtor at the end of the year 1920 showed liabilities $4,447.27 in excess of the book value of the assets, which were prior to petitioner’s claim. Such assets, as shown by the balance sheet of the debtor introduced in evidence, consisted largely of live stock.

Although the financial condition of the debtor, as disclosed by its books, may have looked black to petitioner in the year 1920, the fact remains that the debtor corporation was still to be liquidated, and is not entirely liquidated even now. We do not know whether the assets and liabilities as shown by the books of the debtor correctly reflected the amounts available to the petitioner. The fact that the petitioner took a deduction of only 60 per cent of the debt in his return for 1920 is some indication that at that time he did not consider the debt wholly worthless, as it must be to permit a deduction under the Revenue Act of 1918. We do not believe that the petitioner has satisfied the requirement of the statute in ascertaining the debt to be worthless.

Judgment will be entered for the respondent.

Considered by Trammell, Mokris, and Murdock.


author: Siefkin :

text:
    Michigan Trust Co. et al., Executors, Estate of Charles P. Limbert, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6725.
    Promulgated November 8, 1927.

      P. H. Travis, Esq., and Frank E. Seidman, G. P. A., for the petitioners.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Siefkin :

At the hearing petitioner waived its contention as to the March 1, 1913, value allowed by the Commissioner for the stock in the Charles P. Limbert Co. The only issue remaining is as to the validity of the transfer of December, 1920. The respondent contends that the circumstances tending to show the gift was not bona fide are: (1) That the proceeds from the sale of the stock went to Charles P. Limbert and not to Clara T. Limbert; (2) that such proceeds were not received by Clara T. Limbert until after the death of her brother and were then received by her as his heir; (3) that the proceeds from the sale of the stock were included in the inventory of the estate in the probate proceedings and in the estate-tax return to the Federal Government; (4) that the amount of such proceeds was included in an attempted trust which Charles Limbert purported to create for the benefit of his sister at or about the time of the sale of the stock.

As to the first and second points, it is our opinion that the evidence shows clearly that the proceeds of the sale became the separate property of Clara T. Limbert. As to the third point, the inventory and estate-tax return were made by a minor officer of the Michigan Trust Co. who had no knowledge of the conditions under which the proceeds of the sale were received or were dealt with in October, 1922, and that when the matter was discovered by persons cognizant of the facts and authorized to act for the estate, steps were taken to correct the mistake. The fourth contention is based upon facts which, in our opinion, instead of showing that the brother considered the proceeds as his own, tend to show that he intended his sister to have such property absolutely.

Clara T. Limbert, the only living relative of Charles P. Limbert, was the natural object of his bounty, and we are fully convinced from the testimony of the witnesses who appeared at the trial, and from the circumstances surrounding all of the transactions in question, that the gift to the sister was a valid one.

Judgment mil be entered on 15 days' notice, v/nder Rule 50.

Considered by Trammell, Moeeis, and Muedock.


author: Geeen:

text:
    First National Bank of Marlow, Okla., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9889.
    Promulgated November 10, 1927.

      P. V. Rabb, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
   OPINION.

Geeen:

The First National Bank of Marlow, Okla., contends that it is entitled to deduct, under the provisions of section 234(a) (5) of the Revenue Act of 1921, $2,000 which its predecessor charged off on a $2,500 note within the taxable year, it having been determined by the predecessor that the probable recovery thereon would not exceed $500.

The facts here show that the Guaranteed State Bank of Marlow, Okla., of which the petitioner is the successor, purchased a $2,500 note of the Miller-Link Lumber Co. from a correspondent bank in St. Louis, Mo. The Miller-Link Lumber Co., before the maturity of the note, was placed in the hands of a receiver. In 1921, after the maturity of the note, the state bank examiner compelled the bank to charge $2,000 of the principal of the note to profit and loss.

The record shows that the bank was in regular communication with the creditors’ committee of the insolvent lumber company, but received no satisfactory statements in regard to the collectibility of the note. Information had also been received from the bank in St. Louis, from which the note had been purchased, that it had charged off notes of this company in the amount of $200,000. The only possible recovery appeared to be from the proceeds of a life insurance policy on the life of the president of the company, which was involved in litigation between the heirs of the deceased and the creditors of the corporation.

