author: Smith: Littleton,

text:
    Arthur R. Jones Syndicate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8343.
    Promulgated December 17, 1926.
    Amounts paid by petitioner during the taxable year for the use of money for which first preferred shares were issued represented the payment of a dividend and not the payment of interest on indebtedness.

      Maurice T. Weinshenk, Esq., and David K. Tone, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.

      In this proceeding the petitioner contests the determination of a deficiency in income and profits tax for 1921 in the amount of $4,005.73, resulting from the disallowance of a deduction of $29,166.65, claimed by the petitioner to have been paid as interest on a loan. The Commissioner designated the amount as a dividend upon stock.
    FINDINGS OF FACT.
    The petitioner is an Illinois syndicate with its office at 842 First National Bank Building, Chicago. The Arthur K. Jones Syndicate was organized in December, 1920, for the purpose of purchasing and acquiring title to certain real estate, the “ Springer Building,” located at Clinton and Canal Streets, in the City of Chicago, and to manage and dispose of the same for the benefit of its members. The property was acquired by the Syndicate at a master-in-chancery sale, through the agency of the Northern Trust Co. of Chicago. The legal title to the property was placed in the Chicago Title & Trust Co. as trustee for the members of the Syndicate.
    Arthur B,. Jones held a fourth mortgage on the property in the amount of $65,000 and was required to make redemption on or before December 11, 1920, in order to protect his interest. Approximately $600,000 was needed for this purpose. He and some of his associates valued the property considerably in excess of the amount required to redeem the same, and they raised among themselves $350,000, with the understanding that a Syndicate would be organized and that certificates or shares would be issued to the contributors in proportion to the amount contributed, the understanding being that preferred shares would be issued for the amounts contributed and that $65,000 common shares would be issued to Jones for his claim against the property. These men were unable to obtain additional contributions to bring the amount to $600,000.
    Among the subscribers who had agreed to contribute to the enterprise were F. C. Austin, who had subscribed $50,000, and his cousin, H. W. Austin, who had subscribed $50,000. F. C. Austin was a wealthy man. Before any syndicate agreement had been drawn and on or before November 1, 1920, Jones approached F. C. Austin for a loan to the Syndicate of $250,000. At first Austin was not favorable to making the loan. Jones had several talks with him about the matter, and finally Austin stated that he would make the loan but could not do so at the legal rate of interest, and agreed to loan the Syndicate $250,000 provided he was paid 14 per cent per annum thereon. Thereupon, Jones discussed the matter with his associates. At first they all objected to paying 14 per cent interest, but finally, when it was found that there was no other way that they could raise the amount of money needed to take over the property, they consented to pay Austin 14 per cent interest per annum. Austin was informed of this fact, whereupon he stated to Jones that the loan would be for two years. Jones desired that the loan should be for one year, but Austin refused to make it on that basis and it was finally agreed that the loan would be made on December 11, 1920, and become due on July 1, 1922. On or about December 8, 1920, Austin demanded that, in addition to the interest at 14 per cent per annum, he be given $20,000 of the common shares which were to be issued to Jones for a claim against the property as a bonus for making the loan. Jones refused this demand and Austin informed him that in that event he would not loan the Syndicate the $250,000. Thereupon, Jones began negotiations with his friend Vm. Tilden, president of the Ft. Dearborn National Bank, with the view of seeing if other arrangements could be made to raise the money. After considerable discussion of the matter, Tilden informed Jones that if he could not borrow the money elsewhere he would loan him $250,000 if it should become necessary to protect Jones’ interest in the property. It was not convenient for Tilden to make the loan, but he agreed to arrange it because of his personal friendship with Jones. It was the desire of Jones and his associates to obtain the loan elsewhere than from Tilden if possible. After his talk with Tilden, Jones again conferred with F. C. Austin and informed him of the negotiation with Tilden, whereupon Austin agreed to loan the Syndicate $250,000 at 14 per cent per annum and to waive his demand for the $20,000 common shares as a bonus. Up to this time nothing had been said by anyone concerning the matter of the issuance by the Syndicate of first preferred shares; on the contrary, the understanding was that preferred shares would be issued for the. amounts contributed to the Syndicate, including the $50,000 contributed each by F. C. Austin and H. W. Austin, and that any profit upon such contributions should be entirely dependent upon the success of the Syndicate.
    About the day before it was necessary to take over the property under the right of redemption, up to which time the loan of $250,000 had not been made, Austin informed Jones that it was his desire to have the loan of $250,000 evidenced by first preferred stock of the Syndicate and that his attorney would prepare and submit an agreement providing for this. The reason given by Austin for this was that, although he was convinced from his dealings with Jones over a long period of years, if it were a personal matter with Jones he would pay the 14 per cent per annum without question and carry the transaction out in good faith, but inasmuch as he was lending the money to the Syndicate composed of several people he feared the usury law. Austin forthwith had prepared and submitted to the Syndicate an agreement, hereinafter set forth in the findings of fact. Jones and his associates met and discussed the agreement and the members were informed by Jones of his conversation with Austin. The time for action was at hand and the Syndicate members acceded to the demands of Austin. Austin was informed of the assent of the Syndicate members to the agreement, whereupon Austin made a last moment demand that the 14 per cent per annum on the $250,000 be paid monthly and' that a guarantee policy guaranteeing the title to the property be executed in favor of F. C. Austin and H. W. Austin by the Chicago Title & Trust Co., as trustees, in the amount of $350,000 to protect not only the $250,000 advanced by Austin but also the $100,000 which he and his cousin, H. W. Austin, had subscribed in the amount of $50,000 each as second preferred shareholders of the Syndicate. The Syndicate agreed to make payments monthly, and the policy in favor of F. C. and H. W. Austin was procured, for which a premium of $1,500 was paid by the Syndicate.
    On December 1, 1920, the following agreement drawn by the personal counsel of F. C. Austin was executed and adopted by the members of the Syndicate and assented to by the Chicago Title & Trust Co. as trustees. The $250,000 was thereupon advanced by F. C. Austin to the Syndicate. The receipt of this sum was evidenced by a document which recited that F. C. Austin was the owner of 2,500 shares of first preferred shares of the par value of $250,000 and that such shares were redeemable on July 1, 1922, at par plus a dividend at the rate of 14 per cent per annum.
    This Agreement, made this first day of December, 1920, between
    IT. O. Austin
    H. W. Austin
    David K. Tone
    Drank Schoenfeld
    J. Wallace Wakem
    William B. Frankenstein
    Arthur R. Jones and
    Irving Isador, parties of the first part and
    Chicago Title & Trust Company, party of the second part, Witnesseth:
    That whereas first parties, for the purpose of investment, did heretofore determine to acquire the beneficial interest in the proceeds and avails of the following described property, to wit:
    * * * * * * *
    Whereas, first parties did not intend or desire to acquire any title to said property, legal or equitable, but only an interest in the net avails and proceeds thereof; and
    Whereas, in pursuance of said plan of investment and concurrently and contemporaneously with the execution of this instrument, second party did acquire the title to the above described property for the benefit of first parties in the proportions and subject to the conditions hereinafter set forth; and
    Whereas, first parties did heretofore agree and determine that the title to all of the said property should be acquired and held by second party upon the trusts and for the uses and purposes and subject to all the terms and conditions hereinafter set forth;
    Now, therefoke, in consideration of the premises and of the mutual agreements herein contained and of One Dollar ($1.00) to second party paid by first parties, the receipt whereof is hereby acknowledged, the parties hereto declare that the title to said property is held by second party in trust, upon the trusts and for the uses and purposes and subject to all the terms and conditions contained in this instrument, as follows:
    ARTICLE I.
    The name of the association of the beneficiaries under this trust shall be Arthur R. Jones Syndicate, and its object shall be the acquisition of the above described property, the management and disposition of the real estate described in said master’s certificate and the division of the profits, avails and proceeds of said trust property among its shareholders.
    ARTICLE II.
    The following officers of the Syndicate are hereby named, to fill the respective offices, and to serve until their successors be duly elected and qualified:

    None of the above officers shall receive any compensation, except for services performed in behalf of the Syndicate, and in such case the amount thereof shall be determined by the Syndicate members.
    Any one or all of said Syndicate officers may be removed at any time by the Syndicate members, and in case of the death, removal, resignation or incapacity of any Syndicate officer, then his successor shall be chosen by the Syndicate members, as provided in Article VII hereof.
    ARTICLE III.
    The capital of the Syndicate shall be made up of twenty-five hundred (2500) first preferred shares of One Hundred Dollars ($100) each, six thousand (8000) second preferred shares of One Hundred Dollars ($100.00) each, and Six Hundred Fifty (650) common shares of One Hundred Dollars ($100.00) each, all of said preferred shares to represent and be issued only for cash paid in by preferred shareholders at par, and said common shares to represent and be issued to an amount of six hundred and fifty (650) shares of One Hundred Dollars ($100.00) each, to Arthur R. Jones in payment for his liens upon and interest in said real estate, which have been assigned to second party simultaneously with the execution and delivery hereof.
    The following subscribers to preferred shares have paid the amounts set opposite their respective names.
    FIRST PREFERRED.
    F. C. Austin. ... $250,000.

