author: ARUndell:

text:
    Appeal of HAMLER COAL COMPANY.
    Docket No. 6337.
    Decided September 22, 1926.
    A liability to respond in damages for breach of contract occurring in 1920, which liability taxpayer does not admit to the injured party and does not accrue on its books, is not a proper deduction for the taxable year in which the breach occurred.

      W. W. Spalding, Esq., for the petitioner.

      Arthur J. Seaton, Esq., for the Commissioner.
    This is an appeal from the Commissioner’s determination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $4,904.18, of which approximately $3,000 is in controversy. The Commissioner in his amended answer admitted that the determination of deficiency was in error, as alleged by the taxpayer, in regard to all items except a deduction of $6,896.94, which the taxpayer claimed as a proper deduction from gross income on account of an alleged bad debt.
    FINDINGS OF FACT.
    The taxpayer is a Pennsylvania corporation with its principal office at Clarion.
    On July 22, 1919, the taxpayer entered into the following agreement with Currie & Campbell, a partnership:
    For and in consideration of the sum of One Dollar, and other valuable considerations, the Party of the first part, hereby agrees to furnish One Hundred Fifty Tons, net, FOB their mine at Huey, Pa., Bituminous Coal of the Lower Kittaning Grade, daily, commencing shipment on or about August 4, 1919 to party of the Second part, for and during the period of one year from August 4, 1919, for which the said Second Party agrees to pay the sum of Two and 50/100 ($2.50) Dollars per net ton, said payments to be made on the 20th of the month following shipment by check mailable and payable to the Hamler Coal Go., Clarion, Pa., actual railroad weights to govern all settlements.
    The price or prices named in this contract are based upon the present rate for mining. It is understood and agreed that any increase or decrease in the cost of mining will be added to or deducted from the price herein named.
    In case of strikes, accidents, deficient transportation, Federal Demands, or other cause beyond the control of the party of the first part, unavoidably causing stoppage or partial stoppage of the mining and shipping of this coal, deliveries herein contracted for may be suspended or partially suspended as the case may be, and shall not require party of the first part to ship, or second party to receive in subsequent months amount not shipped or received during the period of such contingency.
    Both parties to this agreement performed their respective parts thereunder until some time in April, 1920.
    Beginning in April, 1920, the taxpayer failed to deliver to Currie & Campbell the full amount of tonnage provided for in the contract. The shortages from April, 1920, to the expiration date of the contract were as follows:
    Tons
    April, 1920— 1, 092. 55
    May, 1920— 2, 006.40
    June, 1920_ 2, 684. 05
    July, 1920_ 3, 318.10
    August, 1920. 450. 00
    The average market price of the coal mined by the taxpayer rose rapidly from April, 1920, to August, 1920, and the taxpayer did not ship the full amount of coal to Currie & Campbell, as required under his contract, but instead sold coal during this time on the open market at the higher prices.
    From July 14, 1920, until July 29, 1920, the taxpayer and Cur-rie & Campbell carried on a correspondence in which each blamed the other for breach of the contract. Currie & Campbell in this correspondence claimed that the taxpayer was not shipping the required amount of coal but instead was selling coal on the open market when it had plenty of cars to comply with the contract. The taxpayer on the other hand claimed that Currie & Campbell were not paying for the coal shipped in accordance with the terms of the contract and that it was shipping a proportionate amount of coal and excused itself for not shipping the full amount because the Pennsylvania Railroad was not furnishing it with its allotment of cars. In the latter part of July, 1920, each of the parties notified the other that it would no longer perform the contract but instead would institute suit for the other’s breach of contract.
    In September, 1920, the taxpayer consulted its attorney in regard to the Currie & Campbell contract. After being informed of all the facts relating thereto this attorney advised the taxpayer that it had breached its contract and that Currie & Campbell could retain the amount due for coal already shipped and could recover additional damages against the taxpayer.
    The account with Currie & Campbell as it stood on the books of the taxpayer on July 31 showed an unpaid balance due the taxpayer of $6,896.94. This was for coal delivered during June and July, 1920. The items making up this total remained on the books of the taxpayer as an account receivable, due from Currie & Campbell, until May 31, 1922, when they were charged off to deficit account.
    On August 22, 1921, Currie & Campbell filed a statement of claim against the taxpayer in the Court of Common Pleas of Clarion County, Pa., claiming damages in the amount of $50,872.78, with interest, against which they allowed the taxpayer a credit of $5,573.34, representing the amount which they admitted was due the taxpayer for coal shipped during June and July.