We conclude that that debt represented by the note was recoverable only in part and that there was ample reason for charging off $2,000 in 1921.

Judgment uMl be entered for the respondent.

Considered by Sternhagen, Lansdon, and ARUndell.


author: Gebbn:

text:
    J. H. Hulme, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11027.
    Promulgated November 10, 1927.

      Joseph A. Gill, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
   OPINION.

Gebbn:

The petitioner is here seeking to take as a deduction for “ bad debts ” losses alleged to have occurred in the year 1920. The petitioner was the active vice president of the Drumright State Bank of Drumright, Olda., from 1914 until the fall of 1920. In his management of the affairs of this institution, he was required by the discount committee and board of directors to personally guarantee some of the loans which were made under his direction. The bank had a critical examination by the state authorities in the fall of 1920, as a result of which certain of the loans had to be removed from the assets of the bank. The bank called upon him to take up the above-mentioned notes in accordance with his guarantee. The petitioner in his return for the taxable year 1920 claimed as a deduction for “bad debts” the amount expended in taking up the Logue-Thompson Drilling Go. and the E. O. McCullough notes and by his amended petition seeks to deduct the amount of the L. F. Messman note.

The question before this Board is one entirely of fact, and the three items will be discussed in the order in which they are listed above.

The loan of the Logue-Thompson. Drilling Co. was acquired by the petitioner, who was the owner of one-third of the stock in the corporation, in the fall of 1920. Subsequently, in the same year, by vote of the board of directors, all the assets were sold and the proceeds applied to liquidate indebtedness other than that of the petitioner, making his note absolutely worthless. Under this state of facts, the petitioner sustained a loss which was properly deductible under section 214(a) (4) of .the Revenue Act of 1918.

The evidence in regard to the E. O. McCullough transaction is extremely vague. McCullough and the petitioner were partners in the automobile business. The loan made ley the bank was made in the name of McCullough and the petitioner neither signed nor endorsed it; however, the proceeds went entirely to the partnership. There is no evidence as to the date the loan was made nor as to whether losses arising from the partnership were deducted in prior income-tax returns. The record is also lacking as to the amount of this loan which was contributed by McCullough for the benefit of the partnership. The payment of an obligation of his own on the part of the petitioner does not represent a loss. In the absence of any evidence as to the amount that was paid on behalf of McCullough, the finding of the Commissioner should be sustained.

As to the loss claimed in connection with the L. F. Messman note, the evidence is extremely vague. The petitioner received the proceeds of the note and also during the taxable year was prosecuting a suit against the maker of the note upon which he expected to recover and did make a recovery of $2,500 in the subsequent year. The evidence presented does not disclose a loss which may be deducted during the year 1920.

Judgment will be entered on 15 days' notice, wnder Bule 50.

Considered by Sternhagen, Lansdon, and Arundell.


author: Smith :

text:
    Fred Fear & Co., Inc., and Boyce Extract Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9327.
    Promulgated November 10, 1927.

      Benjamin Mahler, Esq., and Maxwell Bhmerler, G. P. A., for the petitioners.

      P. J. Bose, Esq., for the respondent.
   OPINION.

Smith :

During the taxable years Fear & Co. conducted the business of the Doxsee Co. as a department of its own business. At the time of the organization of the latter company in 1918 the stockholders of the company recognized that their shares of stock had no value except such as might be given to them by the financial assistance which was to be given to the corporation by Fear & Co. The assets of the latter company consisted of a strip of land on the Island of Marco, off the coast of Florida, of a building and some equipment which had little value. The evidence shows that if Fear & Co. had insisted upon acquiring all of the stock of the subsidiary company at the time of the reorganization in 1918, it could have done so. Out of sentimental reasons the two stockholders of Fear & Co. were willing that the members of the Doxsee family holding shares of stock in the old company should have a like number of shares in the new company but only with the provision that Fear & Co. should have complete control of the policies and management of the subsidiary company and vote its stock as it desired. There is no reason to question the arrangement that was made. Under-the facts the petitioners must be held to be affiliated with the subsidiary company during the calendar years 1919, 1920, and 1921.