      SECOND PREFERRED.
    F. 0. Austin_ $_
    H. W. Austin_ $_
    David K. Tone_ $_
    Prank Schoenfeld_ $_
    J. Wallace Wakem_ $_
    William B. Frankenstein_ $_
    Arthur R. Jones_ §_
    Irving Isador_ $_
    After the issuance of preferred shares to each of the subscribers as herein listed, and of common shares to the number of Sis Hundred Fifty (650) shares of One Hundred Dollars ($100.00) each, to Arthur R. Jones, the remaining second preferred shares shall be issued only by vote of the Syndicate members, as provided in Article VII hereof.
    Said first preferred shares shall be subject to redemption, as a whole, on July 1, 1922, by payment of the par value thereof plus a dividend at the rate of fourteen per cent per annum from the date hereof to the date of such payment. Such redemption may be made either from money accruing to the Syndicate from rents in excess of expenditures, or from money borrowed by the Syndicate, or from money furnished by the second preferred, and common shareholders, as hereinafter provided in Article XIII hereof.
    ARTICLE IV.
    Certificates shall be issued by second party evidencing the shares of the Syndicate members in substantially the following form:
    Abthub R. Jones Syndicate.
    No- -Shares
    This is to certify that_is (first preferred 1 second preferred! shares of One Hundred Dollars common j each of the beneficial interest of Akthub R. Jones Syndicate established for the purpose of acquiring the property described in a certain Trust Agreement, dated the 1st day of December, 1920, and on deposit with the undersigned as Trustee, being known as
    Trust Agreement Number_
    The total par value of the first preferred shares authorized to be issued is Two Hundred Fifty Thousand Dollars ($250,000) and the total par value of the second preferred shares authorized to be issued is Six Hundred Thousand Dollars ($600,000) and the total par value of the common shares authorized to be issued is Sixty-Five Thousand Dollars ($65,000.00).
    This certificate and the interest represented hereby shall be subject to all the terms and conditions contained in said Trust Agreement to the same extent and in like manner and with the same force and effect as if said Trust Agreement were fully and at length described herein.
    It is expressly agreed that the holder hereof has no claim or interest, legal or equitable, in the property described and referred to in said Trust Agreement, but only an interest in the net avails or proceeds thereof as in said Trust Agreement provided.
    This certificate is transferable only by endorsement on the bach of the same and the surrender thereof to the Trustee, when a new certificate will be issued to the transferee.
    Chicago,-, 19_
    Chicago Title and Trust Company, As Trustee,
    By-
    * * * * * * *
    ARTICLE Y.
    Said Master’s certificate has, simultaneously with the execution and delivery of this instrument, been purchased from The Northern Trust Company for the sum of - Dollars ($_), and an assignment of said certificate has for the time being been taken in the name of an individual representing second party, and second party guarantees to first parties that such individual is acting solely for second party and that he will execute whatever documents are necessary to assign or convey to second party his interest in said certificate, or the real estate therein described (in case a deed to said real estate shall be taken in his name), free and clear of any defects in title arising by reason of any acts or omissions of such individual or any judgments or claims which may exist against him.
    ARTICLE VI.
    The deed to second party, by which the real estate described in said Master’s Certificate shall be conveyed to second party, as Trustee, shall recite that said property is conveyed to second party, as Trustee, under the provisions of a Trust Agreement dated the first day of December, 1920, and known as Trust No.- (said Trust Agreement being this instrument) and shall contain the following provisions:
    “ Eull power and authority is hereby granted to said trustee to improve, manage, protect and subdivide said premises or any part thereof, to dedicate streets, highways or alleys, and to vacate any subdivision or part thereof, and to resubdivide said property as often as desired, to contract to sell, to sell on any terms, to convey, either with or without consideration, to donate, to dedicate, to mortgage,' pledge, or otherwise encumber; to lease said property, or any part thereof, from time to time, by leases to commence in praesenti or in futuro, and upon any terms and for any period or periods of time, not exceeding 198 years, and to renew or extend leases upon any terms and for any period or periods of time, and to amend, change or modify leases and the terms and provisions thereof at any time or times hereafter; to partition or to exchange said property, or any part thereof, for other real or personal property, to grant easements or charges of any kind, to release, convey, or assign any right, title or interest in or about said premises and to deal with said property and every part thereof in all other ways and for such other considerations as it would be lawful for any person owning the same to deal with the same, whether similar to or different from the ways above specified, at any time or times hereafter.
    In no case shall any party, to whom said premises, or any part thereof, shall be conveyed, contracted to be sold, leased or mortgaged by said trustee, and in no case shall any party dealing with said trustee in relation to said premises, be obliged to see to the application of any purchase money, rent or money borrowed or advanced on said premises, or be obliged to see that the terms of this trust have been complied with, or be obliged to inquire into the necessity or expediency of any act of said trustee, or be privileged or obliged to inquire into any of the terms of said trust agreement.
    The interest of each and every beneficiary hereunder and of all persons claiming under them, is hereby declared to be personal property and to be in the earnings, avails and proceeds arising from the disposition of the premises; the intention hereby being to vest in the said Chicago Title and Trust Company the entire legal and equitable title in fee, in and to all of the premises above described.”
    The Trustee shall actually have all of the powers above described, so far as concerns the public or any purchaser or person dealing with the Trustee other than the beneficiaries, hereunder, and all such persons shall be entitled to rely upon the powers of the Trustee as set forth in the recorded deed to said Real estate, without restriction by reason of anything herein contained; but as between the Trustee and the beneficiaries hereunder the Trustee shall act only on the written direction of the owners of not less than three-fourths of the shares of the beneficial interest hereunder represented by second preferred and common shares, or in case of arbitration as hereinafter provided for, then on the written direction of the arbitrator, or in case of non-redemption of all of said first preferred shares as hereinbefore provided on July 1, 1922, then and thereafter only on the written direction of the holders of all of the outstanding first preferred shares.
    ARTICLE VII.
    The real estate described in said Master’s Certificate shall be operated and managed by the Syndicate Members or authorized representatives who shall serve without compensation except as hereinbefore provided.
    All action by the Syndicate Members shall be by the assenting vote of three-fourths of all of the outstanding second preferred and common shares, (each share being entitled to one vote), but in case any proposed action shall not receive a three-fourths affirmative vote, but shall receive a majority vote of the outstanding second preferred and common shares, then if such majority shall wish to have the matter arbitrated, the matter shall be referred for decision to the President of Chicago Title and Trust Company, or to some person whom he may designate, and the decision of such arbitrator shall be binding upon all parties concerned; provided, however, that if redemption of all of said first preferred shares as hereinbefore provided shall not be made on July 1, 1922, then and thereafter all action by and on behalf of the Syndicate members, including the matters covered by Articles X, XV, and XVI hereof, shall be solely by the vote of the first preferred shares, each of such shares being entitled to one vote.
    Meetings of the second preferred and common shareholders may be called at any time by a majority of such shareholders, and five days’ notice of such meeting shall be given by mailing the same to each of such shareholders at his residence or business address if known, or, if not known, then to such shareholder at Chicago, Illinois.
    ARTICLE VIII.
    It is understood that the rentals up to and including December 11, 1920 (in case said property shall not be redeemed or otherwise disposed of by the Syndicate before that time), shall accrue to and belong to said Arthur R. Jones, rather than to the Syndicate.
    The surplus of money paid in by the preferred shareholders, after deducting the amount paid to the said The Northern Trust Company, in purchase of said Master’s certificate, amounts to the sum of-Dollars ($-), which sum shall be deposited in a bank in the name of the Treasurer of the Syndicate, and all other moneys including rents received by the Syndicate Treasurer shall be deposited in such bank account, and disbursements shall be made upon checks signed by the Treasurer of the Syndicate. The Treasurer shall at once pay the general taxes on said real estate for the year 1919 and unpaid installments now due, if any, of special assessments.
    In case of redemption, sale or other disposition of the property belonging to the Syndicate, the proceeds thereof shall be received by second party and shall be applied in the order following.
    1. To the payment of all debts and obligations of the Syndicate.
    2. To the payment of the outstanding first preferred shares of the Syndicate at the rate of One Hundred Dollars ($100) per share plus a dividend thereon at the rate of fourteen per cent, per annum from the date thereof.
    3. To the payment of the outstanding second preferred shares of the Syndicate at the rate of One Hundred Dollars ($100.00) per share, plus a dividend thereon at the rate of six per cent, per annum from the date hereof.
    4. To the payment of the outstanding common shares of the Syndicate at the rate of One Hundred Dollars ($100.00) per share, plus a dividend thereon at the rate of six per cent per annum from the date hereof.
    5. The surplus remaining shall be distributed ratably to the holders of second preferred and common shares without preference to either in proportion to their respective holdings.
    The same priorities shall be observed in the distribution of any other syndicate moneys.
    ARTICLE IX.
    No shareholder in the Syndicate shall, by reason of being a shareholder, be deprived of the right to purchase the Syndicate property, or any part thereof.
    ARTICLE X.
    Except as otherwise provided in Article VII hereof, this trust may be terminated at any time by an instrument in writing signed and acknowledged by the holders of not less than three-fourths of the then beneficial interest hereunder represented by second preferred and common shares, and delivered to said trustee. In any event, this trust shall be terminated at the end of twenty (20) years from the date hereof. Upon the termination of this trust, all of the then undisposed of properties held by the trustee hereunder may be partititioned among the then beneficiaries hereunder, in such manner as such beneficiaries may by agreement determine, or in default of such agreement and upon proper direction of the holders of not less than three-fourths of the then beneficial interest represented by second preferred and common shares, or of an arbitrator, if arbitration is had, all of said undisposed-of properties may be sold as a whole or in part by the trustee hereunder, at public or private sale or sales. Provided, however, that no such private sale, in case of termination of the trust, shall be made without notice thereof to the shareholders of record at the time, place and terms of such sale, and an opportunity to such shareholders as desire so to do, to buy the property sold in proportion to their respective interests at the same price and upon the same terms as it is proposed to sell the same at such private sale, such notice and offer to shareholders to be in writing and either delivered to them personally or mailed to them at their respective residence or business addresses, if known to the trustee, or if not known, then at Chicago, Illinois, not less than ten days prior to such sale. Upon such sale or sales being made, the trustee shall have the power to convey to any purchaser or purchasers thereat, by deed or deeds without covenants, the said properties, or any part or parts thereof, so purchased, the net proceeds of such sale or sales less the expense thereof to be divided pro rata among the then beneficiaries hereunder according to their respective interest; it being understood that the distribution in such case shall be according to the priorities set forth in Article VIII of this instrument.
    ARTICLE XI.
    It is understood and agreed that in all cases under this instrument the parties interested in the earnings, avails and proceeds of this trust, and the extent of their interest, shall be determined by the records of this trust or documents pertaining thereto in the hands of the trustee and the trustee is hereby expressly authorized in all cases to deal with all persons in interest accordingly.
    ARTICLE XII.
    If any shareholder in the Syndicate shall acquire a judgment or other lien upon the real estate described in said Master’s Certificate, it is understood and agreed that the Syndicate shall have the option to acquire the same at the price paid by such shareholder.
    ARTICLE XIII.
    In case redemption of said first preferred shares shall be determined upon by a three-fourths vote of the second preferred and common shares, or by the arbitrator (in case of arbitration), or in case any loan which may be made by the Syndicate shall become due and cannot be renewed it is understood and agreed that the second preferred and common shareholders shall provide, in amounts in proportion to their respective holdings, said redemption money or the amount of said loan, as the case may be, or any amount of cash which it may be necessary to pay on such loan in order to secure a renewal of the balance thereof, and for this purpose there shall be no distinction between second preferred and common shares, and for the money so provided there shall be issued to each person providing the same, to the extent of his contribution, additional second preferred shares at a price of par and accrued dividend (less dividends already paid) at the rate of six per cent per annum from the date hereof; and in case any second preferred or common shareholder shall default in furnishing his pro rata portion of such redemption money, or the amount of such loan, as the case may he, or the amount of cash which it may be necessary to pay on such loan in order to secure a renewal of the balance thereof, or any part of said pro rata portion, then it is understood and agreed that so many of the remaining second preferred and common shareholders as wish to do so may furnish such portion or part thereof, in proportion to their respective holdings of second preferred or common shares, and receive second preferred shares therefor as aforesaid, and in such event they also shall have, in the same proportion, the option to purchase at any time within thirty days after such default, at a price of par and accrued dividend (less dividends already paid) at the rate of six per cent per annum from the date hereof, the second preferred or common shares, as the case may be, of the shareholder who shall have thus defaulted.

