text:
    Appeals of AMERICAN CENTRAL FRUIT AUCTION CO.
    Docket Nos. 3084, 3169.
    Submitted October 5, 1925.
    Decided December 1, 1925.
    Personal service classification denied.

      Robert Ash, Esq., for the taxpayer.

      J. A. Adams, Esq., for the Commissioner.

      Before Littleton, Smith, and Teussell.
    These are appeals from determinations of deficiencies in income and profits tax for the years 1918 and 1919 in the amounts of :$15,896.37 and $18,236.29, respectively. The questions in issue are: (1) Whether during the years 1918 and 1919 the taxpayer was -a personal service corporation within the meaning of section 200 ■of the Eevenue Act of 1918, and (2) whether the taxpayer is entitled to deduct from its income for the years 1918 and 1919 amounts for salaries of officers in excess of the amounts actually paid. For the purpose of the hearing the appeals were consolidated.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized in 1913 under the laws •of the State of Arizona, with its principal office at St. Louis, Mo. During the years 1918 and 1919 the outstanding capital stock was $200,000, par value, divided into 2,000 shares, which were issued $165,000 for good will and $35,000 for cash. It was organized for the purpose of carrying on a wholesale fruit business at auction on a commission basis and was the successor to two preceding ■organizations engaged in the same business in St. Louis. . The assets and liabilities of the corporation were stated on its books •of account as follows:
    Í® 18.
    ASSETS.
    Good will-$165, 000. 00
    Furniture and fixtures_ 2, 944. 50
    United States Liberty loan bonds (par)_ 25, 000. 00
    Deed of trust-s._ 10, 000. 00
    Cash- 13,153. 34
    216, 097. 84
    LIABILITIES.
    Capital stock_ 200, 000. 00
    Surplus invested in Liberty loan bonds-5, 000. 00
    Surplus in reserve_ 5,100. 00
    Undivided profits-5,997.84
    216, 097.84
    1919.
    ASSETS.
    Good will-$165, 000. 00
    Furniture and fixtures_ 2, 825. 90
    United States Liberty bonds (par)_ 35, 000. 00
    Deed of trust- 10, 000.00
    Cash- 19,425. 63
    232, 251. 53

      LIABILITIES.
    Capital stock_$200, 000.00
    Surplus invested in Liberty loan bonds_ 15,000. 00
    Surplus in reserve_ 10,700.00
    Undivided profits- 6, 551. 53
    232, 251. 53
    During the tax years involved in this appeal there were 27 stockholders, 7 of whom were officers or employees of the company. The number of shares of stock, the amount of time devoted to the company, and the compensation of each officer was as follows:

    The total amount of stock owned by the officers of the company was 375⅜ shares, or 18.77 per cent of the total stock outstanding. There were other full-time employees who owned no stock in the company.
    The sole business of the company was the sale of fruit at auction. The fruit was turned over to the company in carload lots by the owner or agent of the shipper and auctioned off to the highest bidder, either in carload lots or in minimum lots of 20 boxes. The company acted as selling agent and never as principal. The sales were made for cash and the proceeds, less the company’s 2 per cent commission and a “ terminal charge ” of 1 cent per package for handling, were immediately turned over to the owner or agent for whom the fruit was sold. It was customary for the company to pay the freight charges on cars of fruit received, which were deducted from the proceeds of the sale on completion of the transaction.
    The auctions were held daily at the Wabash Railroad Terminal, which the company rented, beginning at 9 o’clock in the morning and lasting about two hours. They were open to the public generally and the sale was made to the highest bidder. About 20 per cent of the buyers were stockholders of the taxpayer. Other stockholders attended the auctions when they had fruit of their own to otfer, to observe the market, and to stimulate interest in the buying.
    The stockholders, most of whom were fruit dealers or brokers, frequently and continuously sought to secure business for the auction company through their personal acquaintance with fruit growers- and shippers and through constant communication with the fruit-dealers they represented in their individual businesses. The united support of the principal fruit dealers in St. Louis thus assured the company a substantial business and at the same time benefited the individual interests of the stockholders.
    The earnings and expenses of the company for the years 1918 and 1919 were as follows:
    1918.
    EARNINGS.
    Commission for selling_$58, 378. 67
    Terminal charges_-_ 10, 763. 52
    Interest on bank certificates_ 500. 00
    Interest on deed trust_ 600. 00
    Interest on daily bank balances_ 333. 66
    interest on United States Government Liberty loan
    bonds_ 140. 00
    - $70, 724. 85-
    EXPENSES.
    Labor :
    Office_ .. $12,220.10
    Warehouse . 15, 332.16
    27, 558. 26
    Officers’ salary-
    50. 00
    Fuel, light, and power_ 246.17
    Kent one month, December_ 200. 00
    Furniture and fixtures___ 372. 61
    Insurance and surety bond premium. 867. 03
    Stationery-883. 94
    Telephone, etc_ 254. 61
    Postage_ 77.47
    Adv. and market letters_ 67. 50
    Donations:
    Salvation Army_ $25.00
    Ked Cross- 50. 00
    U. W. Workers_ 150.00
    225. 00
    Repairs_ 99.43
    Miscellaneous expenses. 409. 78
    Taxes and licenses:
    Federal income paid at source_ $4,10$. 50
    Federal capital stock_ 112. 50
    State and city- 1, 000. 26
    5, 221. 26
    - 36, 685. 66
    Total profits for year. 34,039.19
    Total sales, $2,905,775.50.

      1919.
    EAJRNINGS.
    •Commission for selling_$77, 971. 77
    Terminal charges- 13, 717. 80
    Interest on deed of trust- 600. 00
    .Interest on daily bank balances- 444. 65
    Interest on United States Government Liberty loan bonds_ 1,176.10
    $93, 910. 32
    EXPENSES.
    Labor:
    Oflice_$14,731.40
    Warehouse_ 23, 080. 60
    37, 812. 00
    25. 00
    ■Officers’ salary-25. 00
    50. 00
    Fuel, light, and power-359. 07
    Sent__ 2,400. 00
    Furniture and fixtures-353. 40
    Insurance and S. B. premium-248. 00
    stationery_ 721. 23
    Phones, etc_ 277. 05
    Postage-39.45
    Attorney fees, etc-41.93
    Advertising and market letters. 105. 00
    Bepairs_ 67.90
    Hardware, brooms, and sacks-188. 71
    Auditing books-25. 00
    Miscellaneous-150. 43
    Taxes:
    Estate and city-$636. 36
    Federal_ 280. 50
    -916.86
    - 43,756.63
    Total profits for the year- 50,153. 69
    Total sales, $3,871,276.95.
    The corporation paid dividends of $19.07 per share in 1918 and $24.49 per share in 1919. The salaries paid the officers of the corporation for each of the years 1918 and 1919, and claimed as deductions from gross income in tax returns, amounted to $50.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Smith

: One of the requirements of a personal service corporation is that its income shall be ascribable primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation. In the instant appeal holders of more than 80 per cent of the stock are not. officers or employees of the taxpayer corporation. They are interestedi in the success of the corporation, but there is no evidence that they are “regularly” engaged in the active conduct of its affairs. In view of this fact the corporation fails to meet one of the essential requirements of a personal service corporation.

The taxpayer claims the right to deduct from gross income for the years 1918 and 1919 amounts for salaries of officers in excess of the amounts ever paid or incurred. The statute permits the deduction of ordinary and necessary expenses paid or incurred during the taxable-year in carrying on any trade or business, “including a reasonable allowance for salaries or other compensation for personal services-actually rendered.” It is the contention of the taxpayer that salaries, of only $50 per year to its two principal officers is not reasonable-compensation for services actually rendered, and, therefore, that in computing net income the taxpayer should be entitled to the deduction of a larger amount for compensation of officers. Salaries or-other compensation of officers which are neither paid nor incurred are not ordinary and necessary expenses and are not legal deductions, from gross income under section 234 (a) (1) of the Revenue Act of 1918.


source: Caselaw Access Project

author: James

license: Public Domain

text:
    Appeal of F. W. LUKINS.
    Docket No. 2544.
    Submitted June 9, 1925.
    Decided December 8, 1925.
    1. The taxpayer received $30,000 and applied the said sum to his own use in the year 1917. He failed to make any disclosure of the fact of such receipt in connection with his income-tax return. The Commissioner determined that the amount so received was income and that the return filed for the said year was wilfully false and fraudulent. In the absence of credible evidence either as to the nature of the transaction or as to the-intent of the taxpayer in filing his return, the determination of the Commissioner as to tax and penalty is sustained.
    2. The taxpayer omitted from his return of income for the year-1918 certain amounts, aggregating $9,000, under the mistaken belief that the amounts so received were not income. The Commissioner added the amounts to income but did not assert a penalty.. Held, on the evidence, that the taxpayer did not file a return for the year 1918 which was wilfully false and fraudulent.