      On September 26, 1921, the taxpayer filed an affidavit of defense with counter-claim to the above suit, in which it denied all liability under the contract and set up a counter-claim to the amount of the said account receivable, to wit, $6,896.94.
    The parties settled this suit out of court in the early part of 1922 and on May 31,1922, the taxpayer paid Currie & Campbell $5,255.80, paid their own attorney $953.96, and in addition relinquished any right to collect for the coal which they had shipped to Currie & Campbell and for which they had charged Currie & Campbell the above sum of $6,896.94.
    Currie & Campbell were solvent during all of this time.
    The taxpayer never attempted to ascertain what its liability would be on account of its breach of contract, nor did it set up on its books any accrued liability to cover the same.
    In its income-tax return for the calendar year 1920 the taxpayer claimed a $6,896.94 deduction from gross income as a “ bad debt,” the amount being the account against Currie & Campbell for the coal shipped during June and July, 1920.
   OPINION.

ARUndell:

Under the circumstances set forth in the findings of fact, the petitioner contends that the amount of $6,896.94 due it by Currie & Campbell should be allowed as a deduction from income for the year 1920, either as a bad debt or as a loss arising out of a transaction entered into for profit.

It seems clear that the amount is not deductible as a bad debt, as Currie & Campbell were, at all times here material, entirely solvent, and, moreover, the amount sought to be deducted was not charged off the books during the year 1920.

We believe that the deductibility of the item in question as a loss is ruled by the Appeals of New Process Cork Co., 3 B. T. A. 1339, and the Bump Confectionery Co., 4 B. T. A. 50. In those cases as here there was a breach of contract within the taxable year and realization by the taxpayer that it had made itself liable for damages. In those cases as in the instant one no recognition of the liability was communicated by the petitioner to the party damaged, nor did it enter on its books an estimate of the damages due. Such facts we have held are not sufficient to give rise to an accrual, and what the taxpayer is in fact seeking to deduct is a reserve to cover in part the damages for which it may be required to respond. As we pointed out in the Appeal of Consolidated Asphalt Co., 1 B. T. A. 79, the Revenue Acts do not permit of the setting-up of a contingent reserve.

At the time the case was heard the taxpayer sought to bring itself within the rule laid down in the Appeal of Producers Fuel Co., 1 B. T. A. 202, but in that case we had an admission of liability and an accrual on the books, all within the taxable year. This distinction we regard as vital.

The Commissioner by his amended answer has admitted that the first two assignments of error in the petition are well taken. We have therefore considered only the third assignment of error.

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


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    PATTERSON PRODUCE COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3994.
    Decided September 23, 1926.
    Where a corporation failed in 1917, and thereafter, until its legal dissolution in 1923, did no business of any kind, held no corporate meetings and exercised no corporate rights or privileges, except that of filing reports and paying franchise taxes required by state law and filing for said years income-tax returns which showed the corporation to be insolvent, and, where a partnership was formed by two of the former stockholders and owners of the corporation, which partnership carried on the same line of business, part of the time under the same name as the corporation, but kept its books and filed income-tax returns accounting for the profits of the business as partners, held, the income in question was income of the partnership and not of the corporation.

      George S. Atkinson, Esq., and Luke B. Garvin, O. P. A., for the petitioner.

      Ellis W. Manning, Esq., for the respondent.
   Van Fossan:

This is a proceeding for the redetermination of a deficiency for the year 1920, amounting to $3,426.20. The question involved is whether the income sought to be taxed was income of the petitioner, a defunct corporation, or of a partnership which succeeded to the business, the partnership consisting of the principal owners and stockholders of the corporation.

FINDINGS OF FACT.