      * * * * * * *
    ARTICLE XV.
    The trustee may resign at any time by giving thirty days’ written notice of its intention so to do to the Syndicate members, said notice to be given by mailing a copy thereof to the residence or business address of each of said members so far as the same shall be known to the trustee, and if not known to said trustee, then by mailing a written notice addressed to each of such members at Chicago, Illinois.
    In case of resignation from office of second party, as trustee, a successor in trust shall thereupon be appointed (except as otherwise provided in Article VII hereof) by an instrument in writing, signed and acknowledged by the owners of three-fourths of all the outstanding second preferred and common shares, or, in case of arbitration, by the arbitrator, and delivered to the trustee herein, whereupon said Chicago Title and Trust Company, as trustee, shall convey to such successor in trust all of the trust property then unconveyed and undisposed of by a deed without covenants which said deed may recite that same is made subject to any contract or contracts for the sale of said premises, or any part or parts thereof, or any lease or leases, or any incum-brance or incumbrances then outstanding, and shall transfer to such successor in trust all other assets then in its possession and held hereunder. Said successor in trust shall thereupon be vested with all the rights, privileges, powers and duties of the trustee named herein as if this instrument had in the first place been executed by and to such successor as trustee herein. And each succeeding trustee may in like manner resign and another trustee may in like manner be appointed in its place.
    ARTICLE XVI.
    Except as otherwise provided in Article VII hereof, if the owners of three-fourths of the outstanding second preferred and common shares, or, in case of arbitration, the arbitrator shall at any time desire to terminate the rights of the trustee acting for the time being under this trust, and appoint a new trustee in its stead, they or he may do so by a written instrument addressed to such trustee acting for the time being, and thereupon like conveyances as in the ease of resignation, shall be made by the trustee then acting to the newly appointed trustee, and thereupon such new trustee shall be vested with all the rights, privileges, powers and duties of the trustees herein, as if this instrument had in the first place been executed by and to such new trustee as trustee herein, and in like manner, a new trustee may thereafter be appointed from time to time by an instrument in writing signed by the owners of not less than three-fourths of the then outstanding second preferred or common shares, or in case of arbitration, by the arbitrator.
    ARTICLE XVII.
    If any suit or other legal proceedings shall be instituted wherein the trustee shall be made a party in any manner or capacity by reason of this agreement or by reason of any instrument made by or to it under any of the provisions hereof, then said trustee shall receive and be paid on demand the costs incurred [sic] the reasonable fees of its attorneys for services rendered in any such suit or proceedings; but nothing herein contained shall be construed as requiring said trustee to prosecute or defend any suit or legal proceedings that may be brought as aforesaid. And it is understood and agreed that no acts done by said trustee under this trust or any instrument made by said trustees or to said trustees at any time under any of the provisions of this trust shall in any manner impose any personal obligations or liability on said trustee other than for its gross negligence or abuse of its powers and discretion. *******
    Certificates were issued by the Syndicate to its members as follows:
    1st Preferred_P. C. Austin_ $250,000
    2nd Preferred_H. W. Austin... 50,000
    2nd Preferred_E. C. Austin_ 50, 000
    2nd Preferred_P. Schoenfeld-35, 000
    2nd Preferred_D. K. Tone-35, 000
    2nd Preferred_I. Isador_ 25,000
    2nd Preferred_J. W. Wakem_. 35, 000
    2nd Preferred_A. R. Jones_ 70, 000
    Common_A. R. Jones-65, 000
    Total_ 615,000
    During the year 1921 the petitioner paid to F. C. Austin for the use of $250,000 advanced by him the following sums on the dates mentioned:
    August 4, 1921___$5,000. 00
    September 6, 1921- 6, 666. 66
    October 4, 1921_ 5,833.33
    November 8, 1921- 5,833.33
    December 6, 1921_ 5,833.33
    January 11, 1922_ 5, 833. 35
    About February, 1922, Jones and certain other members of the Syndicate opened negotiations with F. C. Austin with the view of having the Syndicate borrow from an insurance company $500,000 for the purpose of paying Austin the loan of $250,000 with accrued dividends thereon at the rate of 14 per cent per annum. It was the desire of Jones and the other members of the Syndicate, other than the Austins, that the loan be paid immediately upon the receipt of the $500,000 and that dividends cease at the date of such payment. Austin objected to this and insisted that the 14 per cent per annum be paid to July 1,1922. The Syndicate was without sufficient funds with which to carry the loan, and the prospects were that it would be unable to liquidate it on July 1, 1922, without securing additional funds or selling the property. It was not considered advisable to sell the property at that time. Thereupon, Austin consented to permit the application for the loan of $500,000 to go through and agreed orally to accept payment of the $250,000 and 14 per cent per annum thereon to April 1, 1922. Early in March, 1922, the application for the loan of $500,000 was executed, and during the night following the day on which this application was mailed to the insurance company at Boston, the building owned by the Syndicate was destroyed by fire originating in an adjoining building. The building was insured. The insurance company paid the money to the Chicago Title & Trust Co., trustees. At the time of the fire Austin demanded $250,000 plus 14 per cent to July 1, 1922. The Syndicate refused payment of the 14 per cent on the ground that it was usurious interest. Negotiations following resulted in Austin being paid $250,000 principal, plus 14 per cent per annum to May 6,1922.
    Petitioner’s books were kept and all items of income and deductions, with the exception of the dividends paid to Austin, were included in the return upon the accrual basis. The bookkeepers failed to accrue upon the books the amount of $35,000 due Austin and entered only the payments made, with the result that only the amounts paid were claimed as a deduction in the return.
    The petitioner, in making its return for 1921, deducted as interest the sum of $29,166.65 paid to Austin during that year for the use of the $250,000.- The Commissioner disallowed the deduction upon the ground that the amount constituted dividends on corporate stock.
   OPINION.

Smith:

The question involved in this proceeding is whether the payments to F. C. Austin upon his first preferred shares' were in fact distributions of profits to a shareholder or payments of interest on indebtedness. If the latter, they are deductible from gross income; if the former, they are not.

An inspection of the syndicate agreement shows that the certificates of interest held by Austin are throughout the instrument designated as “ shares.” These shares were subject to redemption, as a whole, on July 1,1922, “ by payment of the par value thereof plus dividend at the rate of fourteen per cent per annum from the date hereof to the date of such payment.” (Art. III.) In case of redemption, sale, or other disposition of the property belonging to the Syndicate, the proceeds thereof were to be applied in the order following:

1. To the payment of all debts and obligations of the Syndicate.
2. To the payment of the outstanding first preferred shares of the Syndicate at the rate of One Hundred Dollars ($100) per share plus a dividend thereon at the rate of fourteen per cent, per .annum from the date thereof. (Art. VIII.)

The first preferred shares had no vote, but “ if redemption of all of said first preferred shares as hereinbefore provided shall not be made on July 1,1922, then and thereafter all action by and on behalf of the Syndicate members, including the matters covered by Articles X, XY, and XVI hereof, shall be solely by the vote of the first preferred shares.” (Article VII.)

In Appeal of I. Unterberg & Co., 2 B. T. A. 274, we stated that the name by which an instrument is denominated is not conclusive as to its character and its true nature must be determined by looking to its terms and legal effect. See also In re Fechheimer Fishel Co., 212 Fed. 357, 360; and Fletcher’s Cyclopedia on Corporations, vol. 6, p. 6020, where the legal principle is laid down:

Whether or not the holder of a particular instrument or certificate is to be regarded as a stockholder or a creditor is a question of interpretation, and depends upon the terms of his contract as evidenced by such instrument and the corporate charter and the statutes of the state.