      J. J. Miller and H. A. Mihills, G. P. A.’s, for the taxpayer..

      O. E. Gurl, Esq., for the Commissioner.

      Before James, LittletoN, Smith, and Tkussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1917 in the amount of $5,977.53, with a penalty under section 3176, Rev. Stats., in the amount of $7,713.20, a total for 1917 of $13,690.73; and a deficiency in income tax for the year 1918 in the amount of $3,957.12. Substantially the entire additional tax and penalty asserted by the Commissioner are in controversy.
    FINDINGS OF FACT.
    The taxpayer is a resident of Kansas City, Mo., and, during the taxable years here in question,-was general manager of the Waverly Coal Co. and the Farmers Fuel Co. of that city.
    During the taxable year 1917 the taxpayer received $15,000 from J. D. Guyton and $15,000 from W. R. Harrington. Neither of these amounts was reported in the income-tax return of the tax-, payer. During the same year the taxpayer expended in interest. $1,122.51 and made contributions to exempt charitable organizations in the amount of $487.
    As respects the two amounts of $15,000 for the year 1917, the tax-, payer failed to make any disclosure thereof on his income-tax return and failed to subject the same voluntarily to tax, but wilfully and knowingly refrained from making such disclosure or from setting forth in any manner the nature of the transactions giving rise to the receipt thereof, and wilfully and knowingly filed a false and fraudulent return for the said year. As respects four amounts aggregating-$9,000, omitted by the taxpayer from his return for the year 1918,. the taxpayer failed to make any disclosure upon his income-tax returns and failed to subject the same voluntarily to tax, under a mistaken conclusion of fact and law that the said amounts did not constitute gross income in and for the said year, and he did not wil-fully and knowingly file a false and fraudulent return in respect-, thereof for the said year.
    decision. '
    The deficiency should be computed in accordance with the follow--ing opinion. Final determination will be settled on 15 days’ notice,, in accordance with Rule 50.
   opinion.

James

: The taxpayer is 68 years of age. He has been in the coal business since 1881, starting in that business in Streator, Ill. Dur-... ing the years 1917 to 1920, inclusive, he was president of the South-, west Interstate Coal Operators Association, and since 1917 has been a director in the National Coal Association.

During the year 1917 the taxpayer received from J. D. Guyton and W. R. Harrington the sum of $30,000, $15,000 from each, and reported neither of these amounts in his income-tax return for that year. The Commissioner discovered the amount in connection with the audit of the returns of Guyton and Harrington, and added it to taxable income in the determination of the deficiency here in question. The taxpayer testified as to the transaction: “ I borrowed this money from Mr. Guyton and Mr. Harrington and gave them my notes for it.” He stated on direct examination that the payment was not compensation, was not for services rendered, did not involve the sale of.any property owned by him or the rent of any property; was not the forgiveness of any debt, the income of any joint venture, any interest, any -dividends, or any payments indirectly from the Waverly Coal Co., in which he was interested; and he testified by way of final conclusion that it did not represent any item of income from Guyton and Harrington. He repeated again, “ It was a straight loan from them. I knew them; knew they had money and I needed some money and I went to them and borrowed it. I gave them my notes.” He stated further that he had not repaid the loans; that he did not remember that any demand had been made upon him for payment; that he had never paid any interest upon them; and that he did not remember whether any demand for interest had been made. He also testified that he had deposited the $30,000 so received in a bank in Streator, Ill., of which his brother was president. He was asked on direct examination what was done with the amount so deposited, and replied, “Well, that is a matter that seems to me that is not germane to this proposition.” He testified it was not turned over to anyone else.

On cross-examination the taxpayer was asked when he got the money from Guyton and Harrington, and stated that he could not remember. He did not know how long he had known Harrington. He was not certain whether he had ever done business with Harrington but thought he had sold him some coal; that he had never before borrowed money from either Guyton or Harrington; that as to the notes, which he alleged had been given, he could not give the dates and had “ mislaid my memorandum about that.” He stated that the notes bore interest at the rate of 6 per cent, “ as I remember.” When asked if he had ever talked with Guyton and Harrington about the matter, he said that he had, but, when asked to relate the conversation, he replied, “ Oh, that was some time ago; I can’t remember what was said.” While he had testified on direct examination that he could not have repaid the loans or paid the interest after 1917, he admitted on cross-examination that he had himself returned a taxable income for 1918 of $23,056. When asked why he had selected a bank in Streator, Ill., for the deposit of the funds at a distance of some 400 miles from Kansas City, he replied, “ I suppose I had some good reason for it at the time; I do not remember just what that was now.” When asked if he had put up security on the notes, he replied, “ I put up some security; I have forgotten just what it was now. I know there was some put up.” When asked if he had made any effort to procure the notes or evidence of their existence, for the purpose of the hearing before the Board, he said, “ I did not think that — never thought of that; it never occurred to me.” However, when pressed to explain why he had secured a 15-day extension of time for the hearing in order to get affidavits from Guyton and Harrington to show that notes were given and that the transaction was a loan, he admitted that he had secured the extension for that purpose and that his efforts to secure evidence from Guyton and Harrington had failed because of their •refusal either to testify or produce the alleged notes in question. The record shows that there was no subpoena issued to either Guyton or Harrington and no effort on the part of the taxpayer to compel the production of evidence of the character indicated.

The cross-examination then veered to the business of Guyton and Harrington, and from that point reads, by questions and answers, as follows:

Q. What was the business of Guyton and Harrington at that time?
A. They were in the mule and horse business.
Q. Who were they selling their horses and mules to, Mr. Lukins? '
A. Anybody that wanted them; they had many of them put up on the market.
Q. Were they not selling them to the Army, Mr. Lukins?
A. I think they had a contract.
Q. You know they had contracts with the Government to sell mules and. horses.
A. Well there are-
Q. You know what Government don’t you?
A. Well there are a good many governments.
Q. I am trying to get an answer to my question. Isn’t it a fact that they had a contract with the British Government?
A. Yes, I think they were.
Q. Yes. Did you have anything to do with that?
A. No.
Q. No? You did not?
A. No.
Q. Were you acquainted with the British officers in that deal?
A. I met some of the officers.
Q. You met them.
A. Yes, sir.
Q. Did you have any business transactions with them?
A. Well I don’t remember just what business transactions you mean.
Q. Did you have any business transactions with these British officers?
A. Not with all of them-
Q. Not with all of them. You did with a few.
A. I knew some of them.
Q. And you had business transactions with one of them did you not?
A. One of the officers I had business with; Colonel Drage. He was president of our company at that time. He was the only one that I had business transactions with. The business transaction was only the company’s business. That is all.
Q. Mr. Drage that was associated with you was one of the British officers?
A. He was a British officer.
Q. He was a British officer?
A. Yes, sir.
Q. He had something to do with the buying of mules from Guyton and Harrington?
A. Well he was — he had charge of a remount station.
Q. And this $30,000 was used in that transaction?
A. What transaction?
Q. The transaction we are talking about with Mr. Drage?
A. No, Drage hasn’t anything to do with that whatever.
Q. Did not have anything to do with the $30,000; did not have anything to do with it?
A. No.
Q. And the $30,000 you got then you kept yourself?
A. Yes, sir.
Q. For your own personal business?
A. Yes, sir.
Q. That is all, Mr. Lukins.

The taxpayer appeals to the Board from the assertion by the Commissioner of a tax upmn a transaction involving the receipt of $30,000, which he admitted that he had for his own use. His testimony that the transaction involved the loan of $30,000 is incredible and unworthy of belief. The determination of the Commissioner in respect of the gain of $30,000 and of the fraudulent concealment thereof, must be approved.

As to the year 1918, the taxpayer concedes that he received $9,000 “ on account ” of the indebtedness of the Waverly Coal Co. to him, which consisted of a mixed aggregate of advances, interest, bonus, and salary accounts. Money received on account of any of thesej except advances, would in any event be income. The taxpayer contends that the $9,000 must first be applied to principal. There is no evidence before the Board as to the amounts of advances, separated from interest, bonuses, and salary, and, under the circumstances, we are compelled to affirm the Commissioner’s determination for the year 1918, even if the taxpayer were, as a matter of law, entitled to the allocation he seeks.

The Commissioner asked the Board to find a deficiency in the form of a penalty for wilfully and fraudulently failing to return the above $9,000 of income in the year 1918. We are satisfied that the taxpayer wilfully failed to return it or to disclose its source, but we are not convinced that he was guilty of fraudulent concealment, so as to warrant the assessment of the penalty. The burden of proof in this respect was upon the Commissioner, he not having asserted the penalty as part of the deficiency, and we find nothing in the record, as respects 1918, which clearly and unmistakably points to fraudulent intent.


author: Maeqtjette:

text:
    Appeal of K. B. BIRKELAND.
    Docket No. 3464.
    Submitted July 1, 1925.
    Decided December 21, 1925.
    Allowable deductions in computing net income determined.