In 1913, A. B. Patterson, his wife, his son, A. B. Patterson, Jr., and two other parties formed a corporation under the laws of the State of Texas, known as the Patterson Produce Co., the principal stockholders being A. B. Patterson, his wife, and son, the other in-corporators holding only qualifying shares. The corporation was created for carrying on the business previously conducted by A. B. Patterson individually as a dealer in poultry products.

The corporation was engaged actively in business during the years 1913, 1914, 1915, 1916, and until August, 1917. The business was successful until the latter part of 1916. In August, 1917, the corporation found itself indebted in an amount approximating $60,000, with corporate assets amounting to less than $10,000. About August 10, 1917, the corporation closed its doors for a period of a week, during which time it made settlements with various creditors, turning corporate accounts over to one creditor. The president of the corporation, A. B. Patterson, deeded his home and farm, both personally owned, and his life insurance policies over to a bank creditor.

At the same time, in August, 1917, A. B. Patterson and his son made an oral agreement of partnership, providing that each should take from the firm only a living and that they should personally assume the obligations of the insolvent corporation, and that after paying all the corporation’s debts they would share the profits of the partnership. There were no tangible assets of the corporation after settlement with creditors and no assets were transferred to the partnership. Pursuant to this agreement A. B. Patterson and his son continued to carry on the poultry business, dealing under the name of A. B. Patterson, Jr., and later under the same name as the corporation — Patterson Produce Go. They gave their personal notes for certain of the debts of the corporation and in the course of time paid them out. Prom August 10, 1917, until some time in 1923, when the corporation was legally dissolved under the Texas law, the corporation continued to make such corporate returns as were required by the laws of Texas and also filed in each of these years, except 1923, Federal income and excess-profits tax returns. These returns were not filed until the corporation was penalized for not filing same, and in the returns it was noted by taxpayer that the corporation was insolvent.

After the insolvency of the corporation and informal settlement with creditors in August, 1917, though using during part of the time the name “ Patterson Produce Company,” the firm transacted all business as a partnership and in no respect and at no time held itself out to the business world as a corporation, nor did it hold any meetings of the officers or stockholders, declare any dividends, keep any books, claim any privileges and immunities of a corporation, or in any other way deal with the public as a corporation. After August 10,1917, the books were kept as a partnership and individual income-tax returns were made out and filed by the partners showing the profits earned in the business of the partnership. During the period from August 10, 1917, to date of its dissolution, the corporation engaged in no business and had no income.

Under date of March 28, 1925, pursuant to an examination of the books of account and records, the Commissioner mailed a deficiency letter fixing the amount of the deficiency for the year 1920 at $3,426.20. It is from this determination of deficiency that the taxpayer has appealed.

Judgment for the petitioner.

GRBen not participating.


author: Green:

text:
    Appeal of FRANK B. GILBRETH, INC.
    Docket No. 4568.
    Decided September 23, 1926.

      George H. D. Foster, Esq., for the petitioner.

      J. Arthwr Adams, Esq., for the Commissioner.
   Green:

The petitioner has appealed from the determination of a deficiency in income and profits taxes, in the sum of $2,168.67, for the calendar year 1919. The petitioner filed its return as a personal service corporation but the Commissioner determined that it was not entitled to classification as such and recomputed the tax.

FINDINGS OF FACT.

Frank B. Gilbreth, Inc., is a domestic corporation with offices at 77 Brown Street, Providence,, R. I. Its business is described as “ Consulting Engineering in Management.” The company was organized on December 17, 1913, and its entire capital stock, consisting of ten shares of the par value of $100 each, was issued to Martha B. Gilbreth. Shortly thereafter all of said stock ivas assigned to Lillian M. Gilbreth and she continued to hold and own all of the stock down to and including the year 1919.