Fear & Co. claims that it made a loan to the Doxsee Co. in 1918, of $30,000, and that there was a complete understanding that in case the loan could not be paid out of profits of the subsidiary company before additional amounts were advanced upon notes given to it by the subsidiary company, the loan was a loss. We think that the evidence does not warrant such an interpretation of the agreement made. Fear & Co. acquired $30,000 par value of the capital stock of the subsidiary company. Apparently the $30,000 was advanced to the subsidiary company as a consideration for the stock. In 1920 Fear & Co. retained this stock interest in the subsidiary company. But if it might be held that the loan was payable only out of profits there apparently was no reason to suppose that that loan might not be paid out of profits' subsequent to 1920. From a consideration of the entire evidence we are of the opinion that the action of the Commissioner in disallowing the deduction of any loss in 1920 is correct.

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

Considered by Littleton, Tettssell, and Love.


text:
    Lang Broom Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8281.
    Promulgated November 10, 1927.

      H. G. Wdllerstedt, O. P. A., for the petitioner.

      Albert S. Lisenby, Esq., for the respondent.
   OPINION.

Smith :

1. The first question presented is whether the petitioner is entitled to deduct from gross income the difference between its book inventory at June 30, 1919, and the actual inventory of cane and. bamboo and of manufactured brooms in the amounts of $840 and $895.17, respectively. The Commissioner has assumed that the petitioner is claiming a double deduction in respect of these items. He has assumed, in the first place, that the cane and bamboo inventory is included in the cost of goods sold and that the shortage in the broom account is not reflected in the gross sales. The evidence of record, however, clearly shows that this is not the case. The cane inventory at January 1,1919, was $4,849.42. Purchases during the year amounted to $11,329.16, making a total of inventory at the beginning of the year and total purchases during the year of $16,178.58. Proper credits to the account, exclusive of the $840 charged to profit and loss, were $3,187.63; the inventory at the close of the year was $3,121.74, making the total of these items $6,309.37. The difference between $16,178.58 and $6,309.37 would indicate that the cost of the goods used in the manufacture was $9,869.21. The schedule attached to the petitioner’s return for 1919 shows, however, that only $9,029.21 was used as representing the cost of materials used. It is, therefore, plain that the petitioner has not attempted to include in the cost of materials used the $840 representing the shortage in the inventory discovered at June 30, 1919. Clearly, the amount is a legal deduction from gross income.

The exhibits introduced in evidence also show that the shortage in the broom account was credited to the broom sales account and appears as a part of the gross sales for the year 1919. Since this amount was erroneously included in the gross sales it is proper to deduct it from gross income as a loss. The $840 and $895.17, representing the shortage in inventories at June 30, 1919, are deductible from gross income.

The deficiency letter shows that the Commissioner added to the petitioner’s gross income for 1919, $1,000 by reason of a sale by it of real estate during the year. The facts are clear that the loss on the sale of the real estate was $1,318.72. Since in its return the petitioner deducted only $666.22 in respect of the transaction, it is entitled to a further deduction of $¿52.50.

The petitioner acquired patents at some time in exchange for $10,000 of its capital stock, upon which the Commissioner has allowed invested capital of $6,250. The evidence does not show the date of acquisition of the patents or that they had any value on March 1, 1913, assuming that they were acquired prior thereto. Upon this state of the record the claim of the petitioner for the deduction for exhaustion of the patents is disallowed.

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

Considered by Littleton, Tettssell, and Love.


author: Love:

text:
    North & Dalzell, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3837.
    Promulgated November 10, 1927.

      Irving Zion, Esq., for the petitioner.

      T. M. WilJdns, Esq., for the respondent.
   OPINION.

Love:

We will first dispose of the respondent’s contention that he erred in allowing the petitioner the benefit of section 303 of the Revenue Act of 1918, and that the petitioner’s tax for the year in question should be computed under section 301 of the 1918 Act.