      K. B. Birkeland and G. T. Mortonson, G. P. A., for taxpayer.

      Willis D. Nance, Esq., for the Commissioner.
    Before Makqtjette.
    This appeal is from the determination of a deficiency in income taxes for the years 1919 to 1921, inclusive, in the amount of $29,-536.59, consisting of 1919, $6,018.27; 1920, $23,516; and 1921, $2.32.
    The questions involve the computation of the taxpayer’s net income for the years 1919, 1920, and 1921.
    In determining the net income for 1919, the Commissioner disallowed as deductions and added to taxable income:
    Taxes paid_ $202.09
    Depreciation_ 2, 036. 68
    Aviator well_ 1, 812. 05
    Other expenses_ 15, 575. 30
    Investment and loan to Northern Oil & Gas Co_ 13,000.00
    Total_ 32,626.12
    In determining the net income for 1920 the Commissioner disallowed $30,628.12 for depletion and added to income $48,500 as rent received from K. B. Birkeland Syndicate, making a total addition, of $79,128.12.
    In determining the net income for 1921 the Commissioner disallowed $2,000.16 for depletion.
    FINDINGS OF FACT.
    The taxpayer is a resident of Minneapolis, Minn.
    During the years 1919, 1920, and 1921, he was engaged in the oil business, and in the course of that business bought and sold oil leases, drilled oil wells on contract for other parties, drilled and operated oil wells for his own account, invested in stocks, and loaned money.
    In 1919 the taxpayer paid taxes as follows:
    Personal property taxes_$10. 20
    Real estate taxes on Rouse and lot in Seattle, Wash_ 202.09
    Timber taxes on timber located in British Columbia_ 308. 00
    Total_ 520. 29
    In 1919 the taxpayer paid ordinary and necessary business expenses in the total amount of $15,575.30.
    In 1919 he sustained a loss of $1,812.05 in the performance of a contract for the drilling of an oil well for the Aviator Oil Co. He received under the contract $22,130 and expended in the work $23,942.05.
    The taxpayer acquired a rotary well-drilling rig in 1919, which cost him $10,183.38, and used the same during 1919 in drilling wells for others as well as for himself. A reasonable allowance for the exhaustion, wear and tear of the rotary rig for 1919 is $2,036.68.
    On January 22, 1919, the taxpayer signed, as an indorser, a note for $3,000 of the Northern Oil & Gas Co. running to the Mercantile State Bank of Minneapolis. On September 20, 1919, the taxpayer discharged his liability as an _indorser by paying $3,000 to the Mercantile State Bank. On November 2, 1919, all of the assets of the Northern Oil <& Gas Co. were sold at public sale by the trustee under a mortgage, and thereafter, and within the year 1919, the $3,000 indebtedness was ascertained by the taxpayer to be worthless and was charged off upon his books as uncollectible. The taxpayer owned $5,000 of stock in the Northern Oil & Gas Co.
    During 1919 the taxpayer sold a one-half interest in an oil lease covering ten acres for $50,000 par value of Liberty bonds. The whole lease had cost him $15,000. The other half interest previously had been sold for $20,000 in cash. In 1920 the taxpayer sold $51,600 of Liberty bonds for $44,024.78. ,
    During 1920 the taxpayer received from the K. B. Birkeland Syndicate $48,500 in rent. That amount was reported by the taxpayer and included in gross income of .$104,253.94 upon his amended return for 1920.
    In his return for 1920 he claimed a deduction of $30,628.12, which consisted of an estimated amount for the depletion of oil leases, $2,036.68 for depreciation of the rotary rig and other items •representing repairs.
    A reasonable allowance for the exhaustion, wear and tear of the rotary rig for each of the years 1920 and 1921 is $2,036.68.

      DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 7 days’ notice, under Rule 50.
   OPINION.

Maeqtjette:

The effect of our findings is to sustain the contentions of the taxpayer as to the deductions for 1919, except in one respect. He claimed a loss of $13,000 for an investment in and loans to the Northern Oil & Gas Co. The proof showed a loss only to the extent of $3,000. As to that item, both the note evidencing the liability as indorser and the check by which the taxpayer discharged that liability were introduced in evidence. The taxpayer claimed to have loaned $5,000 more to the corporation and to have invested $5,000 in stock. There was insufficient proof of the loan. Relative to the investment in stock, we note that the taxpayer claimed, and was allowed by the Commissioner in 1920, a loss of $1,250 for investment in stock of the Northern Oil & Gas Co. There was no evidence of the date when the capital loss actually occurred. In his amended return for 1920 the taxpayer claimed bad debt deductions in the amount of $10,750, deductions for losses by fire, storm, and casualty of $3,522.78, and total deductions under “ Schedule K ” of $14,272.78. The books of account showed bad debts of $1,750, with the inclusion therein of the $1,250 referred to, covering worthless stock in the Northern Oil & Gas Co. In the absence of evidence explaining the partial duplication we can not allow any loss for 1919 by reason of an investment in that stock.

The Commissioner’s determination for 1920 was questioned by the taxpayer in two respects. The Commissioner increased income by the amounts of $48,500 for “rent received from K. B. Birkeland Syndicate not reported,” and $30,628.12 for “ depletion not substantiated.” There was error by the Commissioner as to the item first referred to. The taxpayer’s gross income for 1920 consisted of:

Receipts from oil sales, wells 1 and 2_$45,310,49
Receipts from Birkeland Syndicate_ 48, 500. 00
Receipts from gas sales_ 920. 99
Receipts from oil sales, Humble lease_ 9, 522. 46
Total_104; 253. 94

Therefore, the action by the Commissioner would constitute a duplication of income and the claim of the taxpayer is sustained.

With reference to the depletion deduction, however, we sustain the Commissioner, except to the extent of $2,036.68, which falls under the same item but constitutes depreciation as distinguished from depletion. The proof in this appeal makes any computation of a depletion deduction utterly impossible. The taxpayer was Interested in several leases of oil lands during 1920. He had items of income from sales of oil from at least two of them. His testimony referred to but one. Evidence of production in barrels, as shown by pipe-line vouchers, had reference to a name quite different from anything testified to. But even assuming that those records are correct as to production, nevertheless they are valueless in any determination of a depletion allowance, since there is not a particle of evidence to inform us of the cost of the property or leases, the date of acquisition, and the other essential data. Accordingly, we can not disturb the determination of the Commissioner with reference to that item.

The taxpayer also claimed depletion for 1921 in the amount of $2,000.16. For the same reasons we can not compute any depletion allowance. However, the taxpayer is entitled to a deduction of $2,036.68 for the depreciation of the rotary rig in that year.


author: MoRRis:

text:
    Appeal of CARTER MEDICINE CO.
    Docket No. 3791.
    Submitted August 26, 1925.
    Decided December 21, 1925.
    Tbe inclusion in invested capital for the year 1918 of certain expenditures for advertising made between 1880 and 1910 and charged to expense, disallowed.

      Walter 8. Orr, Esq., for the taxpayer.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Marquette and MoRRis.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1918 in the amount of $1,247.46.
    The question involved is whether there should be included in invested capital, as earned surplus, a portion of the advertising expense incurred over a series of years in the development of good will.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation. It was organized in 1880, with an issued capital stock of $20,000 par value, all of which was closely held. Its business consisted of the manufacture and sale of proprietary medicines, its principal product being “ Carter’s Little Liver Pills.” All advertising expense, since the organization of the company, has been charged on the books to current expense. The annual sales and advertising expense were as follows:

    DECISION.
    ' The determination of the Commissioner is approved.
   OPINION.

MoRRis:

The taxpayer seeks to capitalize part of its advertising expenses charged to cost of sales over the years 1880 to 1910, and to have the amount of $1,000,000 included in earned surplus for purposes of invested capital. It treated the entire advertising expense, throughout its history, as a charge against the cost of its sales. It loQks back over the past history and, selecting the year 1910 as the time when an increase in advertising expense did not materially result in increase in sales, contends that by that year the saturation point had been reached, after which all future advertising expense resulted only in maintaining sales but not increasing them. The taxpayer then computes the aggregate advertising expense from 1910 to 1923 to be 34½ per cent of its aggregate sales during that period, and, applying that percentage to the aggregate sales from 1880 to 1910, finds an aggregate amount of advertising expense, in excess of the 34½ per cent, of about $1,000,000.

The argument is ingenious but it is of little assistance in a determination of the earned surplus as it stood at 1918. No evidence whatsoever was adduced regarding the earnings of the taxpayer for any one of the years from 1880 to 1923. We are not advised whether there were earnings or losses. Earnings are one of the criteria of the existence of good will, but we can not say that good will had an actual existence in the form of an earned surplus, merely upon data of sales and advertising expense. In addition, it does not at all follow that the advertising expense of a given year would have a necessary resultant in the sales of that given year.

Expense for advertising may be wisely or unwisely incurred, but the mere amount has little significance. For illustration, in 1889 the taxpayer spent $90,000 and had sales of $411,000. In 1890 it increased its advertising expense by $160,000, with an increase in sales of but $70,000, while in the year following it reduced its advertising expense about $30,000, as compared with 1890, and its sales increased over that year to the extent of over $20,000. In 1921, with advertising expense of $170,000, the sales were $500,000, yet in 1922, with an increase in advertising expense of but $27,000, sales jumped $168,000, and in 1923 a further increase in expense of less than $20,000 resulted (if advertising can be said to be the cause) in an increase of $75,000 in sales. Comparisons might be made ad infinitum, but the apparent fact is that the saturation point, as the taxpayer designates it, had not been reached in 1910 or in any other definitely ascertainable year.

The taxpayer was manufacturing not only “ Carter’s Little Liver Pills ” but other articles as well, and, although the evidence was to the effect that the largest part of the advertising expense was in connection with particular pills, yet the absence of more explicit evidence showing the separation makes it impossible to determine the extent to which the expense was incurred solely in the development of that trade-mark or name.

However, we desire to particularly emphasize that it is the year 1918 with which we are here concerned and not the year 1910. Even if we found an earned surplus to exist in 1910 to the extent of $1,000,000, which was not apparent upon the taxpayer’s books, we can not say, in the absence of evidence as to earnings and balance sheets, that such earned surplus still existed to be included in the invested capital of 1918.


text:
    Appeal of H. T. COCHRAN.
    Docket No. 3801.
    Submitted October 9, 1925.
    Decided December 21, 1925.

      Maynard Teel, Esq., for the taxpayer.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before James and Tetjssell.
    This is an appeal from the determination of a deficiency in income tax for the year 1919 in the amount of $1,521.22. The question involved is whether or not the taxpayer in computing his net income for the year 1919 is entitled to deduct a loss sustained by him in that year from the operation of his farm.
    FINDINGS OF FACT.
    The taxpayer is an individual residing on a farm, known as the Fairview Farm, about 1 mile from the village of Dawson, Pa. The Fairview Farm consisted of three tracts, the first of which was acquired about 1902, the second in 1910, and the third about 1917. The taxpayer and his family have made their home on the farm for many years, but during the year 1919 the family lived in Washington, Pa., in order that the taxpayer’s children might attend school there. During the time the taxpayer’s wife and. children were in Washington, Pa., he remained on the farm and continued to operate it, but about every two weeks he spent Sunday with his family. There are two frame houses on the farm, one of which contains six rooms and bath, and is and has been occupied by the taxpayer as a residence.
    The farm in question, for many years prior to 1916, was operated by the taxpayer as a general farm, and the taxpayer, who had been reared on a farm and understood farming, actually worked thereon. About the year 1916 the farm agent for Fayette County, Pa., made a special effort to encourage the raising of livestock by the farmers of that county, and as a part of his campaign published newspaper articles dealing with the advisability of raising high grade beef cattle and also talked to the farmers in person on that subject. The business was represented to the farmers as one that promised to be profitable. The taxpayer was one of the farmers approached by the county agent on the subject of raising high grade beef cattle, and, as a result of the efforts of the county agent, he purchased in the year 1916, at a high price, a number of Hereford cattle and went into the cattle-raising business. He also, at a considerable expense, converted his farm from a general farm to a stock farm. During the years 1918 and 1919 farm labor was very scarce, due to war conditions, and the taxpayer devoted practically all o| his time to working on his farm.