Lillian M. Gilbreth and her husband, Frank B. Gilbreth, devoted their entire time to the operation of the company and the services rendered by each were of equal value. Mrs. Gilbreth, in the year 1919, received a salary of $7,250. The names of other employes and amounts of salary paid them during the year were as follows:

Frank B. Gilbreth_$7, 750.00
E. J. Terry_ 3, 330. 00
Nathaniel Major, Jr_ 3, 300.00
John B. Bentleyl_ 1, 887. 29

No dividends were ever paid on the stock. The gross income as shown by the return was $48,934.68, of which amount $48,730.17 was received as compensation for services rendered, $118.39 as interest, and $86.12 as. interest on Liberty bonds. The expenses deducted in the return were as follows:

Office_$9,995.68
Office salaries- 1, 068.74
Salaries of those engaged in personal service_ 24,164. 59
Expenses of those engaged in personal service_ 487.10
Laboratory expenses_ 1, 553. 95
Salaries, laboratory men_ 977. 60
Advertising- 277. 90

The inventory of the company was made up of office furniture, printing devices, motion picture machines and equipment, and was valued by the petitioner at $1,356.30. It had additional cash in banks $3,942.54, and Liberty bonds $12,150, making a total of assets of $11,448.84.

The petitioners employed a number of young engineers some of whom were regarded as students. The record is not clear as to the amounts earned by or paid to these employes.

Judgment for the Commissioner.


author: Korner, Chairman:

text:
    Appeal of MATTEAWAN MANUFACTURING COMPANY.
    Docket No. 7923.
    Decided September 23, 1926.
    1. The so-called tentative return, for the taxable year 1918, filed by the petitioner on or about March 15, 1919, is not the return contemplated to be filed by the provisions of section 239 of the Revenue Act of 1918. Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856.
    2. The consolidated return, for the taxable year 1918, filed by the petitioner and the Henderson Estate Co. on or about May 9, 1919, made in accordance with sections 239 and 240 (a) of the Revenue Act of 1918, is the return required by law of each of the corporations whose net income and deductions are included therein. Appeal of F. A. Ball Co., 3 B. T. A. 1172, and Appeal of National Tarilc & Export Co., 3 B. T. A. 1217.
    3. The return referred to in section 273 of the Revenue Act of 1924 is, for the purposes of this appeal, the return required by section 239 of the Revenue Act of 1918, and not the so-called tentative return; and “ the amount shown as the tax by the taxpayer upon his return,” within the purview of section 273 of the Revenue Act of 1924, is the amount shown as the tax by the petitioner on the return required by section 239 of the Revenue Act of 1918, which is, in this case, the consolidated return.
    4. The so-called tentative return, for the taxable year 191S, filed by the petitioner on or about March 15, 1919, showed an estimated tax liability of $40,000 which was assessed against it on the collector’s books, on or about October 6, 1919. The consolidated return, for the taxable year 191S, filed by the petitioner and the Henderson Estate Co., showed a total tax liability of $33,303.44, of which $31,638.29 was shown as the petitioner’s proportion of the tax, which it paid. The Commissioner determined the tax liability of the two companies, on a non-affiliated basis, to be $35,147.96 for the petitioner and $422.93 for the Henderson Estate ■ Co., and refunded to the latter the difference between the total consolidated tax and its tax computed on a separate basis, or $32,880.51. The petitioner filed a claim for the abatement of the $40,000 assessment, made on the basis of the tentative return, which the Commissioner, by letter dated August 10, 1925, proposes to allow in the amount of $4,852.04 and reject in the amount of $35,147.96. Held, that the proposed rejection in part of the claim for abatement is, to the extent that the amount of the rejection exceeds the tax shown by the petitioner on its return, to wit, $3,509.67, a determination of a deficiency by the Commissioner after June 2, 1924, and that jurisdiction lies in the Board to hear and determine the appeal.

      Richard E. Dwight, Esq., for the petitioner.

      P. S. Crewe, Esq., for the Commissioner.
   Korner, Chairman:

The Commissioner has moved to dismiss for lack of jurisdiction in the Board to hear and determine the appeal, on the ground that the tax, the claim for the abatement of which he proposes to reject in part, was assessed prior to the enactment of the Revenue Act of 1924, and that, since the passage of that Act, the Commissioner has not proposed to assert an additional tax as a deficiency. The evidence is meagre; but the facts upon which we base our opinion are those contained in the pleadings which are undisputed.

On or about March 15, 1919, the petitioner filed, with the collector of internal revenue for the second district of New York, a tentative income and profits-tax return for the year 1918, showing an estimated tax liability of $40,000, and paid to the collector the sum of $10,000, being the first quarterly installment of said estimated tax. This estimated tax liability of $40,000 was assessed against the petitioner on the collector’s records on or about October 6, 1919, and it is this assessment in respect of which the petitioner filed a claim for abatement, the rejection of which in part is the cause of petitioner’s appeal to this Board.