The petitioner admits that the respondent was correct in his determination that it was entitled to the benefits of section 303 of the 1918 Act and, therefore, the burden of proof is on the respondent to show that he erred in computing the petitioner’s tax under that section. If the respondent is to prevail in this respect, it is necessary that he establish either by evidence offered by him or' by the petitioner’s evidence as a fact that the petitioner was not in fact carrying on a trade or business part of the income of which was derived from personal service and part from the employment of capital. There is not sufficient evidence in the record to prove that the petitioner did not conduct such a business as is provided for by section 303 of the Revenue Act of 1918. The respondent, having in his determination of the deficiency herein, found that the petitioner came within the provisions of section 303 of the Revenue Act of 1918, and there not being sufficient evidence to prove that the petitioner did not in fact come within the provisions of that section, we can not disturb his determination in that respect.

The petitioner contends that its war-profits credit should be increased. As a basis for this contention it alleges that it clearly falls within the provisions of sections 310, 311, and 330 of the Revenue Act of .1918. Briefly, the contention made by the petitioner is that this is a case of the reorganization, consolidation, or change of ownership after January 1,1911, of a trade or business now carried on by a corporation.

The pertinent sections of the 1918 Act are as follows:.

Seo. 310. That as used in this title the term “ prewar period ” means the calendar years 1911, 1912, and 1913, or, if a corporation was not in existence during the whole of such period, then as many of such years during the whole of which the corporation was in existence.
Sec. 311. (a) That the war-profits credit shall consist of the sum of:
(1) A specific exemption of $3,000; and
(2) An amount equal to the average net income of the corporation for the prewar period, plus or minus, as the case may be, 10 per centum of the difference between the average invested capital for the prewar period and the invested capital for the taxable year. * * *
Sec. 330. That in the case of the reorganization, consolidation, or change of ownership after January 1, 1911, of a trade or business now carried on by a corporation, the corporation shall for the purposes of this title be deemed to have been in existence prior to that date, and the net income and invested capital of such predecessor trade or business for all or any part of the prewar period prior to the organization of the corporation now carrying on such trade or business shall be deemed to have been the net income and invested capital of such corporation.
If such predecessor trade or business was carried on by a partnership or individual the net income for the prewar period shall, under regulations prescribed by the Commissioner with the approval of the Secretary, be ascertained and returned as nearly as may be upon the same basis and in the same manner as provided for corporations in Title II, including a reasonable deduction for salary or compensation to each partner or the individual for personal services actually rendered. * * *

In determining whether the petitioner carried on the same business as that conducted by the predecessor partnership, the record before us must be controlling. The partnership, predecessor to the petitioner, appears to have conducted a business of a dual nature. Income was derived from one part of the business by reason of personal service; from the other part by reason of the employment of capital. The nature of that part of the partnership business, the income of which was derived from the employment of capital, is not disclosed. Likewise, the petitioner, which claims to have carried on the same trade or business as that conducted by the predecessor partnership, conducted a business, in a part of which the employment of capital was necessary, and in a part of which the income was derived from personal service.

We do not know nor can we assume that that part of the business of the petitioner in which the employment of capital was necessary is, in fact, a continuation of the same part of the business of the partnership in which capital was employed. The record in this respect is entirely silent. We must hold, therefore, that the petitioner has failed to establish its claim that it comes within the provision- of section 310 of the 1918 Act.

Inasmuch as the petitioner does not come within section 330 of the Revenue Act of 1918, we must also approve the war-profits credit for the year 1918 as determined by the respondent.

Judgment will be entered for the respondent.

Considered by Trussell, Smith, and Littleton.


author: Sternhagen :

text:
    Mossman, Yarnelle & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3269, 11076.
    Promulgated November 11, 1927.