      During the year 1919, on account of the fact that the price of cattle had gone down, and for other reasons, the operation of the taxpayer’s farm was unprofitable, and he sustained a loss therefrom. The parties, to this appeal have stipulated that the amount of the loss was $10,555.91. The taxpayer in his return for the year 1919 did not deduct the amount of the loss in question.
    The taxpayer is, and has been for many years, the owner of a number of shares of stock in certain companies engaged in the mining and selling of coal, from which he derives, and has heretofore derived, a substantial income. However, during the years mentioned herein, he had no regular business except managing and operating his farm, and that business was conducted by him for profit and not for pleasure or recreation.
    The Commissioner, upon audit of the taxpayer’s income-tax return for the year 1919, made certain adjustments increasing his income, which are not material here, and to which taxpayer apparently takes no exception, but refused to allow the taxpayer to deduct the amount of the loss sustained by him from the operation of his farm.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Hule 50.


author: Marquette:

text:
    Appeal of W. H. HARRIS GROCERY CO., INC.
    Docket No. 3884.
    Submitted July 8, 1925.
    Decided December 21, 1925.
    Where the evidence is clear and convincing that the board of directors of a corporation actually met within the year and voted additional compensation to its officers and employees, such additional compensation is properly deductible from gross income for that year under section 234 (a) (1) of the Revenue Act of 1918, although no formal minutes of the meeting were preserved.

      B. E. Cabell, Esq., and James H. Rindfleiscb, C. P. A., for the taxpayer.

      George G. Witter, Esq., for the Commission'er.
    Before Marquette and Morris.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1918 in the amount of $16,174.80. The deficiency letter showed an overassessment for 1919 in the amount of $89.46.
    The question here involved is whether the taxpayer is entitled to the deduction »f additional salaries to officers and employees of $27,000 in 1918 and $25,000 in 1919.

      FINDINGS OF FACT.
    The taxpayer is a Virginia corporation, engaged in the wholesale-grocery business in Richmond.
    At a meeting of the taxpayer’s board of three directors held ⅛ December, 1918, it was voted to pay additional salaries for 1918 of' $15,000 payable to two officers and directors, and of $12,000 to be divided among employees, in amounts and to such persons as should! be determined by the two officers. The amounts so determined and the employees to whom payable (17 in number) were entered upon the books of the taxpayer for the year 1918 prior to the closing of the books. No authorization for the action appeared in the taxpayer’s minute book under date of 1918, but under date of February 15,1919, the following record was entered in the minute book:
    A meeting of tlie directors of the W. H. Harris Grocery Co. Inc. was this day held in their office, 15th & Dock Sts., Richmond, Ya.
    Eeby. 15th, 1919.
    Present
    W. H. Harris.
    A. R. Ellerson.
    J. D. Berger.
    The minutes of the last meeting were read.
    On motion duly seconded it was resolved that in view of the increase of labor imposed upon the officers and employees of this Company, and of their faithful and diligent efforts during a period of disturbed labor conditions, that in addition to their regular salaries there should be paid to each officer and employee of the Company an amount equal to their special efforts in aiding the Company to continue their usual growth and success during the past year, despite the fact that labor conditions were poor. In view of the fact that prices have advanced a great deal on food stuffs it is very necessary that the increases shall be very liberal, especially on account of the great increase in the cost of living.
    Be it resolved that this Company shall pay -an additional $15,000.00 to its officers and an additional $12,000.00 to its employees.
    The above amounts to be divided among its officers and employees according to the standing and the value of their services to the Company, and to be paid at a time later which will be suitable to the Company.
    Having no further business to come before the meeting, same adjourned.
    W. H. Habéis, Prest.

    J. D. Berger, Seo’y.

    In December of 1919, two of the taxpayer’s officers and directors informally decided that additional salaries should be paid for 1919 of $15,000 to the two officers and directors and of $10,000 to such employees and in such amounts as the two officers might determine. No entries were made upon the books of the taxpayer within the year 1919 covering such additional salaries. The two officers made their determination and approved payment to themselves and to 22 employees within the year 1920, the action being authorized by a vote of the directors under date of January 81, 1920, reading as follows:
    Annual meeting of the Directors of the AV. H. Harris Grocery Oo. Inc. was .this day held in their offices 15th & Dock Sts., Richmond, Virginia.
    Jany. 31, 1920.
    Present
    AV. H. Harris.
    J. D. Berger.
    S. H. Ellerson.
    Minutes of the last meeting were read.
    On motion duly seconded it was resolved that a bonus or additional salaries, would be paid to the officers and employees of the Company according to their standing and services performed by them during the year.
    Officers to receive_$15, 000. 00
    Employees_ 10, 000. 00
    The above amounts to be paid at a later time suitable to the Company.
    There being no further business to come before the meeting, same adjourned.
    AV. H. Harris, Prest.

    J. D. Berger, Secy.

    Both of the officers, who were also directors, were stockholders in the taxpayer, but the amounts determined upon as their additional compensation for 1919 bore no relation to their respective stockholdings.
    All contracts of employment, with one exception, were verbal and, during the years 1918 and 1919, all employees with reference to whom additional salaries were authorized as aforesaid had the understanding at the beginning of each year that in addition to their regular salaries they would receive such further amounts at the end of the year as might be determined upon by the two officers in their sole judgment and discretion.
    The taxpayer kept its accounts and rendered its returns upon the accrual basis.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Eule 50.
   opinion. •

Marquette:

We are satisfied from the evidence that the additional compensation to the officers and employees of the taxpayer for the year 1918 was determined and became a liability of the corporation during that year. The evidence convincingly discloses that a directors’ meeting was held within the year, at which meeting the amount of additional compensation was determined, and these amounts were actually set up on the taxpayer’s books as liabilities to the several officers and employees within the year. No formal minutes of this meeting were made in the corporate minute book, and no formal- action was taken until February 15, 1919. That formal action of the board of directors is not essential to the creation of a liability against the corporation, if action was in truth intended, was held in Appeal of Reub Isaacs & Co., 1 B. T. A. 45. We therefore are of opinion that the additional compensation authorized for the year 1918 was a proper deduction for that year.

The evidence with respect to the year 1919 leaves us unconvinced that there was any competent action on the part of the directors which could create a liability against the corporation for that year. All the evidence points to action in 1920, and the determination of the Commissioner disallowing the additional salary deduction in. 1919 must be approved.


author: Teussell:

text:
    Appeal of JESSE E. LaDOW.
    Docket No. 4124.
    Submitted July 16, 1925.
    Decided December 21, 1925.
    A court of competent jurisdiction in the State of Ohio adjudged that the taxpayer had held certain shares of stock as trustee for the true owner and must either turn over such shares with the dividends received on the same or pay an amount equal to the par value of such shares plus dividends received. Held, that the amount paid in satisfaction of the court's decree, less interest, is not a loss deductible from gross income.