On or about March 15, 1919, the Henderson Estate Co. filed a tentative income and profits-tax return for the year 1918, showing an estimated tax liability of $4,000, and paid to the collector the sum of $1,000, being the first quarterly installment of said estimated tax. The estimated tax liability was not assessed against the Henderson Estate Co. on the collector’s records.

On or abo’ut May 9, 1919, the petitioner and the Henderson Estate Co. filed a consolidated return of net income and invested capital, showing a total tax liability of $33,303.44, divided as follows:

Matteawan Manufacturing Co_$31, 638. 29
Henderson Estate Co_ 1, 665.15
Total consolidated tax_ 33, 303. 44

The consolidated return contained all the information necessary for a correct determination of the tax liability of the separate companies.

The total tax liability shown on the consolidated return was, in accordance with the then existing practice, assessed on the collector’s records against the company whose name first appeared upon the return, which, in this case, was the Henderson Estate Co.

Against the consolidated tax liability, as it stood charged on the collector’s records against Henderson Estate Co., the collector credited the payments of $10,000 and $1,000, made by the petitioner and the Henderson Estate Co., respectively, at the time of filing their tentative returns. The total of these two payments, to wit, $11,000, was sufficient to cover the first installment of the consolidated tax liability and all but $5,651.72 of the second installment which would fall due on the following June 15th.

On June 15, 1919, the petitioner paid to the collector the sum of $5,651.72, being the balance due on the second installment of the consolidated tax liability. On September 15,1919, and again on December 15, 1919, the petitioner paid to the collector the sum of $8,325.86, being the third and fourth installments, respectively, of the consolidated tax liability. At this point the entire consolidated tax liability had been paid, $32,303.44 by the petitioner and $1,000 by the Henderson Estate Co., and there was still pending on the collector’s records an assessment of $40,000 against the petitioner which had been assessed on the tentative return.

Under date of August 19, 1921, in a letter bearing the symbols IT: SA: CR: AF HLW-9, the Commissioner advised the Henderson Estate Co. that it and the petitioner were not affiliated during the taxable year. 1918. Under date of August 21, 1923, in a letter bearing the symbols IT: SA: CR: D CMG: AF, the Commissioner advised the Henderson Estate Co. that it and the petitioner were affiliated corporations during the taxable year 1918. Under date of June 21, 1924, in a letter bearing the symbols IT: E: AF CEL, the Commissioner advised the Henderson Estate Co. that it and the petitioner were not affiliated with each other during the taxable year 1918. The latter appears to have been the Commissioner’s final ruling on the matter of affiliation.

By letter dated November 6, 1924, bearing symbols IT: CR: C JJMcD, the Commissioner advised the petitioner that an examination of its return for the year 1918 disclosed a deficiency as follows:

Total tax liability_$35,147. 96
Previously assessed_:_ None.
Tax to be assessed. 35,147.96

Said letter also advised the petitioner that it had 30 days within which to protest “ against this determination of a deficiency.”

On or about November 19, 1924, in accordance with a request of a representative of the collector of internal revenue for the second district of New York, the petitioner filed a claim for the abatement of the assessment of $40,000 which had been made on the basis of its tentative return. The rejection in part of this claim is the cause of petitioner’s appeal to this Board.

On or about January 27,1925, by letter bearing symbols IT: CR: C JJMcD, the Commissioner advised the Henderson Estate Co. of an overassessment of taxes for the years 1918 and 1919, and requested that company to file a claim for refund therefor. In compliance with that request, the Henderson Estate Co. filed a claim for refund of taxes for the year 1918, in the amount of $32,880.51, which amount appears to have been computed as follows:

Total consolidated tax liability paid-^_$33, 303.44
Less: Total tax liability of Henderson Estate Co.
computed on separate basis_ 422. 93
Amount of refund claimed_ 32, 880. 51

Certificate of overassessment in the amount of $32,880.51 was issued to the Henderson Estate Co., under date of January 25, 1925, and on or about June 10, 1925, said Henderson Estate Co. received a check on the Treasurer of the United States refunding to it the said sum of $32,880.51, together with interest.