We stated, however, in Appeal of Kentucky River Coal Corporation, 3 B. T. A. 644, 649, that the name which has been given to a corporate issue is not a thing to be ignored “ for it is not lightly to be assumed that parties have given an erroneous name to their transaction.”

In Rider v. Delker & Sons Co., 145 Ky. 634; 140 S. W. 1011, it was held that, even though a certificate of incorporation and the certificate of stock itself provided that after five years the holder of preferred stock might demand back his money in the corporation, he can not enforce this provision until the corporate creditors are paid. The court said:

Tbe capital of a corporation is the sum total of its stock, whether common or preferred. Certificates of stock are mere evidences that the holders thereof have invested the sums called for in the certificates in the enterprise. They run the risk of losing their stock if the business is not a success. As between themselves and third persons who deal with the corporation and give it credit, their stock is equally liable. It is only in eases where the corporation is solvent and the rights of creditors will not be injuriously affected thereby that agreements as to preferences among themselves may be enforced. The entire capital, without regard to any arrangement which may exist between common and preferred stockholders, is at all times subject to and liable for the debts of the corporation, and no part of the capital can be withdrawn from the business until the debts of the corporation are satisfied.

The fundamental characteristic of a share of stock is that the holder is a co-owner of the business and not a creditor. A share of stock carries the right to share in surplus profits and assets after corporate debts are paid. This is shown by the decision in In re Interborough Realty Co., 223 Fed. 646. In that case bondholders sought to prove claims as general creditors. In addition to the ordinary provisions of bonds, the instruments provided for sharing at maturity in net profits. For this reason it was contended that the instrument should be treated as stock. There was no provision in the instruments which would make the claims of the holders for principal and interest subordinate to the claims of general creditors. The court held that the bondholders were promised only repayment of the amount of money loaned with interest, and that the provision to permit holders to share in surplus after payment of debts and 5 per cent on stock did not defeat the bondholder’s right to prove as a general creditor for principal and interest. See also Miller v. Ratterman, 47 Oh. St. 141; 24 N. E. 496; Warren v. King, 108 U. S. 389; Hamlin v. Toledo, etc. R. R. Co., 78 Fed. 664; Heller v. National Marine Bank, 89 Md. 602; 43 Atl. 800.

The petitioner cites the case of Savannah Real-Estate Loan & Building Co. v. Silverberg, 108 Ga. 281; 33 S. E. 908, as one tending to support its contentions. In that case the certificates issued by the Loan & Building Co. were designated as shares of preferred stock. They provided cumulative interest of 8 per cent from profits, carried no right to vote, were to be retired at a fixed date, and the holders were not to share in additional profits. The court held these to be certificates of indebtedness. The decision seems to be based on the provisions of the certificates which provided for their retirement upon a specific date and allowed the holders no voice in the management of the affairs of the corporation. There is also the case of Wright v. Johnston, 183 Iowa, 807; 167 N. W. 680, tending to support the contentions oí the petitioner. In that case shares of so-called preferred stock providing a dividend of 8 per cent were issued. The certificates provided that, in the event of dissolution, holders of these shares were to receive par value plus unpaid dividends and no more. They could not vote. They could, on six months’ notice, require the corporation to purchase the stock at par, plus unpaid dividends. They could also make the demand if four consecutive dividends were passed. The corporation could retire the instruments on a given notice. No mortgage of corporate assets could be given without their consent. The court held that holders of these instruments were not shareholders but creditors.

The preponderance of legal authority favors the Commissioner’s contentions in this case.

Judged by the tests laid down by the authorities upon this point, we conclude that the first preferred shares issued by the petitioner were not certificates of indebtedness and that the dividends paid upon them were not the equivalent of interest paid upon indebtedness. Austin refused to loan his money to the petitioner at the rate of 14 per centum per annum because he was afraid of the penalties prescribed by the usury laws of the State of Illinois. He was, however, willing to become a preferred shareholder in the Syndicate. To be sure, he saw to it that he got good security as a preferred shareholder. But this alone did not make him a creditor. We are convinced that his money was invested in the business and that he was a co-owner and not a creditor.

In oral argument and by brief counsel for the petitioner have emphasized the point that it is the practice of courts to admit parol evidence to explain the meaning of a written instrument where usury laws are involved. The admission of such parol evidence is justified on the ground that the charge of usury raises a question of the legality of the instrument. Clemens v. Crane, 234 Ill. 215, 230; 84 N. E. 884; Ferguson v. Sutphen, 3 Gilm. (Ill.) 547, 566, 567; Galbraith v. Fullerton, 53 Ill. 126, 128. No question of usury is involved, however, in the instant proceeding, and we are convinced that the nature of the first preferred shares is not changed by the fact that the owner of such shares was to receive a high rate of dividend upon them or that such dividend was paid monthly instead of strictly in accordance with the terms of the agreement.

The petitioner originally insisted that the Syndicate was not taxable as an entity but this contention was abandoned.

Judgment will be entered for the Commissioner.

Littleton,

dissenting: Whether the amount paid or accrued was intended as a dividend or as interest must be determined from the intention of the parties. An analysis of the document set out in the findings of fact and the evidence presented at the trial convinces me that the $250,000 was intended as a loan and that the 14 per cent per annum was intended as interest for the use of the $250,000.

Section 201 (a) of the Revenue Act of 1921 defines dividends ” as any distribution made by a corporation to its shareholders or members, whether in cash or in other property out of its earnings or profits accumulated since February 28, 1913.

The Commissioner no doubt assumed that the amount paid to F. C. Austin in 1921 was a dividend, because the written agreement calls it a dividend. No dividend was ever declared. The Syndicate applied the earnings from its property for the first six months of 1921 to the payment of taxes due for the preceding year, debts, insurance and repairs. Certain of the obligations for repairs, etc. were deferred and the earnings for the balance of the year were paid to Austin for the use of the money advanced to the Syndicate.

An analysis of article III of the'agreement discloses that it does not provide for the payment of any dividend on first preferred shares, except in the case of redemption, and that the first preferred shares held by Austin shall be subject to redemption as a whole on July 1, 1922, upon payment thereof plus a dividend at the rate of 14 per cent per annum from the date thereof to the date of payment ; that such redemption may be made either from money accruing to the Syndicate from rents in excess of expenditures, from money borrowed by the Syndicate, or from money furnished by the second preferred and common shareholders, as provided in article XIII. It does not provide for payment of these dividends out of earnings from profits alone. It provides for payment out of borrowed money or for the payment out of the money furnished by other shareholders when there are no profits. Although there were no rents or profits and no money was available as provided in articles III and XIII of the agreement, Austin, under the terms of the agreement, could take possession, sell the property, and reimburse himself for his advancement, plus 14 per cent per annum. He was not dependent upon the earnings or profits for the return of his principal or interest.

Austin had agreed to loan the Syndicate $250,000 at 14 per cent per annum. He knew that the Illinois statutes limited the legal rate of interest to 7 per cent per annum. He feared that some of the members of the Syndicate might object to the 14 per cent per annum and he concluded that the agreement prepared by his attorney should be accepted by the Syndicate to protect him in this matter. It was not his intention to invest the $250,000 at the risk of the enterprise. He had already subscribed $50,000 at the risk of the business and there is no question about that; he was paid neither interest nor a dividend on the $50,000.

The Commissioner contends that we can not inquire beyond the written instrument upon which the transaction was based, but this rule does not apply in proceedings of this character. Peugh v. Davis, 96 U. S. 332; Sigua Iron Co. v. Greene, 88 Fed. 207; O’Shea v. New York C. & St. L. R. R. Co., 105 Fed. 559; Mitchell v. McShane Lumber Co., 220 Fed. 878; Appeal of J. W. Solof, 1 B. T. A. 776; Appeal of Converse & Co., 1 B. T. A. 742. The law seems to be well settled that oral evidence is admissible to explain a document where usury is exacted. Houghton v. Burden, 228 U. S. 161, 169; Clemens v. Crane, 234 Ill. 215; 84 N. E. 884.

We have the uncontradicted testimony of three witnesses, parties to the transaction, that the money advanced by Austin to the Syndicate was a loan on which the Syndicate agreed to pay interest at the rate of 14 per cent per annum monthly and that the 14 per cent was in fact interest. Thirty-five thousand dollars interest accrued upon this loan and $29,166.65 was paid during 1921. Canceled checks were offered in evidence showing these payments. The Syndicate agreement says nothing about payments in the year 1921, and yet we find that payments were regularly made and received by Austin. This indicates that it was the oral and not the written instrument that controlled the nature of the transaction.

It is not always easy to distinguish between an investment and a loan, or what is dividend and what is interest. The general rule is that whenever a person who advances money is guaranteed the return of his money plus interest so that his principal is never in jeopardy then the transaction is a loan. When one advances money for a business enterprise, depending upon the hazards of the business as to whether he will receive the return of his principal or receive any profit thereon, he becomes a shareholder in the transaction. Austin was guaranteed the return of his money advanced with interest at 14 per cent per annum. This is disclosed not only by the documents set out in the findings of fact but also by testimony submitted at the trial. Looking to the terms and legal effect of the document, and taking into consideration the oral and documentary evidence offered, I am of opinion that the transaction was a loan and not an investment, and that $35,000 which the Syndicate agreed to pay annually in monthly installments was interest and not a dividend. The first preferred certificates issued by the Syndicate to Austin were merely evidence of indebtedness.

KorNek, Green, and Teusssll concur in the dissent.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Louis Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19376.
    Promulgated December 17, 1926.

      Louis Stern pro se.

      W. F. Gibbs, Esq. for the respondent.
   Littleton:

The Commissioner determined a deficiency of $379.03 for the calendar year 1923. Petitioner claims that this deficiency is incorrect in so far as it results from the disallowance by the Commissioner of a loss of $4,701.88 on German marks.