      Jesse E. LaDow, Esq., pro se.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before LittletoN, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income tax for the year 1919 in the amount of $3,361.81. The question involved is whether or not the taxpayer, in computing his net income for the year 1919, is entitled to deduct the amount of a judgment paid by him in that year under the circumstances hereinafter set forth.
    FINDINGS OE FACT.
    The taxpayer is a resident of Mansfield, Ohio.
    In November, 1911, the Mansfield Bubber Co., a corporation with its place of business at Mansfield, Bichland County, Ohio, went into-bankruptcy. The taxpayer, B. L. Chase and several other persons were directly obligated on some of the paper of said company and, being anxious to protect themselves from loss, agreed among themselves to buy and did buy the assets of the company at the trustee’s sale. In the year 1912 they organized a new corporation under the name of the Mansfield Tire & Rubber .Co., transferred the assets which they had purchased at said sale to the new company and received therefor a certain number of shares of the common capital stock of the company and a certain number of shares of its preferred capital stock. All of these shares were issued originally in the name of the taxpayer as trustee. The number of shares of the common stock to which the the said B. L. Chase was entitled was 144, and his allotment of the preferred stock ultimately was 60 shares. Subsequently, the taxpayer delivered to B. L. Chase the 144 shares of common stock and delivered to the other persons interested the amounts of common stock and preferred stock to which they were entitled. Thereafter, a stock dividend was declared and each of the parties referred to became entitled to 14 shares more of the common stock. The additional 14 shares of common stock to which B. L. Chase was entitled were delivered to him by the taxpayer. The 158 shares of common stock of the Mansfield Tire & Rubber Co. belonging to B. L. Chase were never transferred to his name on the books of the company, although he had actually received the certificate for said shares of common stock. He never received a certificate for the preferred shares and they always remained in the possession of the company or the taxpayer, who was the secretary thereof.
    In the early part of the year 1913 the taxpayer entered into negotiations with B. L. Chase for the purchase of all or part of the stock owned by him in the Mansfield Tire & Rubber Co. However, the negotiations which the taxpayer had with Chase prior to May 24, 1913, did not include his preferred stock in said company. The taxpayer claims that, between May 24, 1913, and the day the negotiations were finally closed, he had further oral negotiations with Chase for the purchase of all the' preferred and common stock which Chase then owned in the Mansfield Tire & Rubber Co., and that the price to be paid Chase included all of his stock in the said company.
    After the negotiations were completed and an agreement had been reached between the taxpayer and B. L. Chase, the said Chase gave to the taxpayer an option which contained a description of the stock which was being bought and sold, with the price and other terms stated therein, upon which the option would be exercised. This option was placed in an envelope with the certificate for 144 shares of common stock and deposited in escrow with the cashier of one of the banks of the City of Mansfield. Within the time stipulated in said option, to wit, on June 10, 1913, the taxpayer exercised the same, went to the bank with B. L. Chase, paid the ¿consideration agreed upon, and received from Chase 158 shares of the common stock of the Mansfield Tire & Rubber Co. — the 144 shares in the envelope and the other 14 shares which were owned by him.
    About a year subsequent to June 10,1913, B. L. Chase died without having in the meantime made a claim for the 60 shares of preferred stock of the Mansfield Tire & Rubber Co. which originally had been allotted to him. The preferred stock remained as it was on the company’s books at the time of Chase’s death until May, 1917, when it was divided by the taxpayer — he being the secretary of said company — among himself and the other persons who he claimed had joined him in the purchase thereof.
    Both prior and subsequent to May, 1917, the administratrix of the estate of B. L. Chase claimed said preferred stock and all the dividends which had been declared thereon. This claim was denied by the taxpayer. He contended he had bought all of the stockholdings of Chase in said company which he had transferred to himself and the other purchasers, the common stock having been transferred on the same day the option was exercised.
    On January 10, 1918, the administratrix of the estate of B. L. Chase sued the taxpayer in the Court of Common Pleas of Rich-land County, Ohio, for- the recovery of said stock or the value thereof, with the accrued dividends. The case was tried before the court without a jury. At the trial the administratrix introduced in evidence a paper in writing, found in B? L. Chase’s private papers after his death, which purported to be a copy of an alleged option (hereinafter called the Chase option), and recited, among other things, that it was for “ 158 shares of common capital stock in the Mansfield Tire and Rubber Company.” The taxpayer testified that he had never seen the original of said option; that it was not a copy of the option that was placed in the envelope in escrow; that the option under which the stock was purchased was taken by Chase at the time it was exercised; that Chase tore his name therefrom and that no one had seen the option since that time. The taxpayer introduced in evidence a paper which he claimed was a copy of the option placed in the envelope by him and Chase, and therein the stock was described in the words, “ My stock in the Mansfield Tire and Rubber Company.” The court, upon consideration of the pleadings and the evidence, found in favor of the administratrix and, on April 5, 1919, rendered judgment against the defendant, the taxpayer herein. The part of the judgment of the court which is pertinent here is as follows:
    * * * The Court does further find that B. L. Chase, now .deceased, did not sell and transfer unto the defendant, J. E. LaDow, Trustee, personally oí-as agent, said sixty (60) shares of preferred stock of the Mansfield Tire & Rubber Company described in the petition of the plaintiff on the 10th day of June, 1913, or at any other time, that the defendant J. E. LaDow, Trustee, or personally has no right, title or interest therein, that said shares of preferred stock are the property of the Estate of B. L. Chase deceased, and that the plaintiff is entitled to recover said shares of stock and all dividends accruing thereon from the date of the issue of said stock together with interest thereon from the respective dates of the payments of said dividends, which dividends and interest to April 5, 1919, the Court finds to be the sum of Three Thousand Two Hundred Nine and 64/100 ($3,209.64) and the par value of said stock to be Six Thousand Dollars ($6,000.00), and of the actual value of par.
    Wherefore it is considered and adjudged by the Court that the defendant, J. E. LaDow, be and is hereby ordered and directed to transfer and deliver unto the plaintiff sixty (60) shares of the preferred stock in The Mansfield Tire and Rubber Company and to pay unto the plaintiff the sum of Three Thousand Two Hundred Nine and 64/100 Dollars ($3,209.64) with interest thereon at 6% from April 5, 1919.
    Or in case the defendant has disposed of said stock and can not for such reason make delivery thereof, then it is considered and adjudged by the Court that the defendant pay unto plaintiff the sum of Nine Thousand Two Hundred Nine and 64/100 Dollars, with interest thereon at 6% from April 15, 1919, for which delivery of stock and for said sum of $3,209.64, with interest thereon at six per cent from April 5,1919, or for which sum of $9,209.64 judgment is awarded to the plaintiff and against the defendant, and for costs of suit taxed at $-, to all of which findings, order, judgment, and decree, the defendant, J. E. LaDow, Trustee, and personally, at the time excepted.
    The judgment in the Court of Common Pleas was affirmed by the Court of Appeals for Richland County, Ohio. The taxpayer in the year 1919 paid to the administratrix of the estate of B. L. Chase the amount of the judgment, together with costs and interest thereon, in the total amount of $9,865.21, of which $713.15 represented interest on the judgment and interest included therein, and $67.40 represented costs.
    The taxpayer was subsequently indicted in Richland County, Ohio, for perjury, the indictment alleging that he gave false testimony in the trial of the suit brought against him by the administratrix of the' estate of B. L. Chase. At the trial the State introduced, and the court admitted in evidence over the objection of the taxpayer, the alleged Chase option. The taxpayer was found guilty of perjury, añd error was prosecuted to the Court of Appeals. He obtained a change of venue, and the hearing on the petition in error was had before the Court of Appeals of the Fifth Judicial District of the State of Ohio — not the same Court of Appeals that affirmed the judgment in the civil suit. That court held that the alleged Chase option was not competent evidence against the taxpayer in the perjury trial and that its admission constituted reversible error, and it reversed the judgment of the trial court and remanded the case for further proceedings.
    The taxpayer, in computing his net income for the year 1919, deducted the amount of $9,865.21 paid under the judgment aforesaid. The Commissioner allowed so much of the deduction as represented interest included in the judgment and interest on the judgment and disallowed the costs and the amount of $9,084.66 included in the judgment as representing the value of the stock and the accrued dividends thereon.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Teussell:

The taxpayer in this appeal has argued that the judgment of the Court of Common Pleas of Eichland County, Ohio, by which it was decreed that the taxpayer held 60 shares of preferred stock of the Mansfield Tire & Eubber Co. as trustee for B. L. Chase, who was the true owner of such shares, and that the taxpayer must account for the value of such shares, together with dividends received thereon, should be disregarded, on the ground that said judgment was influenced by the acceptance of incompetent evidence and possible bias of the trial court. He has argued, further, that the reversal of a verdict of guilty in an indictment for perjury growing out of the above-mentioned civil action should be taken as proving his claim that the judgment in the civil action should be disregarded.

It appears, however, that the court which tried the civil action had before it all the persons and all the competent evidence that could be produced by both parties to the action, and that the determination of the trial court was affirmed upon appeal. We are of the opinion that the decree of the trial court must be taken as finally establishing the facts which were there in controversy, and that the determination of the Commissioner should be approved.

GREEN concurs in the result only.


author: SteRnhagen:

text:
    Appeal of THE SPRINGDALE CEMETERY ASSOCIATION.
    Docket No. 4169.
    Submitted October 31, 1925.
    Decided December 21, 1925.
    1. Tbe directors of tbe taxpayer by informal action set up as a reserve fund, for tbe perpetual care of cemetery lots, a percentage of tbe price received for lots sold. There was a contract obligation with the purchasers to keep tbe lots in repair, but no trust was created in favor of tbe lot owners. Held, that tbe sum appropriated for tbe reserve fund may not be subtracted from tbe sale price in ascertaining tbe gain realized on tbe sale.
    2. In considering tbe price received for lots sold around March 1, 1913, as evidence of tbe value of tbe remaining lots on that date, such price may not be reduced by a percentage thereof which is placed in a perpetual care reserve fund.

      J. E. Houston, Esq., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.
    Before Sterni-iagen, LáNSdoN, and AeuNdell.
    This appeal is from the determination of a net deficiency of $363.04 in income tax for the years 1918, 1919, 1920, and 1921. The errors assigned are the improper determination of value on March 1, 1913, as the basis for gain or loss on sales in the taxable years of cemetery lots, and the inclusion in taxable income of an amount alleged to be a perpetual care fund. The findings of fact are based in part on oral testimony and in part on such portions of a revenue agent’s report as were stipulated in evidence.
    FINDINGS OF FACT.
    The taxpayer was incorporated February 14, 1855, by a special act of Illinois. The charter contains, among other provisions, the following:
    Out of the proceeds of the sales of lots the Corporation may first pay the purchase money of the land purchased for Cemetery purposes and the expenses of grading, laying out and fencing' the same and all necessary incidental expenses, with interest; and after the payment of such purchase money, expenses and interest the Corporation shall provide, by its By-Laws, for appropriations. out of the proceeds of sales of lots to keep the grounds in repair and in good order; Provided, however, that nothing herein contained shall make it requisite for the Corporation to pay the whole of such purchase money, expenses and interest before extending the laying out, grading and platting other parts or portions of said land from time to time as said Corporation shall deem it necessary and proper.
    It shall be lawful for said Corporation to take and hold any grant or bequest of money or property in Trust, and to apply the same or the income thereof, under the direction of the Board of Directors, for the improvement of said Cemetery or any portion thereof or in the erection and preservation of any tomb or monument, according to the terms of any such grant or bequest; and any Court having equity jurisdiction for the County of Peoria shall have power to compel the performance of such Trust.
    On March 1, 1913, the taxpayer owned certain cemetery grounds and lots, which are set forth to the satisfaction of the parties in a certain “ Exhibit H ” attached to the revenue agent’s report of September 3, 1924. The said exhibit correctly shows the value per square foot of such properties on March 1, 1913, in a column headed “ Cost sq. ft.” This figure varies as to different lots, the maximum being $1.50. The March 1, 1913, value used by the Commissioner is shown on said exhibit in column headed “Net cost sq. ft.,” which figure is uniformly 25 cents less than the figure of “ Cost sq. ft.” This figure of 25 cents per square foot is an amount arbitrarily set up on the taxpayer’s books as the portion of the price in each sale set aside as a so-called perpetual care reserve.