Under date of August 10, 1925, by letter bearing the symbols IT: CR: C JDK, the Commissioner notified the petitioner that its claim for abatement of 1918 taxes, in the amount of $40,000, would be allowed for $4,852.04 and rejected for $35,147.96, in the next schedule to be approved by him. The petitioner received from the collector of internal revenue for the second district of New York a notice and demand for tax, dated • September 28, 1925, giving notice that there had been assessed against it the sum of $35,147.96, as balance of tax for the year 1918, plus interest of $14,059.18 from December 15, 1918, to August 22, 1925, making a total of $49,207.14.

We express no opinion as to whether or not the assessment made against the petitioner, in the amount of $40,000, on the basis-of its tentative return, and the assessment of the entire consolidated tax liability against the Henderson Estate Co., were proper assessments; nor as to whether or not the refund made to the Henderson Estate Co. in excess of the amount actually paid by it, or in excess of that portion of the consolidated tax for which it was liable on the face of the return, was a proper refund. If the assessments and the refund as made were not proper, those are matters involving purely administrgtiye errors with which we are not concerned. It is for us to determine whether on the facts before us there has been a determination of a deficiency by the Commissioner after June 2, 1924; if so, jurisdiction obtains in this Board to hear and determine the appeal; otherwise, the Commissioner’s motion to dismiss must be granted.

The Revenue Act of 1924 expressly defines the term “ deficiency ” as follows:

Sec. 273. As used in this title the term “ deficiency ” means—
(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed, or collected without assessment, shall first be decreased by the amounts previously abated, credited,, refunded, or otherwise repaid in respect of such tax.

The Commissioner submits, as one of the grounds upon which he bases his motion, that the taxes, in respect of which the petitioner’s claim for abatement pertains, were assessed prior to the enactment of the Revenue Act of 1924. But that alone does not deprive this Board of jurisdiction to hear and determine the appeal. The statute does not define deficiency as the amount by which the correct tax exceeds the amount previously assessed by the Commissioner, but rather as the amount by which the correct tax exceeds the amount shown as the tax hy the taxpayer upon its return, increased by amounts previously assessed or collected as a deficiency and decreased by amounts previously repaid in any manner. It might well be the case that a taxpayer showed one amount as the tax on its return and the Commissioner, through error or otherwise, assessed a different and higher amount, and subsequently determined that the correct tax was greater than that shown by the taxpayer on its return but less than the amount previously assessed. Certainly, under such circumstances, the Commissioner would not be heard to say that, because the correct tax, as he determined it to be, was less than the amount he had previously assessed, though greater than the amount shown by the taxpayer on its return, he had not determined a deficiency.

Before we can apply the test laid down by the statute and thereby ascertain whether there has been a determination of a deficiency by the Commissioner, we must first determine which of the two documents, the tentative return or the consolidated return, is the return referred .to in section 273 of the Revenue Act of 1924. The tentative return filed by the petitioner on or about March 15, 1919, is not the return contemplated by the proxdsions of section 239 of the Revenue Act of 1918. Thus, it was held in the Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856, 864, that—

The return required by the statute is a document prepared in such a manner as to set forth the information called for in the above quotation from section 239 of the Revenue Act of 1918. The form filed by the taxpayer on March 12, 1919, contained none of the information required by section 239, above quoted. We must, therefore, treat this tentative return only as a request for an extension of time within which to file the return, accompanied by a statement that the taxpayer complied with the Commissioner’s requirement of making a payment of one-fourth of the amount of tax estimated to be due, and that this taxpayer, having availed itself of the extension offered by the Commissioner to it and all other taxpayers in similar circumstances, can not now, with any degree of propriety, claim that the simple form used by it, containing none of the information required by the statute, was a return which could start the running of the statute of limitations.