      Frank H. Bryan, Esq., W. J. Vesey, Esq., and J. M. Ohenoweth, Esq., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner claims that for 1918 it has the right to the deduction of $36,000 set forth in the corporate resolution of June, 1919, for additional salaries to officers. The amounts were not fixed in 1918, were not carried in the accounts at any time as a liability, were not, so far as the evidence shows, communicated to any of the employees, and have never been paid. The only evidence of their existence on the corporate records is that contained in the minutes of the meeting of June, 1919. The oral testimony of the officers goes only to the extent of saying that the matter of increased salaries had been discussed at various times, and does not disclose any action definite enough to represent a liability. In 1918 the only evidence is that such an informal discussion occurred, and in our opinion this falls short of establishing a deductible expense paid or incurred in that year. While it is true, as petitioner contends and this Board has repeatedly recognized, that corporate action may be informal and yet binding, the evidence here does not establish any effective corporate action whatever in 1918. The respondent’s determination as to this item is sustained.

For 1918 and 1919, the respondent erroneously reduced invested capital by subtracting from earnings available for dividends tentatively estimated tax amounting in 1918 to $32,361.76, and in 1919 to $66,804.94. This was contrary to L. S. Ayers & Co., 1 B. T. A. 1135, and numerous later decisions, and the respondent is reversed.

The petitioner next argues that at the time of its organization in February, 1908, it acquired in exchange for its capital stock of a par value of $100,000 not only the cash and tangible assets of the business theretofore conducted by the partnership, aggregating $489,-356.34, but also a substantial additional value representing the good will or other intangible assets of the business. This intangible value is claimed by the petitioner to amount to $200,000,

The Revenue Act of 1918, section 326, in setting forth the factors which may be included in invested capital, includes the cash and the full value of tangible property paid in for stock up to the par value of the stock issued therefor. There is a proviso, however, that the excess of the value of the property actually paid in if clearly shown may be included as paid-in surplus. Invested capital may further include the actual cash value of intangible property bona -fide paid in for stock or shares not exceeding the lowest of (a) the value of the property, (b) the par value of the stock, (c) 25 per cent of the par value of the stock outstanding on March 3, 1917. In St. Louis Screw Co., 2 B. T. A. 649, followed in Tyler & Hippach, Inc., 6 B. T. A. 636, the Board held that where a mixed aggregate of tangible and intangible property was paid in to a corporation in exchange for' its capital stock, and the aggregate value of the property exceeded the par value of the stock issued therefor, a proportionate allocation might properly be made by which a portion of the par value of the stock was to be regarded as issued for tangibles and a portion for intangibles, and the excess of the value of tangibles over the par value of the stock proportionately issued therefor might properly be included within invested capital as paid-in surplus, although as to intangible property such paid-in surplus was clearly prohibited by the statute. See Herald-Despatch Co., 4 B. T. A. 1096. Thus it will be seen that if the petitioner is able to prove a value of intangibles paid in for stock or shares, its invested capital is increased by an amount equivalent to the portion of par value of stock attributable to intangible property.

There is no question that the value of the business paid in for stock or shares included cash and tangible property aggregating $489,-356.34, and that the par value of the total stock issued for the business as a whole was $100,000. Thus far the Commissioner has included the full amount within invested capital. The taxpayer contends that this should be increased by the alleged intangible value. This requires the determination by this Board of two questions — (1) whether in fact at the time of the corporate organization there was any intangible property in the business, and (2) if so, the determination of its value.

There are no well known and uniformly accepted rules either for the determination of the existence of good will or for its valuation, and it is only by looking at the circumstances of the business as a whole in the light of its history up to the time of the transfer date under consideration that the question can be decided. The evidence discloses that the business conducted by the partnership was successful from the time of its inauguration in 1898 until its incorporation m 1908; that its reputation was well and favorably established; that its investment out of earnings increased, from year to year; and that its earnings showed a steadily upward trend except for the year 1904, when there was a slight decline. The statement of two witnesses, both substantially interested in the present proceeding, were that in their opinion the good will was worth $115,000 or $200,000. Their method, however, of reasoning to this opinion gave little, if any, indication of its basis. While the problem of valuation is not to be confined to the application of mathematical formulae or governed by a slavish adherence to a rule, nevertheless it may not as a matter of law be disposed of by the categorical opinions of witnesses unless their training and experience and their intelligent appreciation of the nature of the valuation problem give substance to their opinions. With such evidence as there is in this record in respect of the history of this business, we have reached the conclusion that the good will of the business was on February 5, 1908, worth $100,000.