      The corporation’s by-laws contained no provisions for appropriating any part of receipts from the sale of lots as such perpetual care fund, and no resolution to that effect was passed by the directors. The directors by informal decision set up such a reserve on the books. The amount.of 25 cents a square foot was an estimate of the amount required to provide a sufficient fund for future care.
    Section 51, chapter 21, Eevised Statutes of Illinois, provides:
    Ti‘u.st Fund. The Board of Directors of such cemetery society, or cemetery association, or the trustees of any public graveyard, may set apart such portion as they see fit of the moneys received from the sale of lots in such cemetery or graveyard, which sums shall be kept separate from all other assets as an especial trust fund, and they shall keep the same invested in safe interest or income paying securities, for the purpose of keeping said cemetery or graveyard, and the lots therein, permanently in good order and repair, and the interest or income derived from such trust fund shall be applied only to that purpose, and shall not he diverted from such use.
    The uniform certificate of purchase covering each lot sold contains the following:
    The Association will clean and keep in proper order, the surface of, and the walks belonging to, the above lot, without further charge, during the existence of said Cemetery.
    During the taxable years the taxpayer sold certain of its lots, and the portion of the amount received which should be included in taxable income is the subject of this controversy.
    DECISION.
    The deficiency should be computed in accordance with the following opinion and will be settled on 15 days’ notice, under Rule 50.
   OPINION.

SteRnhagen:

The situation here is different from that considered in the Appeal of The Los Angeles Cemetery Association, 2 B. T. A. 495, for there the fund for perpetual care was mandatory .and was clearly a trust fund. Here it is permissive under the State law. Bourland v. Springdale Cemetery Association, 158 Ill. 458; 42 N. E. 86. The taxpayer voluntarily set up a reserve based on an ■estimate, but there is lacking the clear evidence necessary to establish a trust. So far as the record shows, the directors might at any time reduce the fund or perhaps wipe it out, without restraint, their liability, if any, being one for breach of covenant or contract. Hence we hold that the whole amount received on the sale of lands in the taxable years was gross income to the extent of the excess ■ over March 1, 1913, value or original cost, whichever was higher.

Since the 25 cents per square foot which was reserved for perpetual care was part of the sale price in the taxable years, it was no less so as to sales made around 1913 which were used as measures of value of the remaining lands. It was therefore improper to reduce 1913 value by 25 cents a square foot, and we hold that the figures shown in the column headed “ Cost sq. ft.” should be used to determine March 1, 1913, value.


author: Trammell

text:
    Appeal of GATE CITY COFFIN CO.
    Docket No. 4517.
    Submitted October 3, 1925.
    Decided December 21, 1925.
    Basis for deduction on account of wear, tear, and exhaustion of assets determined.

      B. B. Pettus, Esq., and A. L. Lafrantz, G. P. A., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before GratjpNer and TraMmell.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1918, 1919, and 1920, in the amount of $9,143.06. The deficiency arose from the disallowance by the Commissioner of part of the deductions taken by the taxpayer for the exhaustion, wear and tear of its buildings, machinery, and equipment during those years.
    BINDINGS OF FACT.
    The taxpayer is a corporation, organized in the year 1881 under the laws of the State of Georgia, with a capital stock of $100,000, and is and has been since the organization engaged in manufacturing coffins, caskets, funeral supplies, and cedar chests, at Atlanta, Ga.
    From timé to time, since the corporation was organized, it has made additions, betterments, and repairs to its buildings or erected new buildings, and has purchased and installed new machinery. The buildings, additions, and betterments were erected or made largely by the taxpayer’s employees and were constructed as far as possible from material that the taxpayer carried in stock. The additional machinery was installed by the taxpayer’s regular employees. The taxpayer only charged to its building and machinery accounts the cost of the machinery purchased and the cost of material and labor especially purchased or employed for or in connection with new buildings, additions, and betterments. The cost of building materials taken out of its regular stock and the wages paid to its regular employees for work done on the new building and on additions and repairs to its old buildings were charged to expense.

      In the year 1902, E. C. Calloway, now president of the taxpayer, acquired a majority — one or two shares more than a half interest— of the taxpayer’s capital stock. The book value of the capital stock at that time was $107,499.35. The owners of the capital stock claimed that the book value of the stock did not accurately reflect the cost of the buildings and machinery, inasmuch as part of the buildings and machinery had been erected and installed by the company’s regular employees and the cost thereof charged to expense instead of to the building and machinery accounts. Calloway, after an investigation, was convinced that the claim of the stockholders was correct and he paid them for a bare majority of the capital stock the amount of about $66,000, which he was convinced represented the value of the stock as reflected by the actual cost of buildings, machinery and other assets. Soon after Calloway acquired control of the corporation, the building account was increased by $20,000 and the machinery account was increased by $5,000 to cover the- amount estimated to have been spent on buildings and machinery and not capitalized. During the years 1902 to 1913, additions were made to the taxpayer’s buildings, and of the cost thereof $10,997.12 was charged to expense and not to the building account. Further additions and betterments were made to the buildings in the year 1917, at a cost of $3,717.49. The cost of the taxpayer’s buildings as of December 31, 1917, was at least $74,853.68.
    In the.years 1918 and 1919, the taxpayer owned auto hearses, which it acquired at a cost of $5,882.20, and its allowance for the exhaustion, wear and tear of the auto hearses should be computed on that value.
    The Commissioner, upon audit of the taxpayer’s returns for the years 1918, 1919 and 1920, determined that exhaustion, wear and tear of the buildings owned by the taxpayer should be computed upon a value of $46,903.70 for the year 1918,.and $71,136.21 for the years 1919 and 1920, and that the exhaustion, wear and tear of the machinery should be computed upon a value of $25,610.60 for the year 1918, $24,029.35 for the year Í919, and $28,400.92 for the year 1920. The rates of depreciation adopted by the Commissioner are acquiesced in by the taxpayer.
    DECISION.
    The deficiency should be computed in accordance with- the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Trammell

: The evidence presented by the taxpayer in support of its contention as to the values of its several assets, upon which allow-anees for depreciation should be computed, is vague, indefinite, and unsatisfactory. It is impossible for the Board to determine therefrom that the cost of the taxpayer’s machinery, or the fair market value on March 1, 1918, plus the cost of additional machinery purchased thereafter, was, during the years involved herein, greater than the values determined by the Commissioner. The values adopted by the Commissioner as a basis for computing the taxpayer’s allowance for the exhaustion, wear and tear of its machinery. in the years 1918, 1919, and 1920 is therefore approved. We find that the cost of the taxpayer’s building was, as claimed in its returns for the years involved, $14,853.68, but there is not sufficient evidence from which we can hold that they had any greater value than therein claimed. The cost of the auto hearses is established to have been $5,882.20, and the taxpayer’s allowance for the exhaustion, wear and tear thereof should be computed on that basis. In all other respects the determination of the Commissioner is approved.


author: Kornee, Chairman:

text:
    Appeal of BARNETT WEISS.
    Docket No. 4497.
    Submitted October 14, 1925.
    Decided December 23, 1925.
    1. Bare estimates of traveling expenses not sufficient as evidence proving the deductibility of such items.
    2. Losses claimed by taxpayer on investments in stock- and loans to a corporation not proved.

      Barnett Weiss pro se.

      M. N. Fisher, Esq., for the Commissioner.
    Before KorNer.
    The taxpayer appeals from a determination of a deficiency in income taxes for the year 1923 of $113.95, which deficiency arises from the Commissioner’s disallowance, of (a) alleged traveling expenses, and (b) losses due to investments in stock and loans to a bankrupt corporation. The taxpayer was the sole witness, and the testimony, after direct and cross examination, was in many respects so indefinite, unsatisfactory, and varying that it was extremely difficult to deduce therefrom a finding of fact. The taxpayer produced no records or competent data of any description to support his oral statements, and his own recollection was extremely uncertain in many respects.

      FINDINGS OF FACT.
    1. The taxpayer is a resident of New York City. During the year 1923 he was a traveling salesman, selling ladies’ neckwear and scarfs. He worked on a commission basis and his territory included New York City, Port Chester, and certain Hudson River towns, to wit, Yonkers, New Rochelle, Newburgh, Poughkeepsie, Kingston, and Hudson; likewise certain New Jersey towns, to wit, Asbury Park, Long Branch, Perth Amboy, and South Amboy. In canvassing the Hudson River towns taxpayer usually made two-day trips. In canvassing other towns outside of New York City he usually went out in the morning and returned in the late evening. During the year 1923 he was so engaged in traveling for upwards of 20 weeks. Hotel bills were incurred only on trips to the towns up the Hudson River. Taxpayer kept no record of drawings or expenses nor did he keep any record of mileage traveled or of amounts expended by him for traveling or hotel expenses.
    2. The Weiss Metal Corporation was organized by taxpayer’s father and one Tausick, who was the taxpayer’s employer. The taxpayer was vice president of the corporation, but testified that he did not own any stock. In some way, which is not disclosed by the evidence as to whether it was an investment in the stock of the corporation or a loan to it, taxpayer placed in the hands of the corporation $2,000. In 1923 the corporation went into bankruptcy and Tausick received a small .percentage on his investment as a stockholder or as a creditor. The taxpayer was notified of the bankruptcy but filed no claim in the bankruptcy proceedings. He received no distribution in the liquidation of the corporation. There were very few creditors of the corporation, except Tausick, who was also the main stockholder.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Kornee, Chairman:

This appeal is typical of a class of cases which the Board is called upon to decide upon testimony which is nebulous or conflicting, or both. The taxpayer took the stand in his own behalf and testified that he traveled for upwards of 20 weeks in the year 1923 as a salesman. He kept no records or memo-randa of any description showing his expense accounts or the miles traveled by him. The only evidence offered by him was an estimate that he must have spent $1,800 in that period of time as traveling expenses. He stated on the witness stand that this was nothin»- more than an estimate.