The return referred to in section 273 of the Revenue Act of 1924 is, for the purposes of this appeal, the return contemplated by the provisions of section 239 of the Revenue Act of 1918; and, since the tentative return filed by the petitioner is not the return contemplated by the provisions of section 239 of the Revenue Act of 1918, it is not the return referred to in section 273 of the Revenue Act of 1924, and the estimated tax shown on the tentative return is not “ the amount shown as the tax by the taxpayer upon his return ” within the purview of section 273 of the Revenue Act of 1924. The statement on the face of the tentative return of the estimated tax was not an acknowledgment or admission by the petitioner that the amount thereof was its correct tax liability. It was what it purported to be— the petitioner’s best estimate of the tax when based upon a completed return.

The only document filed by the petitioner which was prepared in accordance with the provisions of section 239 of the Revenue Act of 1918, was the consolidated return of net income and invested capital which it filed for itself and the Henderson Estate Co. on or about May 9, 1919. Such consolidated return containing, as if did, all of the information necessary to a determination of the tax liability of the separate companies, was the return of the petitioner within the purview of section 239 of the Revenue Act of 1918, Appeals of F. A. Hall Co., 3 B. T. A. 1172, and National Tank & Export Co., 3 B. T. A. 1217; and, a fortiori, it is the return referred to in section 273 of the Revenue Act of 1924, and the amount of the tax shown by the petitioner on said consolidated return, to wit: $31,638.29, is the “amount shown as the tax by the taxpayer upon his return ” within the purview of section 273 of the Revenue Act of 1924. The amount shown as the tax on that return has not been increased by any previous assessment (or collection made without assessment) as a deficiency, nor has the amount shown as the tax upon that return been decreased by any amounts abated, credited, refunded, or otherwise repaid to the petitioner in respect of such tax.

Stripped to their essential elements, then, the facts are: The petitioner filed a return and showed a tax thereon of $31,638.29, the entire amount of which has been paid. The Commissioner had previously made an assessment, based upon a tentative return, of $40,000, for which the petitioner filed a claim for abatement. The Commissioner subsequently determined the petitioner’s correct tax liability to be the sum of $35,147.96, an amount less than that previously assessed but greater than the tax shown by the petitioner upon its return. Clearly, then, the result of the Commissioner’s proposed rejection in part of the claim for abatement is a deficiency determination in the amount of $3,509.67, representing the amount by which the correct tax liability, as computed by the Commissioner, exceeds the tax shown by the petitioner on its return. Since the Commissioner’s deficiency letter bears date of August 10, 1925, which is subsequent to the enactment of the Revenue Act of 1924, the Board has jurisdiction to hear and determine the appeal. The Commissioner’s motion to dismiss this proceeding is denied. The Commissioner is granted 60 days from the date hereof in which to file answer to the appeal.


author: Steenhagen

text:
    Appeal of Estate of W. A. BLAIR.
    Docket No. 2440.
    Decided September 23, 1926.

      W. E. Baird, G. P. A., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    Estate tax deficiency of $205.46, arising by increasing the valuation of stock in decedent’s gross estate and by disallowing part of the deduction taken for the support of dependents.
    FINDINGS OP PACT.
    Decedent was a resident of Atchison, Kans., and died March 6, 1922, leaving a widow and two minor children. His net estate was more than $50,000 and less than $75,000. The gross estate included 540 shares out of a total of 2,741 shares of the issued and outstanding capital stock of the Blair Elevator Co. This corporation was the owner of and beneficiary under a policy of life insurance upon the life of decedent which amounted to $120,000. Upon his death the corporation received this amount. The Commissioner determined the value of said 540 shares to be $75 per share or a total of $40,500, and in arriving at this value the Commissioner included the aforesaid $120,000 among the corporation’s assets, and determined that said amount represented 60 per cent “of the adjusted net worth of the corporation at the date of decedent’s death.”
    For two years after the death of decedent the estate paid over $300 a month on account of the widow and children. These payments were made under an order of the probate court allowing $300 a month. The widow and children had no other income.
   OPINION.

Steenhagen

: The Commissioner fixed the value of the stock at the date of death at $75 a share, which the petitioner says is too high, because it reflects the amount of the insurance as among the corporate assets. We can not as a matter of law say that the valuation of a share of stock must exclude such an asset. That the right of the beneficiary under a policy is an asset seems clear. In re Reed’s Estate, 243 N. Y. 199; 153 N. E. 47. Whether at any given time it is worth its face or its surrender value or something between is a matter of fact requiring proof. It can well be imagined that the ownership of such a policy would raise the value of the stock under some circumstances more than under others, depending upon the terms of the policy and, during the life of the assured, upon his age and health. It is in the instant case entirely conceivable that on the date of death a willing seller and willing buyer of similar stock would have agreed on a price of $75 a share. We sustain the Commissioner’s valuation.