FINDINGS OF FACT.

Petitioner is a resident of Brooklyn, N. Y. On various dates during the years 1920, 1921, and 1922, he acquired an aggregate of 569,000 German marks, at a total cost of $4,701.88. The market value of the 569,000 marks on January 1, 1923, was $78.52. The market value of the same total number of marks which the petitioner still owned on December 31, 1923, was $.000,000,132,008. During the calendar year 1923 the 569,000 marks were neither sold nor otherwise disposed of by the petitioner.

In his income tax return for the calendar year 1923 petitioner claimed a deduction of $4,701.88, the total cost of the marks, as a loss sustained in that year. Petitioner’s return showed a tax of $365.31, which amount, less the 25 per cent credit allowed by the Revenue Act of 1924, he paid.

Upon audit of the return the Commissioner denied the deduction of $4,701.88 and increased the income accordingly.

Judgment will be entered for the •petitioner upon the issue raised. Order of redetermi-nation 'will he entered on 15 days’ notice, under Bule 50. Appeal of Murchison National Bank, 1 B. T. A. 617; Appeal of Samuel Bird, 4 B. T. A. 259.


text:
    Carl Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19377.
    Promulgated December 17, 1926.

      Carl Stern pro se.

      W. F. Gibbs, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency of $688.45 for the calendar year 1923. Petitioner claims that this deficiency is incorrect in so far as it results from the disallowance by the Commissioner of a loss of $7,134.88 on German marks and German Government bonds.

FINDINGS OF FACT.

Petitioner is a resident of Brooklyn, N. Y. On various dates during the years 1920, 1921, and 1922, he acquired an aggregate of 569,000 German marks, at a total cost of $4,701.88. The market value of the 569,000 marks on January 1, 1923, was $78.52. The market value of the same total number of marks which the petitioner still owned on December 31, 1923, was $.000,000,132,008.

During the years 1915 and 1922 the petitioner acquired certain German Government bonds, at a total cost of $2,433. These bonds were owned by the petitioner throughout the calendar year 1923 and on January 31 of that year they had a value of $4.14, and the same bonds had a value on December 31, 1923, of $.000,395.

Neither the marks nor the bonds were sold or otherwise disposed of by the petitioner during the calendar year 1923. In his income-tax return for the calendar year 1923 petitioner claimed a deduction of $7,134.88, the total cost of the marks and bonds, as a loss sustained in that year. Petitioner’s return for 1923 showed a tax of $136.29, which amount, less 25 per cent credit allowed by the Revenue Act of 1924, he paid.

Upon audit of the return the Commissioner denied the deduction of $7,134.88 and increased the income accordingly.

Judgment will be entered for the petitioner upon the issue raised. Order of redetermmation will be entered on 15 days’ notice, imder Rule 50. Appeal of Murchison National Bank, 1 B. T. A. 617; Appeal of Samuel Bird, \ B. T. A. m.


author: Smith:

text:
    Thomas J. Avery, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4788.
    Promulgated December 17, 1926.
    The amount of bad debts ascertained to be worthless and charged off! from the petitioner’s books of account in 1919 and deductible from gross income in the petitioner’s income-tax return for that year determined.

      Edgar Watkins, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in the amount of $15,335.65, resulting from the Commissioner’s disallowance of a deduction for bad debts claimed for the year 1919.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Atlanta, Ga., and up to January 1, 1926, engaged in a business of selling steam engines, sawmills, and woodwork machinery under the name of Avery & Co. He had been engaged in the business since 1903.
    In making his income-tax return for 1919 the petitioner deducted from gross income $36,567.28 for bad debts ascertained to be worthless and charged off within the year. In the amendment of his tax return the Commissioner has allowed the deduction of only $1,841.26 of this amount and has increased net income by the balance. Most of the deficiency of $15,335.65 results from such disallowance.
    The bad debts charged off and claimed as a deduction from gross income were all represented by notes which the petitioner received on sales of merchandise. These were known as twenty-year title retained notes and were sealed and recorded, and under the statutes of Georgia such notes were collectible for a period of twenty years. Title to the goods thus sold remained in the vendor until the notes were fully paid, and the goods might be repossessed at any time on the failure of the vendee to pay the notes when due. The notes ranged in amounts from $10 to $1,000 or more and were payable over the entire period from 1903 to 1919. The notes were usually given in a series and for small amounts payable at intervals from thirty to ninety days.
    Most of the debtors were lumber men and farmers widely scattered over middle and south Georgia. The payments on the notes depended largely on the general prosperity of the community. It was the policy of the petitioner to be lenient with debtors and not to force collections by suit or to repossess goods until the debtors had been given every chance to meet their obligations. Representatives of the petitioner traveled over the territory from time to time, keeping in touch with the debtors and making collections whenever possible. A good many accounts were put in the hands of local attorneys for collection after recovery by other means had failed. During the years 1914 and 1915 business conditions in Georgia were bad. Cotton sold as low as 5 cents a pound. Debts were extremely difficult to collect and creditors generally, including the petitioner, were lenient with debtors. In the years 1918 and 1919 business conditions improved and the petitioner was vigilant in his efforts to collect or otherwise close all outstanding obligations. Letters were written to debtors urging settlements and the petitioner’s agent and attorneys made many personal investigations of past due accounts. In a few cases the debtors had left the community in which they had resided and could not be found. In others they were found hopelessly insolvent, with no property to satisfy a judgment if obtained. In a few cases suits for collection were brought and accounts credited with the amounts collected on the judgment. Some of the machines which had been sold were repossessed and the resale or estimated value thereof credited to the accounts of debtors. The machinery which had been in the hands of purchasers for many years was generally of little value.
    The petitioner kept a single entry set of books. The notes herein considered were not entered in current accounts receivable but were kept in a separate book known as the note record book. All transactions relating to these notes, such as credits, renewals, etc., were recorded therein. There was a general profit and loss account but the notes were not reflected in such account. The petitioner did not ordinarily prepare balance sheets. Whenever they were prepared, the notes receivable were entered at their face value. Prior to 1919 no notes receivable were charged off as worthless on the petitioner’s books of account. In December, 1919, the petitioner, with his bookkeeper, went over all the note records extending as far back as 1903, made a list of all unpaid or partially unpaid notes thought to be uncollectible and worthless at the time, and deducted the total amount of the same from income for that year. The notes were not charged off on the general ledger, nor was the list claimed reflected in the profit and loss account. Each note listed as uncollectible was marked with a check mark opposite the entry in the note record book, indicating that it had been charged to income tax in the year 1919.
    The majority of the notes charged off were due and payable prior to March 1, 1913. Many of them had been paid in part, with only a small unpaid balance remaining. In many cases no payments had been made during recent years. In a few instances, however, the note records showed payments during the years 1918 and 1919. The petitioner did not relax his efforts during subsequent years, to collect the note accounts designated as “ charged to income tax in 1919,” and in numerous instances the debts claimed as bad in the tax return for 1919 were later collected. The following examples may be taken as typical of the 100 accounts comprising the whole:

    The following debts, in the amounts indicated, are found to have been worthless at December 31, 1919, and charged off during that year:
    Debtor. Amount claimed.
    Beatenrieter, O. B_$15.00
    Fender, J. F_ 265.16
    Knight, W. N_112.80
    392.96
   OPINION.

Smith:

In this appeal we find one of the too frequent examples of the administration of taxing statutes made exceedingly difficult because of irregular and improper bookkeeping practices. From the year 1903 to the year 1919 the petitioner carried on his books a constantly growing and changing account of notes receivable without ever having audited and closed his books in any intervening year. We find that in the year 1919 these unpaid notes included notes owed by something over 100 debtors, which notes the petitioner believed uncollectible on December 31, 1919. A majority of the notes believed to be uncollectible were due and payable prior to March 1, 1913. Not one of the accounts had been charged to profit and loss on the books of the petitioner or charged off in any year. The petitioner’s income-tax returns for the years 1913 to 1918, inclusive, show no deduction for bad debts. In his income-tax return for the year 1919, he deducted from gross income $36,567.28 for bad debts. Upon an investigation and reaudit of his books, the petitioner now claims the deduction from gross income on account of bad debts of $24,012.43, in addition to the $1,841.26 allowed by the Commissioner.

The Commissioner objects to the deduction on the following-grounds :

(1) That the debts in part were ascertained to be worthless prior to the year 1919.

(2) That the debts were not, within the meaning of the statute, charged off during the year 1919.

(3) That the debts were in part not worthless at December 31, 1919. '

(4) That of the debts existing prior to March 1,1913, only the cost or the March 1, 1913, value thereof, whichever is lower, may be deducted as a loss in any subsequent year.

Section 214 (a) of the Revenue Act of 1918 provides:

That in computing net income there shall be allowed as deductions:
* * * * * * *
(7) Debts ascertained ‘to be worthless and charged off within the taxable year.

The method of charging off the notes used by the petitioner was most unusual. The bookkeeper for the petitioner, the principal witness in this case, testified as follows:

Q. Flow does it [the charge-off] ever get into profit and loss account?
A. We don’t have any profit and loss account. When they [the notes] are paid they go back in here and show up on this account. We keep after them all the time. If we charged them to loss and gain there might be a loss entirely. Leave it like that, it shows how much is collected, and if there is any balance there we still get after it. That was really not charged into loss and gain at all. It is just a record on the note register.
Q. That simply represents a notation on the record here, the note record, that in 1919 you simply claimed it as a deduction from gross income in the income-tax return, did you?
A. Yes.
* * * * * * *
Q. Each one of these accounts you still keep open today and if one of the makers of the notes come in you give him a credit on that account?
A. Yes.
Q. So there has been no actual closing of the account or no actual charging off except the notes charged off to income tax in 1919?
A. That is it exactly. We keep them right here.