For a mixed aggregate of tangible and intangible property, having a combined actual cash value of $589,356.34, there was issued $100,000 par value of capital stock; and by applying the rule laid down in Appeal of St. Louis Screw Co., supra, it is found that intangible property, of a value of $100,000, was paid in to petitioner for $16,967.66 par value of capital stock. Since the par value of the capital stock issued for the intangible property is the lowest of the three limitations prescribed by the statute, this is the amount to be included in invested capital; and invested capital shown in the deficiency notice should be increased by $16,967.66. Proper adjustment should be made under section 326 (c) in respect of inadmissible assets.

Pursuing further the subject of intangible value, the question is raised as to such value on March 1, 1913, as a factor in the computation of gain or loss on the disposition of the business in 1919 to the newly created Mossman-Yarnelle corporation. The facts indicate that the good will had substantially increased in ’ the live years between the creation of the corporation in 1908 and 1913. The capital and the earnings steadily grew. In view of all the evidence, we are of opinion that the fair market value of the good will and other intangible property of the petitioner on March 1, 1913, was $150,000. Since, however, this is higher than the cost in 1908 as heretofore found, it may not be considered in computing any loss which may have been sustained in its disposition in 1919. Ludington v. McCaughn, 268 U. S. 106; 5 Am. Fed. Tax Rep. 5376; United States v. Flannery, 268 U. S. 98; 5 Am. Fed. Tax Rep. 5373. The basis of determining such loss is the lower figure as between cost and value on March 1, 1913, which in this instance is $100,000.

For 1919 the parties are in dispute in respect of the measure of the loss ultimately sustained as the result of the two transactions in October, one whereby the petitioner exchanged its business, good will, cash, stock in trade, contracts, and filing systems, for stock of the new corporation having an aggregate par value of $396,000, and shortly thereafter sold the said stock for $251,700. The precise situation is greatly confused by several counteracting book entries which were made to reflect it, and it is apparently as the result of this confusion that the Commissioner’s determination is likewise not clearly set forth. It is only by a diligent search of the records and a careful analysis that the true situation in respect of its tax significance is disclosed. Throughout the period of its history until the transfer to its successor corporation, the petitioner carried no entry upon its books showing as an asset any of the items of good will, leasehold value, contracts, or filing systems. Whatever it owned of such items was not, therefore, represented, so far as the accounts show, by either cost or 1913 value. The book value of the merchandise account and that of furniture and fixtures were the only two items transferred which were shown on the books. The merchandise account was shown at $245,000, and this item is not disputed by the Commissioner as representing the cost basis to be'used for this item in the transaction. This leaves only the remaining four items. As to these, since the cost or March 1,1913, value was taken as zero, clearly there can be no charge of excessive valuation, and taking the entire stock as having in fact a fair value of $251,700 as represented by the almost concurrent sale thereof, it is readily seen that the loss on the entire transaction can be no less than the $44,877.48 claimed by the petitioner. We have, however, heretofore found that the good will had in fact cost $100,000, and this should therefore be substituted for the zero used by the petitioner on its books as the basis for the inclusion of that item in the group conveyed. Thus the loss becomes $144,877.48 instead of the $44,877.48 taken by the petitioner.

Respondent, in the deficiency notice, has confused the entries in the furniture and fixtures account; and of the total book loss from the sale of the properties and of the stock received therefor he has disallowed the sum of $5,577.48, as the loss alleged to have been claimed by petitioner on the disposition of the furniture and fixtures. His action is premised on the grounds that the furniture and fixtures were entered on the books at a depreciated cost of $4,422.52, and that petitioner, in computing the net loss on the exchange of the properties for stock, assigned to the furniture and fixtures a cost of $10,000. At the time of the transfer, the furniture and fixtures were carried on petitioner’s books at a depreciated cost of $5,577.48, and at the same time, of the total par value of the stock received for all the properties, $10,000 was credited to furniture and fixtures account, reflecting a book profit of $4,422.52. This profit, together with the book profits in the other property accounts, all of which resulted from treating the stock received in exchange for the properties as worth par, and which amounted in the aggregate to $99,422.52, was offset against the loss of $144,300 from the sale of the stock received for the properties, showing a net book loss from the two transactions of $44,877.48, which is the amount which petitioner claimed as a loss in the return. Comparing the actual facts with those assumed by respondent, his confusion is disclosed. The total loss should not have been reduced by $5,577.48, and as to this, respondent is in error.