Tbe Board is cognizant of the fact that every detail of a traveling expense account is difficult to keep and prove, and .for that reason the Board is prone to give considerable latitude in the matter of evidence tending to prove such accounts. However, there must be something more than a bare estimate to support such a deduction. The burden of showing the incorrectness of the Commissioner’s determination is upon the taxpayer, and the bare assertion of an estimate in matters of expenses which can in all probability be proven with some degree of accuracy is not sufficient proof.

The evidence adduced by the taxpayer relative to the second issue raised by his appeal is even more unsatisfactory and conflicting. The Board is wholly unable to determine from the record whether the taxpayer invested $2,000 in the Weiss Metal Corporation, as a stockholder, or whether he loaned such an amount to that corporation. In his petition the taxpayer alleges that he invested this money in stock and loans to the corporation. In his testimony on the witness stand the taxpayer stated that he was vice president of the Weiss Metal Corporation. His testimony then runs as follows : *■

Q. You say that $1,400 cash and. $400 Liberty Bonds and $200 were loans?— A. Yes, Sir.
Q. What was it, money loaned to the corporation? — A. Well, I loaned money to the corporation.
Q. Did you take a note ior it? — A. No, I did not, besause that business was run by my dad and I didn’t keep such strict tabs.
Q. That was not an investment? — -A. No, none of the money was investment in the business.
Q. All the money you put into it then was a loan?. — A. Yes.
Q. And the Liberty Bonds were a loan? — A. Yes, sir, and the checks were a loan, and the Liberty Bonds a loan. Well, they used to say, “ You are a partner in the concern ”, but I never had anything written to that effect.
Q. Did you have any stock? — A. No, he said, you have no stocks but I had his word that I did have. I didn’t care. I was helping him out. That is all I cared for, knowing that if the business was any good, I would get my money back.
* * * * * * *
Q. How do you know this firm went into bankruptcy in 1923? — A. I know at that time that I attended the proceedings at the bankruptcy sale.
.Q. Did you have a claim filed for any amount? — A. No, I had no dm'™ filed.
V ⅝ ⅜ ⅜ ⅝ ⅝ ⅝
Q. If this was a loan to this corporation, the metals company, you didn’t file a claim for the amount they owed you in the bankruptcy proceedings?— A. It was my father’s business and I just treated it as a loan to the firm. I didn’t at that time file a claim. I don’t know why.
Q. Did the bankrupt concern pay something to the creditors? — A. Hardly anything.
Q. How much? — A. I dare say my employer must have received on about $8,000 investment about $120, or something like that. I don’t know what the percentage, is at all.
Q. Was your employer’s investment in stock or a loan? — A. In stock.
Q. How did your employer get anything; was that common stock?, — A. Common stock.
Q. How did he get anything on his common stock unless the creditors were paid in full? — A. That I could not account for.
Q. You know as a fact common stockholders don’t generally get anything in the disposition of the bankrupt’s estate until all the creditors are satisfied?— A. I suppose it works that way, I don’t know.

The taxpayer offered to introduce in evidence three checks drawn by Tausick & Co. to Weiss Metal Corporation. These three checks were in respective amounts of $220, $300, and $700. These checks did not bear the indorsement of the taxpayer, but he claimed that they were drawn by Tausick & Co. to the Metal Manufacturing Corporation and charged to his account on the books of Tausick & Co., who were his employers. There was no evidence in support of this statement; neither the drawer nor the payee of the checks gave evidence nor was there any evidence that the checks in question had aught to do with the taxpayer. The books of his employer were not submitted in substantiation of the alleged charges to the taxpayer’s account therein. On objection by the Commissioner the checks were not admitted in evidence. At .the hearing, which was held in New York City, the taxpayer testified that his employer, who drew the checks and on whose accounts he claims the charges were made against him, was in the city, but no proffer was made of any evidence by such employer.

It is evident from the foregoing that no determination of the facts relative to this transaction was possible. The evidence wholly fails to enlighten the Board as to what the transaction was or what the taxpayer’s rights are therein.

In view of the record as outlined in this opinion, the determination of the Commissioner must be approved.


author: Steeniiagen

text:
    Appeal of JOHN A. BRANDER.
    Docket No. 4080.
    Submitted August 17, 1925.
    Decided December 23, 1925.
    1. Ordinarily, a taxpayer who keeps no books or records of account can not be on an accrual basis.
    2. The proof in this ease is insufficient to establish that the taxpayer’s individual accounts were kept in the books of a corporation of which he was an officer. Upon the evidence, held, that the cash receipts and disbursements method of returning income was proper.
    3. Salary credited to but not received by the taxpayer in the taxable year, as an officer of a corporation which was controlled by the taxpayer and another person and which was able to pay such salary, held, to have been received constructively.

      4. Deduction ior depreciation on a pleasure yaclit as property-used in business, claimed because the yacht was used largely for entertaining present or prospective customers of a corporation of which taxpayer was president and a salesman, not allowed.

      B. K. Slaughter, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Sternhaoíen and Love.
    The taxpayer appeals from the determination of a deficiency of $7,382.82 in income and profits taxes for 1919. He alleges that the Commissioner erred in including in income salary credited to but not received by the taxpayer in the taxable year; and in disallowing depreciation on a yacht claimed to have been used in business. The petition also contains allegations relative to the denial by the Commissioner of claims in abatement for the years 1917 to 1920, inclusive, which were withdrawn by the taxpayer at the hearing.
    FINDINGS OP PACT.
    Taxpayer was president of Brander & Curry, Inc., which was organized by him and Chester M. Curry in 1915. They were the principal stockholders and together controlled the corporation. Its business was to act as selling agent for manufacturers, and it dealt principally in cotton fabrics used in the automobile industry. Chester M. Curry was treasurer and Lewis W. Brander was vice president. All three officers acted as salesmen. They, together with a brother of Curry, constituted the board of directors.
    The taxpayer originally made his income-tax return on an accrual basis, and reported receiving from Brander & Curry, Inc., salary and commissions of $115,166. In 1922 he filed an amended return on the basis of cash receipts and disbursements and reported receipts of $112,661.51 as salary and commissions. He kept no separate books of account of his own. The original return was prepared by a public accountant from the books of the corporation, which were kept on an accrual basis.
    The total amounts credited and withdrawn each year from 1917 to 1919, inclusive, in the account of the taxpayer on the books of the corporation were:

      The credit balances of the officers on the books of the corporation at the beginning and at the close of the taxable year are as follows:

    The cash on hand at the beginning of the year 1919 was $15,-352.62; at the close of the year it was $47,975.92. The surplus at the beginning of the year was $28,017.48; at the close, $114,336.66. The total amount credited to officers in 1919 exceeded the amount withdrawn by $17,465.72.
    On December 31, 1918, the corporation had investments in stock and bonds aggregating $90,525.08; on December 31, 1919, $286,-619.73.- These investments were mainly in the shares of stock of corporations with which Brander & Curry, Inc., did business. Its outstanding stock was $25,000.
    The earnings of the corporation in 1919, after deducting all salaries and expenses, were sufficient to have paid a dividend of 350 per cent on the outstanding capital stock and 150 per cent on the combined capital and surplus at December 31, 1918.
    The corporation paid for its purchases within 10 days or monthly, and extended credit to its customers of from 60 to 90 days. All of its assets were pledged with banks or commercial bankers for loans.
    In the summer of 1919 the taxpayer purchased a motor yacht for $7,000. He later spent about $60,000 in remodeling, redecorating, and refitting it. He claims depreciation of $13,327.40, at the rate of 20 per cent on a total cost of $66,637.40. From the date of purchase until the early part of January, 1920, the yacht was being remodeled and was not put into service until that month. It was used largely for entertaining officials of companies with whom Brander & Curry, Inc., did business or hoped to do business. The purpose of the taxpayer was to have pleasant association with persons whose acquaintance might be of business advantage and to impress them with his social and business standing. He frequently loaned the yacht to these persons. On one occasion, when the yacht was being used by a customer, the taxpayer conferred about a transaction which ultimately yielded the corporation of Brander & Curry, Inc., large profits for several years. The yacht gave the taxpayer pleasure and conserved his health. The expenses of operating the yacht were borne by him.

      DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Steeniiagen

: When the taxpayer filed his original return he had had it prepared by a firm of certified public accountants upon whose advice he relied. He had no individual account books and it is said that the return was prepared from the data contained in the books of the corporation of which he was one of the two dominating stockholders. The return stated upon its face that it showed income accrued and not income received, and the amounts of income and deductions were shown to be as follows:

INCOME. .
Salaries and commissions as president and salesman
$115,166. 00 from Brander & Curry, Inc_
512. 50 Dividends received directly_
- $115, 678. 50
DEDUCTIONS.
2, 434. 89 Interest paid___
13, 327. 40 Depreciation on yacht used for business purposes, cost $66,637.00 at 20 per cent_
7,386. 00 Loss on stock market transactions___
2,000.00 Burglary: Jewelry stolen_
500. 00 Country club bond stolen_
- 25, 648. 29
90, 030. 21

After audit and investigation the Commissioner disallowed the depreciation on the yacht as a deduction. The taxpayer then, without securing any previous consent from the Commissioner, filed an amended return purporting to show income received instead of' income accrued, and he now insists that this is the proper method of determining his taxable income. Upon this method, he contends,, he is taxable not upon the amount of salary and commissions of $115,166 which had accrued to him as shown by the corporation’s books, but only upon the amount of $112,661.51, which he actually received during the taxable year. That he actually received only this amount is not disputed, but the Commissioner contends that the taxable income should be determined by the accrual method as originally adopted by the taxpayer; or, if the receipts method be used, the entire amount of $115,166 should nevertheless be included because the circumstances are such as to impute to the taxpayer the constructive receipt of the $2,904.49 entered upon the corporation’s books as a credit to him (and deducted by it on its return) but not actually paid.