The statute does not provide any particular manner for the charging off of a bad debt. We think that the method employed by the petitioner meets the challenge of the statute. If the petitioner were a corporation and the corporation was required to prepare balance sheets for the purpose of determining invested capital and the notes receivable were included in the balance sheet at the face value of the notes, there might be a serious question as to whether this method of charging off bad debts met the challenge of the statute. But we think that in the case of this individual for the year 1919, the notation on the note record that the note was charged off to income tax constituted a sufficient compliance with the statute to warrant the petitioner in making the deduction provided the note was ascertained to be worthless within the calendar year 1919.

It appears to us, however, from the evidence, that there was no ascertainment of worthlessness of a great majority of the notes charged off in the manner above indicated in 1919. The petitioner was unusually vigilant in the collection of notes receivable. Through traveling salesmen and through a collector he continually kept in touch with his debtors, and wherever there was any possibility of collecting anything upon overdue notes the petitioner did not fail to make an effort to collect. This is shown by the fact that he brought many suits after a long period of years and, even where a -fieri facias was returned nulla bona, the fi. fa. was kept alive as long as possible. Some of the notes were endorsed by persons believed by the petitioner to be responsible. Where the maker of the note went through bankruptcy, an attempt was made to collect from the endorser. The petitioner apparently made no special investigation of the likelihood of collection of. delinquent notes in 1919. The bookkeeper testifying for the petitioner with respect to certain accounts could not recall any special investigation made of the account in 1919 by which the account was determined to be worthless in 1919. In reply to the question—

A lot of tills property sold back in 1904, 1905, and 1906, where the notes had not been paid, did not make any investigation in regard to that property in 1919?
A. We were trying to collect it. I do not know about making an investigation. We always have a traveling man to see if there is any chance in the world to collect it.

He further testified:

Q. Do yon recall the discussion about Mr. W. A. Abbott? Had you had any particular information in the year 1919 that you did not have in 1918?
A. I can’t recall now that we had any particular information about it at all. As I told you in the beginning it was in 1919 that we took up all these old accounts and went through to see what we could collect and what we could not collect.

The ascertainment of worthlessness with respect to most of the accounts charged to income tax in 1919 appears to have consisted of nothing more than a discussion between the petitioner and his bookkeeper as to the likelihood of collection of accounts, many of which the petitioner had been unable to collect over a period of years. This is shown by the following testimony of the bookkeeper:

Q. Did you know yourself anything about the financial standing or responsibility of Mr. W. A. Abbott, of Doe Run, Georgia, between the year 1916, and 1919?
A. No, sir; not personally.
Q. Under whose direction or was it upon your own authority that you made those entries there about charging off in 1913 [1919] ?
A. Mr. Avery and I would get together and decide if they were good.
Q. When did you and Mr. Avery get together and make those particular entries that have been read into the record, about charging off in 1919?
A. I do not remember the exact date.
Q. Was it along in February or March, 1920?
A. No; it was along in the latter part of 1919.

This Board has repeatedly held that in the ascertainment of the worthlessness of debts there must be an actual determination of worthlessness by the petitioner within the taxable year based on the failure of reasonable efforts to collect. Appeals of Pacific Pipe & Supply Co., 2 B. T. A. 870; Steele Cotton Mill Co., 1 B. T. A. 299; Egan & Hausman Co., 1 B. T. A. 556; Alemite Die Casting & Mfg. Co., 1 B. T. A. 548.

The evidence adduced at the hearing with respect to the history of each account is too voluminous to review here. It has been carefully gone over and the question as to the ascertainment of worthlessness within the year 1919 has been determined with respect to each account on the facts presented. Where it appears from the evidence that the debtor died within the year 1919, or that the petitioner abandoned his efforts to collect by reason of unsuccessful litigation during the year 1919, the account has been listed in the findings of fact as having been ascertained to be worthless and charged off within the year 1919. In cases where payments on accounts were made regularly up to or near the year 1919 and it is not shown that the debtor could not have made further payments, or where the accounts were obviously ascertained to have been worthless long prior to 1919, the claims for the deduction of such accounts have been disallowed. The evidence of record warrants the deduction of $392.96 for bad debts in addition to the amount allowed by the Commissioner.

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


text:
    C. P. Lathrop & Co., Inc., and Southern Sand & Gravel Co., Inc., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6603.
    Promulgated December 21, 1926.
    1. Petitioners were affiliated during the calendar year 1920.
    2. In view of the evidence in this proceeding, it is held that the Commissioner was not justified in reducing the allowance claimed by C. P. Lathrop & Co., Inc., for compensation paid to its officers.

      M. W. Gooherow, Esq., and J. MoD. Wellford, Esq., for the petitioners.

      J. Hairy Byrne, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits taxes of $3,093.30 against C. P. Lathrop & Co., Inc., for the calendar year 1920, and that company instituted this proceeding within sixty days after the mailing of the notice of deficiency. By consent of the parties the Southern Sand & Gravel Co., Inc., was made a petitioner to the proceeding.
    Petitioners claim that the Commissioner erred in holding that they were not affiliated within the meaning of section 240 (b) of the Revenue Act of 1918, and in disallowing as a deduction $15,000 of a total of $50,500 paid as compensation for officers.
    findings of fact.
    Petitioners are Virginia corporations with principal office at Richmond. C. P. Lathrop & Co., Inc., was engaged in purchasing and selling at wholesale and retail builders’ supplies of all kinds except hardware.
    The business was commenced by C. P. Lathrop, Sr., about 1805, and for about thirty years prior to incorporation on April 8, 1920, the business was carried on in partnership with James D. Patton, Sr. During a period of several years prior to incorporation C. P. Lathrop, Jr., and C. B. Lathrop, sons of C. P. Lathrop, Sr., were also partners.
    The Southern Sand & Gravel Co., Inc., incorporated in 1911, was engaged in the production of sand and gravel and its product was sold exclusively by C. P. Lathrop & Co., Inc. The Southern Sand & Gravel Co., Inc., was separately incorporated for bookkeeping purposes, in order to segregate the costs of materials and expenses incurred. The entire production of the Southern Sand & Gravel Co., Inc., has always been sold by C. P. Lathrop & Co., Inc., and the officers ox me latter managed the affairs of the Southern Sand & Gravel Co., Inc., conducted its policies, purchased its supplies, and selected its employees. The officers of C. P. Lathrop & Co., Inc., were also officers of the Southern Sand & Gravel Co., Inc. The plant and land of the Southern Sand & Gravel Co., Inc., were turned over to it by the Lathrop family, who were the principal owners of C. P. Lathrop & Co., Inc., for all of its capital stock. Twenty-five shares were later sold to James D. Patton, Sr., and 10 shares to J. D. Patton, Jr. To all intents and purposes the Southern Sand & Gravel Co., Inc., has always been conducted as a branch of C. P. Lathrop & Co., Inc.
    During the taxable year 1920 the common voting stock of these corporations was owned as follows:

    Upon incorporation of C. P. Lathrop & Co., Inc., in April, 1920, C. P. Lathrop, Sr., his two sons, and Jas. D. Patton, Sr., turned over their partnership interests to the corporation for stock, the common stock being taken by the Lathrops and 650 shares of preferred stock, being the total issued and outstanding preferred stock at that time, were issued to Jas. D. Patton, Sr. Shortly after incorporation certain shares of common stock of C. P. Lathrop & Co., Inc., were sold to Jas. D. Patton, Jr., C. N. Stutz, Edward McCurley, and Branch Barksdale, employees, for which they gave their notes and turned the stock back to the corporation to be held until the notes were paid. These notes were not paid during 1920. These individuals voted the stock during the time it was so held by the corporations. The stock in both companies, other than that issued to the Lathrops, was issued to the persons named on condition that if they should desire to relinquish it they would first offer to sell it to the Lathrops or to the corporation.

      C. P. Lathrop, Sr., and his two sons were president, vice president, and treasurer, respectively, ^of both corporations. Jas. D. Patton, Jr., was made secretary of C. P. Lathrop & Co., Inc., some time during 1920. C. P. Lathrop, Sr., was the active head of the business and the prime mover in all of the affairs of both corporations. He personally indorsed all notes of the corporation for money borrowed. The gross business of C. P. Lathrop & Co., Inc., for 1920 was in excess of $800,000. At the date of incorporation C. P. Lathrop & Co., Inc., authorized a drawing account of $1,000 a month each for C. P. Lathrop, Sr., president, and C. P. Lathrop, Jr., vice president, and $300 a month for Jas. D. Patton, Jr., secretary. It was the avowed purpose of the corporation at the time to adjust the officers’ salaries during the year to conform to the judgment of the directors as to the value of the services rendered to the corporation. During the year 1920 officers’ salaries were determined, entered upon the books, and paid without regard to stockholdings, as follows:
    O. P. Lathrop, Sr., president_$15,000
    C. P. Lathrop, Jr., vice president_ 15,000
    C. B. Lathrop, treasurer_ 15, 000
    Jas. D. Patton, Jr., secretary_ 5,500
    Total_ 50, 500
    This amount was claimed as a deduction by C. P. Lathrop & Co., Inc., in its return for 1920. The Commissioner disallowed $15,000 of the amount as a deduction.
    The Southern Sand & Gravel Co., Inc., paid salaries only to C. P. Lathrop, Sr., president, and C. P. Lathrop, Jr., vice president, in the amount of $5,000 each. It reported a loss of approximately $6,000 for the year 1920.
    C. P. Lathrop, Jr., assisted his father generally in the management of the corporations and he was also the principal salesman of the business. C. B. Lathrop and Jas. D. Patton, Jr., in addition to their duties as treasurer and secretary, respectively, were engaged exclusively as salesmen of the company’s product. The officers and salesmen of the corporation bore their own expenses without reimbursement, and considerable amounts were expended by them in promoting the interests of the corporation and in selling its product. C. B. Lathrop had been with the business since 1904; C. P. Lathrop, Jr., since 1905. Jas. D. Patton, Sr., who had been a partner for about 30 years, withdrew from active participation in the business shortly before incorporation. He was paid no salary by either corporation. Jas. D. Patton, Jr., had been with the business since 1910. Edward McCurley was bookkeeper and C. N. Stutz was employed in the lumber department.