We have found, therefore, that as a result of the entire conversion in 1919 of these assets into cash through the acquisition of the stock and its cash sale, there was a loss amounting to $144,877.48, and this amount should be used in the computation of the petitioner’s net income for that year. The result is a matter of computation, and since it does not produce a net loss it will not affect petitioner’s taxable net income for 1918.

The evidence does not establish any error of the respondent in respect of the inclusion in income of the amount of $50,000 allocated to the lease, and since the point is not pressed by petitioner the respondent is sustained.

In computing the deficiency in accordance herewith proper adjustment should be made for the correct taxes in computing the invested capital.

Keviewed by the Board.

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


author: MoRRis:

text:
    Appeal of Theodore H. Smith.
    Docket No. 1054.
    Promulgated November 11, 1927.

      Francis J. Batchelder, G. P. A., for the petitioner.

      Arthur E. Fast, Esq., for the Commissioner.
   OPINION.

MoRRis:

Petitioner alleges error on the part of the respondent in disallowing as a deduction in the computation of his taxes for the years 1917, 1918, and 1919 the amounts of $24,980, $22,236.26, and $18,901.06, respectively, representing premium discounts sustained by petitioner in the marine insurance transactions hereinbefore discussed, and, further, in deducting from dividends received from the Atlantic the sums of $24,980, and $22,236.26 and holding that said amounts were not dividends but were a return of capital invested. While the petitioner contends that the figure of $24,980 above referred to is excessive to the extent of $2,440.40, no satisfactory explanation has been advanced which would warrant our making any change. It is true the petitioner’s witness, an expert accountant, testified as to what the books contained, but he has not shown us by his testimony why the book figures should be changed.

For reasons which will be made apparent by this opinion, these marine policies purchased by petitioner from the Atlantic must be separated into two classes: (1) policies purchased in the name of the petitioner and resold by him to his clients, and (2) policies purchased by the petitioner for and in the name of his clients.

With respect to the policies of insurance purchased by the petitioner from the Atlantic in his name for resale to his clients we confess that we can see no difference between such purchases and sales and the ordinary purchases and sales of any other assets or commodities. By purchasing this insurance in his own name the petitioner thereby became a policy holder of the Atlantic and as such, enjoyed all of the rights and privileges appertaining thereto, which included voting. He purchased this insurance for the express purpose of reselling it and it is clear to us that he must have regarded the amount of the premium collected from his clients plus what he would receive from the Atlantic by way of certificates of profit as the sale price. Therefore the insurance premiums paid by the petitioner upon policies issued to himself represented the cost of such insurance purchased for resale and upon such resale the profit derived or the loss sustained is the difference between the premiums paid by petitioner to the Atlantic and the amounts received from clients plus the certificates of profit from the Atlantic. Said profit or loss should be reported in the year in which the certificates of profit are received. As the certificates had a market value of 90 to 95 per cent during the taxable years in question, the amount of the profit or loss should be determined by including the certificates at 95 per cent of their face value if the petitioner’s books are kept on the cash receipts and disbursements basis, or at their face value if his accounts are on the accrual basis.

The circumstances surrounding the insurance purchased by petitioner for William E. Peck & Co., Inc., and the Bull Insular Line are, we believe, entirely different. In these cases the petitioner was not in the relation of principal and client, as in those cases where he purchased insurance in his own name for resale, but was acting in his usual capacity as insurance agent negotiating insurance for and in the name of his client. As such agent or broker, he procured the policies for those two companies.