There is no foundation in this record upon which it can be said that the method of accounting regularly employed in keeping the taxpayer’s books of account is the accrual method. He had no method of accounting, for he kept no books, and, except in an extraordinary case, which does not now come to mind, an accrual method without accounting records is an anomaly. Such a method is inherently an accounting system whereby one is enabled not merely to record receipts and payments after they 'take place but to keep track of his financial rights and obligations under a credit system. Even a simple practice of accruals would require systematic accounting and some sort of bookkeeping. Without records it may generally be concluded that the cash method is being used. But the Commissioner says that the taxpayer did have books, in effect, for his accounts were kept on the books of the corporation, and that from these his tax return was compiled. This is not to be assumed, and the proof is not convincing. It appears only that the single item of salary and commissions was taken from the corporation’s books. Whether all the remaining items of dividends, interest, depreciation, and losses also appear there is not established. We hold, therefore, that the receipts method may properly be used as the taxpayer claims.

The Commissioner then contends that the situation is such as to constitute a constructive receipt by the taxpayer, and cites article 53 of Regulations 45. This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his tona -fide selection of this method by “ construing ” that to be received of which in truth he has not had the use and enjoyment. Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means for taxing something other than income and thus violating the Constitution itself. Doubtless, however, there are clear cases of constructive receipt, such, for example, as that of the bond owner who chooses not to cash his coupon but to permit it to remain uncut in the possession of another. He will not be heard to say that the amount of the coupon is not his income because he did not in fact receive it. The receipt is entirely within his own control and disposition. So, from the evidence, it seems to be in the present appeal. Brander and Curry were the sole owners ■of the business and all its assets. Brander, as president, could at any moment have elected to take the $2,904.49 as he did the $112,-661.51, and no one else could have prevented him. The corporation had sufficient assets to pay him and there was no one to dispute his right to it. He contends that, as a practical matter, the assets were pledged, and hence beyond his disposition. But the pledge itself was his voluntary act. During the year he permitted the corporation to change its investments, and he could just as freely have permitted it to pay its salary debt to him. It was not that the corporation would not pay, but rather that he would not receive. This election to give the corporation the temporary use of the amount is an exorcise by him of its'enjoyment, and this is one of the primary attributes of income. The Commissioner therefore correctly determined that the taxpayer’s income from salary and commission was $115,166.

The taxpayer purchased a yacht in the summer of 1919, for which he then paid $7,000. Before the yacht could be used it was necessary to have it overhauled and substantially repaired and reconditioned. This was not completed until 1920 and the cost was over $60,000. When this was paid does not appear in the record. Hence, in no event could there be an allowance for exhaustion of more than half a year upon the basis of $7,000, upon the evidence before us. But it is our opinion that no depreciation whatever may be recognized as a deduction.

A yacht is essentially a luxury. It is an instrument of pleasure and comfort which none but the wealthy can afford. It is not ordinarily regarded as a business facility. But it is argued that, however this may he ordinarily, this yacht was bought and used as a business facility; and this was its sole reason for existence. Curry, in testifying in his companion appeal [infra,, 237], said that the reason why these vessels were not purchased and owned by the corporation was that he and Brander wanted to continue as members of the New York Yacht Club and could do so only if they were yacht owners. Corporate yacht owners were not admitted to membership because yachting is not regarded as a commercial activity but as “ a gentlemen’s game.” Notwithstanding this, however, it is contended that in fact the yacht was property used in Brander’s trade or business of earning salary and commissions from the corporation. Brander had" tried for some time to build up his business through the subordinates of his customers and this was not sufficiently profitable. So he decided to “ work on the men higher up,” and this required activities of a social nature. He must live on their scale, offer them comforts and conveniences such as he thought they were accustomed to, and entertain them elaborately. So he joined clubs in the city and the country, bought automobiles, and finally a yacht. Sometimes he placed these entirely at the disposal of his business acquaintances and sometimes he went along. The purpose in this was to develop friendship in the hope of business profits. The story is familiar to all. In its essence it is the promotion of good will. It is the traditional drummer’s free cigar. Sometimes it takes the form of the local seller inviting the foreign buyer to his home for dinner or to his club for lunch or to his country club for golf. Sometimes it is subtle and sometimes obvious. Some there are who have no social interest except as it may be helpful to earnings. Thus the manufacturer makes friends with the wholesaler, the builder with the architect and the rubber merchant with the tire maker.

What we have said indicates the scope of the taxpayer’s argument. It becomes a question of degree and not one of defined principle. Merely because a social asset is also a business advantage, it is not to be said that its exhaustion is an item of business deduction. The yacht in the present appeal is a social instrument of this character and we hold that its exhaustion may not be deducted.

Smith dissenting.


text:
    Appeal of CHESTER M. CURRY.
    Docket No. 4173.
    Submitted August 17, 1925.
    Decided December 23, 1925.

      R. K. Slaughter, Esq., for the taxpayer.

      George G. "Witter, Esq., for the Commissioner.
    Before Stern hagen and Love.
    The taxpayer appeals from a determination of deficiencies in income taxes of $976.90 for 1917 and $1,054.25 for 1919. He alleges errors by the Commissioner in including in income for 1917 and for 1919 salary credited to but not received by the taxpayer in each of those years, and in disallowing depreciation on a yacht and an automobile claimed to have been used in business. The petition also contains allegations relative to the disallowance by the Commissioner of claims in abatement for the years 1917 and 1920, inclusive, and of disallowance of depreciation on the yacht and automobile for 1920, but these allegations were withdrawn at the hearing. The Commissioner found an overassessment for 1920 of $1,234.58.
    FINDINGS OF FACT.
    Taxpayer was treasurer of Brander & Curry, Inc., which was organized by him and John A. Brander in 1915. They were the principal stockholders and together controlled the corporation. Its business was to act as selling agent for manufacturers, and it dealt principally in cotton fabrics used in the automobile industry. John A. Brander was president, and Lewis W. Brander was vice president. All three officers acted as salesmen. They, together with a brother of Curry, constituted the board of directors.

      The taxpayer originally made his income-tax returns on an accrual basis. In 1922 he filed amended returns on the basis of cash receipts and disbursements. He kept no separate books of account of his own. The original returns were prepared by a public accountant from the books of the corporation, which were kept on an accrual basis. In 1917 the amount credited to and originally reported by the taxpayer is $58,324.15; the sum received and reported in the amended return is $18,913.23. In 1919 he was credited with and reported originally $115,166; he received and reported in the amended return $112,663.
    At December 31, 1917, the books show the following balances due officers: Chester M. Curry, $55,953.88; J. A. Brander, $56,-817.40; L. W. Brander, $27,820.56. The undivided profits at December 31, 1917, were $32,634.48; cash on hand, $30,309.21.
    The credit balances of the officers on the books of the corporation at the beginning and at the close of the taxable year 1919 are as follows:

    The cash on hand at the beginning of the year 1919 was $15,352.62; at the close of the year it was $47,975.92. The surplus at the beginning of the year was $28,017.48; at the close, $114,336.66. The total amount credited to officers in 1919 exceeded the amount withdrawn by $17,465.72.
    The corporation had total investments in stock and bonds as follows: December 31, 1917, $72,025.08; December 31, 1918, $90,-525.08; December 31, 1919, $256,619.73. These investments were ■.mainly in the shares of stock of corporations with which Brander & Curry, Inc.*, did business. During the years in question its outstanding stock was $25,000.
    The earnings of the corporation in 1919, after deducting all salaries and expenses, were sufficient to have paid a dividend of 350 per cent on the outstanding capital stock, and 150 per cent on the combined capital and surplus at December 31,1918.
    The corporation paid for its purchases within 10 days or monthly, and extended credit to its customers of from 60 to 90 days. All of its assets were pledged with banks or commercial bankers for loans.
    The taxpayer in the fall of 1919 bought a sailing yacht which has been used very largely for the purpose of entertaining persons with ■whom Brander & Curry, Inc., did business. The taxpayer formerly owned a smaller sailing yacht — a one-man boat. In discussing plans for entertaining with J. A. Brander it was decided that the taxpayer would buy a larger boat. Accordingly, this yacht was acquired for $20,000. The taxpayer spent an additional $2,000 for alterations. The alterations were completed about the middle of May, 1920. The taxpayer deducted, for 1919, $8,300 as depreciation — at the rate of 15 per cent on $22,000 — which was disallowed by the Commissioner.
    In 1916 the taxpayer acquired an automobile for $6,000, which was used for entertaining persons with whom the corporation did business, and it was placed at their disposal when they came to the city. As a part of the entertainment it was used sometimes in going to play golf or going to the yacht club. The taxpayer did not use the automobile in his individual work as a salesman; he permitted the corporation to use it for entertaining. In the early years the corporation paid the expenses of maintaining and operating the automobile. The taxpayer deducted, for 1919, depreciation of $1,200, or 20 per cent of the cost, which was disallowed by the Commissioner. The automobile was still in use in 1925.
   DECISION.

The determination of the Commissioner is approved. See Appeal of John A. Brander, 3 B. T. A. 231.

Smith dissenting.