      The officers whose salaries are here in controversy devoted their entire time to the business. C. P. Lathrop & Co., Inc., reported a net income for 1920, after payment of officers’ salaries, of $20,000.
   OPINION.

Littleton:

Upon consideration of the evidence submitted, we are of opinion that the stockholders of C. P. Lathrop & Co., Inc., owned or controlled all the stock of the Southern Sand & Gravel Co., Inc., during the calendar year 1920.

In the deficiency notice mailed to C. P. Lathrop & Co., Inc., the Commissioner gave no reason for reducing the allowance for officers’ salaries for 1920 from $50,500 to $35,500. Presumably, he thought that the total of the salaries paid by the corporation to its officers was unreasonable in amount. The Board is of the opinion from the evidence submitted in this proceeding that the Commissioner was not justified under the statute in reducing the deduction claimed by the corporation for compensation of its officers. The success of the business was due primarily to the services rendered by them; they devoted their entire time and efforts in the interest of the corporation. The entire responsibility of the management and the matter of profitableness of operations rested upon them.

The greater portion of the corporation income was due to their efforts. They were put to considerable personal expense in selling the corporation’s product in the face of keen competition, for which they were not reimbursed by the corporation. The officers had been with the business for a number of years, were experienced and capable men in this line, and were well acquainted with the persons and concerns, both large and small, having need for the material which the corporation was selling. All of this resulted in the corporation being one of the largest builders’ supplies concerns in its territory. There is no indication that the salaries pa-id constituted a distribution of profits in the guise of compensation; in fact the evidence is to the contrary. In view of these facts, the Board is of the opinion that the Commissioner was not justified in reducing the deduction claimed by the corporation for compensation of officers, and his action in this regard is reversed.

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


text:
    J. G. Ball Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6459.
    Promulgated December 21, 1926.

      J. W. Bailey, Esq., for the petitioner.

      W. F. Gihhs, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency in income and profits tax in the amount of $334.04 for the calendar year 1919.

The petitioner is a North Carolina corporation with principal office and place of business at Raleigh. Petitioner alleged that the income determined by the Commissioner for the taxable year was erroneous and that it had complete books and records showing its actual and true net income for the year 1919. In his answer the Commissioner claimed that no books and records had been made available for his inspection and that he had “properly determined the net taxable income for the year 1919 under the provisions of section 212 (b) of the Revenue Act of 1918.”

The case was heard and submitted on the deposition of J. G. Ball, taken in the office of J. E. Owens, Justice of the Peace, at Raleigh, N. C. The witness testified that the corporation had books and records showing its transactions for the year 1919 and that these books were “ in the store.” Pie further testified that he had not seen these records for five or six years. However, he undertook to testify as to the surplus of the corporation at January 1, 1919, and January 1, 1920, as shown by these books. This testimony, which was all the evidence offered in opposition to the Commissioner’s determination, was objected to by counsel for the Commissioner upon the ground that the books of the corporation were the best evidence of their contents. This objection was proper. The record contains no competent evidence upon which the Board can base any findings of fact. We, therefore, approve - the Commissioner’s determination.

Judgment will be entered for the Commissioner.


author: Lansdon:

text:
    Mackechnie Bread Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4839.
    Promulgated December 21, 1926.
    During the year 1917 the petitioner purchased 75 per cent of the capital stock of a competing company. Prior to January 1, 1919, its three stockholders, as individuals, purchased the remaining 25 per cent of the capital stock of such competitor. In 1920 the petitioner purchased all the assets and assumed all the liabilities of the competing company and paid therefor the amount of $1. Held, that the purchase of the stock of the competing company by the petitioner and its shareholders resulted in the affiliation of the two companies, and that the purchase of the assets was an inter-company transaction from which no gain or loss resulted.

      Murdoch J. Gillis, Jr., G. P. A., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner has determined a deficiency in income and profits taxes for the years 1920 and 1921, in the respective amounts of $505.79 and $21.40. The deficiency for 1920 arises from the Commissioner’s disallowance of a loss alleged to have been sustained during that year in connection with absorption of the business of the Miller Baking Co., and that for 1921 results from the disallowance of a certain amount as a deduction from gross income on account of depreciation of the tangible assets of the petitioner used in its trade or business. The second issue was abandoned at the hearing.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal office in Los Angeles. It is engaged in the business of manufacturing bread and selling the same at wholesale.
    During the year 1917 the petitioner acquired 75 shares of the stock of the Miller Baking Co., a corporation, with authorized capital in the amount of $10,000, divided into 100 shares of the par value of $100 each, at a cost of $7,740. Prior to January 1, 1920, the three stockholders of this petitioner, as individuals, purchased the remaining 25 shares of the stock of the Miller Baking Co. On February 11, 1920, the petitioner purchased all the assets and assumed all the liabilities of the Miller Baking Co. for $1. Subsequent to February 11, 1920, the Miller Baking Co. had no assets, except $1 paid into its treasury at that date, and its stock was worthless, but was not returned or canceled.
    The Miller Baking Co. was operated at a loss from the date of its incorporation.
    In its income and profits-tax return for 1920, the petitioner deducted from its gross income the amount of $6,523.05 which, it alleged, it had sustained as loss in connection with the acquisition of the stock and assets of the Miller Baking Co. Upon audit of such return, the Commissioner disallowed the deduction, and held that the amount thereof was paid for the good will of the Miller Baking Co. and that no loss had been sustained by the petitioner in connection with the transactions in question.
   OPINION.

Lansdon:

The petitioner avers that it sustained a loss in the amount of $6,523.05 in the transactions through which it acquired the stock and the assets of the Miller Baking Co. It arrives at the amount of the alleged loss by subtracting the net book value of the assets purchased from the Miller Baking Co. for $1 from the amount that it paid for 75 shares of the stock of such company. The Commissioner has disallowed the alleged loss as a deduction from the gross income of the petitioner for the taxable year on the theory that there was only one transaction and that the amount of $6,523.05 represents the good will value of the Miller Baking Co. acquired by the petitioner when it bought the stock and assets of that concern.

The purchase of all the capital stock of the Miller Baking Co. by the petitioner and its stockholders resulted in the affiliation of the two concerns. The subsequent dealings in the taxable year between the Miller Baking Co. and the petitioner were intercompany transactions from which neither gain nor loss under the income tax laws resulted.

Judgment will ie entered for the Commissioner.


author: Milliken:

text:
    J. F. Weinmann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10665.
    Promulgated December 21, 1926.

      J. I. Trawiclc, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   Milliken:

This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1920 in the amount of $1,447.44. Only one issue is involved and that relates to a profit which the respondent determined resulted from the sale of stock by the petitioner in the year 1920.

FINDINGS OF FACT.

Petitioner resides at 2214 Battery Street, Little Rock, Ark. In 1919 he purchased 200 shares of stock of the Marco Milling Co., of Pine Bluff, Ark., at $30 per share. During the calendar year 1920 petitioner sold 150 shares of the stock of the Marco Milling Co. which he had purchased in 1919, and the gain or loss resulting from the sale of said shares of stock is not in dispute. In September, 1920, petitioner sold the remaining 50 shares of stock of the Marco Milling Co., which he had purchased in 1919 for $80 per share, to W. C. Ribenack for $5,000, agreeing to defer actual payment for the same until 1921 and to take the promissory note of Ribenack for $5,000, payable in 1921. The 50 shares of stock of the Marco Milling Co. were held as collateral security to insure the payment of the note. The note was paid in 1921. The maker of the note was financially responsible for the face value of the note and the same had a fair market value of $5,000 when received by the petitioner in the year 1920. .

Judgment will he entered for the Commissioner,


text:
    Blair Veneer Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6703.
    Promulgated December 21, 1926.

      W. E. Hayes, Esq., for the petitioner.

      A. George Bouehard, Esq., for the respondent.
    Petitioner appeals from the determination of deficiencies in income and profits taxes for the fiscal year ended June 30, 1918, the period July 1 to December 31, 1918, and the calendar years 1919, 1920, and 1921, in the aggregate amount of $27,372.63. Petitioner alleges that the Commissioner erred in three particulars in the determination of the deficiencies aforesaid: (1) That the rate of depreciation allowed on buildings, machinery and equipment is inadequate; (2) the provisions of section 205 of the Revenue Act of October 3, 1917, have not been applied; and (3) the excess profits taxes should have been computed under the provisions of section 210 of the Revenue Act of 1917, and sections 327 and 328 of the Revenue Acts of 1918 and 1921.
    FINDINGS OF FACT.
    Petitioner is a Vermont corporation with principal offices at North Troy, and during the years in question was engaged in the manufacture of veneer products, consisting of veneer packing cases, furniture panels, chair seats, opera seats, table tops, and other varieties of built-up veneers. Petitioner purchases its raw material in log form and cuts its own veneer, using its saw mill and turning lathe for that purpose. After the logs have been cut and placed in a boiling vat, they are removed and the veneer is shaved from the logs. It is then dried in a kiln, or drying machine; after drying it is glued inside and the core set in and pressed or squeezed in heavy machines which bind it for the finished product. The machinery consists of binding, gluing, and drying machines, veneer lathes, and all necessary machine and carpenter shop equipment.
    In 1910 the buildings and equipment of the petitioner were destroyed by fire and in the year 1911 were replaced by the buildings and equipment on hand during the years in question.
    The buildings are of wooden construction, with double boarding covered with wrought iron siding and painted.
    In 1917, 1918, and 1919, the petitioner was engaged as a subcontractor in filling war orders or contracts, and its plant was in operation from fifteen to twenty hours per day during those years. Accurate records were maintained of the hours of operation, but- when a fire in 1924 destroyed the plant and equipment the time records were also destroyed, and the estimate of hours of operation during the years was testified to by the plant superintendent and the president of the petitioner, who were familiar with the same and maintained the records during this period.
    It was not possible, owing to the scarcity of skilled labor during the war period, for petitioner to secure machinists to make the necessary repairs to its machinery, and as a result the wear and tear on the equipment during the years 1917, 1918, and 1919, was very marked. It was necessary for petitioner to employ unskilled labor in the operation of its plants during the years 1917, 1918, and 1919, with the result that the wear and tear on its equipment was greater than it would have been had it been possible to employ experienced labor.
    The vibrations from the large presses in the gluing room caused the buildings to become unstable, and the escape of steam from the boiling vats caused the early rusting of the iron sidings on the outside of the buildings.
   OPINION.