With respect to the peculiar arrangement for the payment of premiums on those policies, it might safely be said that the petitioner acted the same as any other insurance agent might have acted under the same or similar circumstances. Petitioner was confronted with the necessity of satisfying the needs of his clients, and for failure to do so, might have found himself losing some or all of the other business brought to him by his clients, and being so circumstanced, he in effect said: “ I will arrange the insurance which you want and will pay the premium demanded by the Atlantic and I will look to you for reimbursement in part and to the dividends declared by the Atlantic for the remainder.” This indeed, as the petitioner admits, was a wise course to pursue even though he might have sustained a loss on the transaction. The amounts of premiums so advanced by the petitioner were advancements with the expectation of being reimbursed by his clients through the receipt of certificates of profit, and when such certificates of profit were declared and either assigned to or issued directly to the petitioner, although they might be dividend income in the hands of William E. Peck & Co., Inc., and the Bull Insular Line, they lost their identity as such when they were received by the petitioner, and were then nothing more than reimbursement of monies advanced by an agent for the account of his client. To the extent that an amount received by petitioner was more or less than the amount advanced by him, he realized a profit or sustained a deductible loss which profit or loss sh0ui4.be included in the computation of net income for the year in which the certificates of profit were received by the petitioner. In the computation of said profit or loss the certificates of profit should be included at 95 per cent of their face value if the petitioner’s accounts are on the cash basis or at their face value, if on the accrual basis.

Reviewed by the Board.

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

Trussell dissents.


author: Littleton :

text:
    James B. Lowell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7151.
    Promulgated November 14, 1927.

      Joseph, B. Uniache, Esq., and Josefh B. Kelley, Esq., for the petitioner.

      W. F. GiFbs, Esq., for the respondent.
   OPINION.

Littleton :

The petitioner contends that he is entitled to a deduction in 1919 of a loss sustained in that year of one-half the value of the debenture notes of the Sugar Corporation then held by him and, apparently, at the hearing abandoned the claim that a deduction could be allowed on account of a debt which had been determined to be worthless in part. Whether the deduction properly comes under the bad debt provision or the loss provision, it becomes unnecessary to consider in this instance, since it appears that under neither provision is the petitioner entitled to the deduction claimed.

Even if we should consider that the evidence were sufficient to establish the extent to which the debenture notes, which are evidences of indebtedness and represent debts owing by the Sugar Corporation to the petitioner, were worthless, a deduction on account thereof could not be allowed since it is admitted on all sides that the entire debt was not determined to be worthless in 1919, and the revenue acts prior to the Revenue Act of 1921 make no provision for allowing a deduction of a part of a debt. Appeal of Steele Cotton Mill Co., 1 B. T. A. 299.

With respect to the claim that a loss was sustained in 1919, the evidence is wholly insufficient to justify the conclusion that a loss was sustained in that year. The evidence shows that the Sugar Corporation was in financial difficulties, not only in 1919, .but also long prior thereto, but there was no act done in 1919 which would fix the loss as occurring in that year. The most that can be said is that at a meeting of the stockholders held on December 22, 1919, the stockholders voted to accept an offer for the purchase of the corporation’s properties. The sale was 'finally consummated in 1920. The resolution of December, 1919, authorizing the sale of the property, specifically provided that certain classes of claims should be paid from the proceeds of the sale price, but that the debenture notes should not be paid until after another meeting of the stockholders, at which time the extent to which the holders of debentures would share in the funds yet remaining would be determined. No evidence has been presented as to the subsequent stockholders’ meeting, but we do find that a composition agreement was signed in July, 1920, which set out the manner in which the various interested parties should share in the proceeds of the sale which had been consummated. In 1920 the moneys were distributed and the Sugar Corporation dissolved.

We are of the opinion that the foregoing is insufficient to establish a loss as having been sustained in 1919 and, accordingly, the action of the Commissioner in disallowing a loss in that year is sustained.

Some evidence was introduced as to $5,000 which the petitioner advanced on behalf of the Sugar Corporation, but not at the request of said corporation, to pay certain rentals. This amount was included in the amount disallowed by the respondent in determining the deficiency, but the petition puts in issue only the claimed loss of $8,750 on account of the debenture notes, and no amendment was later made which would permit us to consider this issue. Appeal of Dixie Manufacturing Co., 1 B. T. A. 641.

, Judgment will be entered for the respondent.

Considered by Trussell, Smith, and Love.