Milliken:

The controversy concerning depreciation of the buildings and equipment of the petitioner relates to the proper rate, as the parties are in agreement as to the values. The Commissioner determined the rate of depreciation on a composite basis. Considering the hours of operation and the other factors enumerated in the findings of fact, we are of the opinion that a composite rate of depreciation of 10 per cent for the fiscal year ended June 30, 1918, the period July 1 to December 31,1918, and the calendar year 1919, is a proper allowance. No evidence was introduced concerning the calendar years 1920 and 1921, and as a consequence we do not disturb the allowance of the Commissioner for those years.

Petitioner averred in the petition that it was entitled to a variable deduction of 9 per cent instead of 7 per cent, under section 205 of the Revenue Act of 1917, and that the provisions of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918 should be applied. The record contains no evidence which would warrant us in granting the relief sought.

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


text:
    Greenville Opera House Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2311.
    Promulgated December 21, 1926.

      Ernest Kellner, Jr., Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
   Milliken:

This proceeding results from a determination of a deficiency by respondent for the calendar year 1919 in the sum of $3,166.90. The issue involved is the gain or loss resulting from the sale in 1919 of the buildings and equipment of the petitioner.

FINDINGS OF FACT.

Petitioner is a corporation organized and existing under the laws of the State of Mississippi. Petitioner purchased land to be used as a site for an opera house in Greenville, Miss., in 1899, for the sum of $4,711. The value of the land was determined by the Commissioner to be $14,000 on March 1, 1913, and with respect to such •valuation no error is assigned by petitioner. In 1899 petitioner erected an opera house on the land thus purchased at a cost for the buildings and furnishings of $26,585.51. In 1914 petitioner made certain improvements to the buildings, expending the sum of $14,000, about which there is no controversy. In 1919 the land, buildings and equipment were sold for $55,000. The Commissioner in the determination of the deficiency took the cost of the building erected in 1899 of $25,585.51, subjected the same to a depreciation rate of 2 per cent, resulting in a March 1, 1913, value of the buildings of $18,595.13, and depreciated the building at a rate of 2¾ per cent from March 1, 1913, to the date of sale in 1919. Petitioner objects to the March 1, 1913, value of the building as determined by the Commissioner and the rate of depreciation applied from March 1, 1913, to 1919.

The opera house is located on the southeast corner of Poplar and Main Streets, Greenville, Miss. When it was erected in 1899, the streets adjacent to the building were not paved nor were there any buildings of any value erected in close proximity to the building of the petitioner. By March 1, 1913, the streets had been paved in front and on the side of the opera house and valuable and modern buildings had been erected in close proximity. The population of Greenville, Miss., doubled from 1899 to 1913. The opera house is of brick construction, three stories in height, and had a seating capacity on March 1, 1913, of 700 persons. The building was maintained in a good state of repair prior and subsequent to March 1, 1913. In 1913 the building owned by petitioner was the only opera house in Greenville, Miss., but by 1919 a syndicate amusement company was making arrangements to erect an amusement house in Greenville, and the officers of the corporation, fearing outside competition, sold the building of the petitioner to a concern operating a chain of amusement houses in that section of the country.

The building, together with the improvements and furnishings, was of the fair market price or value of $35,000 on March 1, 1913, and a rate of depreciation of 2 per cent should be used, in determining the gain or loss on the sale, for the period March 1, 1913, to 1919.

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


text:
    John Olsen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1460.
    Promulgated December 21, 1926.

      Tom M. Mehajfy, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1919 in the amount of $5,854.66. The issue involved relates to the gain derived in the year 1919 from the sale of certain lands, buildings and equipment of the petitioner. At the hearing of this proceeding counsel for the Commissioner amended his answer and averred that the deficiency for the year in question should be increased by computing the gain on the sale of the property on the basis of a purchase price of $100,000 instead of $50,000.
    FINDINGS OF FACT.
    The petitioner is a resident of the State of Arkansas, with residence at 214 West 13th Street, Little Rock. In 1894 he purchased, in Saline County, Arkansas, a tract of land for the purpose of mining and manufacturing fuller’s earth. Between 1894 and March 1, 1913, the following improvements and equipment were placed on the land and had on March 1, 1913, the following fair market price or value: Six small laborers’ houses of the total value of $6,000; 1 large house of the value of $2,000; a mill house which was two stories high and 120 feet long, built of heavy material and having a concrete foundation, of the value of $5,000; the mill house was equipped with modern machinery, consisting of engines, boilers, blowers, pul-verizers, crushing wheels, and all necessary equipment for the mining and manufacture of fuller’s earth, which had a total value of $20,000; numerous wooden shacks of the total value of $1,000.
    From the date of the erection of improvements and installation of the machinery and equipment, until March 1, 1913, and subsequent thereto to the date of sale, the same were maintained in good repair and necessary replacements were made. All the buildings, machinery and equipment, with the exception of one shaft, which was sold in 1919, were on the property on March 1, 1913. Petitioner in 1919 sold his land, together with all improvements thereon, for $100,000, receiving $50,000 in cash and the remainder of the purchase price was represented by promissory notes maturing in subsequent years. The property sold in 1919 was held as collateral security for the payment of the $50,000 in notes. The notes, at the date of their receipt by petitioner, were worth their face value and partial payment, together with interest, was made on the notes subsequent to the year 1919. Default occurred in the payments of the notes in the year subsequent to 1919, and in 1922 foreclosure was had and the property sold in 1919 was bought in by the petitioner for the remaining payments due on the notes.
    There were included in the sale made by the petitioner in 1919 approximately 530 acres of land, of which 70 acres had been purchased subsequent to March 1, 1913, and the cost of the 70 acres can not be determined from the record.
    Petitioner purchased approximately 460 acres of land in Saline County, Arkansas, in 1894, for $3,848.00. Eight shafts had been sunk on the property prior to March 1, 1913, of the dimensions of 5 by 7 feet, and between 100 to 150 feet deep, and were in daily use. The land was well timbered on March 1, 1913, and was of considerable value. The 460 acres of land purchased prior to March 1, 1913, which the petitioner sold in 1919, together with the shafts, timber and fuller’s earth, had a fair market price or value on March 1, 1913, of $42,500.
    Petitioner maintained no books of account indicating the cost of improvements placed on the property. He was 89 years of age at the date of the hearing and during the last year has suffered a stroke of paralysis.
    The buildings, machinery and equipment, having a fair market price or value on March 1, 1913, of $34,000, sustained depreciation at a composite rate of 5 per cent for the period March 1, 1913, to the year 1919.
   OPINION.

Milliken:

The issue in this proceeding relates to a determination of the March 1, 1913, value of the property of the petitioner which he sold in the year 1919. The deficiency determined by the Commissioner did not take into account necessary and obvious factors, but this omission can not be charged to the Commissioner or his counsel, for the reason that until the hearing the facts concerning the transaction were not in their possession. The deficiency in tax was computed on the theory that petitioner sold his land, machinery and equipment in 1919 for $100,000, receiving $50,000 in cash and $50,000 in notes — the notes were considered of no value at the date of their receipt and accordingly were eliminated from the gain or loss computation.

We have found that the notes were worth their face value in the year of their receipt, and accordingly $100,000 should be used as a starting point in computing the gain or loss. Against the $50,000 in cash that the petitioner received, the Commissioner applied the cost to the petitioner of the land which he had purchased in 1894, or $3,848, and determined a gain of $46,152. No value was allowed for machinery, buildings and equipment placed on the land prior to March 1, 1913, which were sold in 1919, nor was a determination made of the March 1, 1913, value of the land to which attached timber and mineral rights.

The petitioner is 89 years of age and in the last year has suffered a stroke of paralysis which almost destroyed his memory, and his counsel at the hearing was forced to dismiss him as a witness and to abandon efforts to obtain detailed information from him. The petitioner is of the school that carry the facts of their business under their hats — maintaining no books of account in which were recorded the cost of improvements placed on the property. There was no other person who could testify as to the exact cost of the improvements placed on the property prior to March 1, 1913, and the testimony introduced was by persons who had known the property on March 1, 1913, and had a basis for determining its fair market price or value. There can be no dispute — and counsel for the Commissioner so admitted at the hearing — that the improvements set forth in the findings of fact were on the property at March 1, 1913, and were sold in 1919. The difficulty arises in determining the fair market price or value of the same on March 1, 1913. We have the testimony of numerous witnesses who had known the property for years prior and subsequent to March 1, 1913, and from a careful consideration of all the testimony we determine the fair market price or value of the property of petitioner to have been $76,500 on March 1, 1913, and this value should be used in computing the gain or loss resulting from the sale of the property of the petitioner for $100,000 in 1919, with the factor of depreciation at the composite rate of 5 per centum on machinery, buildings and equipment of the value of $34,000 from March 1, 1913, to the year of sale.

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