The proof establishes that $7,200 was actually paid for the maintenance and support of the widow and children and this was on order of the probate court. The Commissioner reduced this by reason of a local statute which we think was not applicable and does not show the amount to be unreasonable. We reverse the Commissioner’s disallowance.

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


author: TRAmmell:

text:
    Appeal of STEELE’S MILLS.
    Docket Nos. 9531, 9532.
    Decided September 23, 1926.
    1. Dor lack of evidence, the determination of the Commissioner that the taxpayer is not entitled to assessment under section 328 of the Revenue Act of 1918 is approved.
    2. On the evidence, held, that the taxpayer did not make a contribution during the taxable year for the erection of a school building for its employees.

      E. S. Parher, Jr., Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.

      These are two appeals, one for the calendar year 1918, and the other for the calendar year 1919, from the determination of deficiencies in the amount of $16,256.06 for 1919, and in excess of $10,000 for 1918.
    For the calendar year 1918, Docket No. 9532, the question involved is whether the taxpayer is entitled to have its taxes assessed under the provisions of section 328 of the Revenue Act of 1918. The deficiency for 1919, Docket No. 9531, arises from the refusal of the Commissioner to allow a deduction claimed by the taxpayer on account of a donation of $25,000 alleged to have been made during that year for the purpose of the erection of a school building, and the action of the Commissioner in reducing invested capital on account of the taxes for the preceding year.
    FINDINGS OF FACT.
    Taxpayer is a North Carolina corporation engaged in the manufacture of cotton yarns and cloth, with its principal place of business at Rockingham.
    During 1918 the taxpayer’s gross income was $1,251,162.71. Its net income was $321,089.45. It paid $4,482 as salaries to its officers during that year.
    The facts relating to the appeal in Docket No. 9531 for 1919, are as follows:
    The Commissioner deducted from invested capital for 1919, $88,-075.25 representing the proration of the amount of $208,412.81, 1918 meóme and profits taxes.
    During 1919 the taxpayer corporation issued its check in the amount of $25,000, payable to the directors of the corporation, for the purpose of erecting a suitable building for educational purposes. The money was to be expended by the directors of the corporation and the property was to be controlled by the board of directors. There was a directors’ meeting on December 31, 1919, the minutes of which meeting are as follows :
    At call of the president the directors of Steele’s Mills met in his office at 3: 30 P. M. December 31, 1919, the following directors being present, R. S. Ledbette, M. H. Folkes, L. S. Covington, W. B. Cole, J. W. Porter. The president stated that he had called the meeting to consider donating a sufficient fund to our employees for the purpose of erecting a school building at our mill. After a thorough discussion of the matter, on motion of L. S. Covington, and seconded by M. H. Pollres, the treasurer was authorized to donate to the operatives of Steele’s Mills and their dependents, $25,000 for the purpose of erecting a suitable building for educational purposes, the money to be expended and property controlled by the board of directors of the Steele’s Mills.
    The plant of the taxpayer is located about four miles east of Rock-ingham. The taxpayer owned the houses in which the employees lived and owned practically all the property in the village. Rock-ingham is a small town and the county school facilities were inadequate to afford proper school advantages to the children of the employees of the taxpayer. The taxpayer owned about 125 houses which were occupied by employees. There were about 250 employees. There were about ten other plants within a radius of about six miles of Rockingham.
    In the fall of 1919 there was difficulty in securing and keeping employees. The employees desired employment at places where they could obtain good living conditions and educational advantages for their children. Some of the plants near the town had the advantage of good school facilities. The competing plants which were not so near towns were providing school facilities for their employees.
    The school facilities at the taxpayer’s plant were inadequate and it was necessary to build a new building. The taxpayer paid the teachers in the school, although they were county schools and were under county supervision. Efforts had been made without success to get the county to supply the necessary educational facilities. It was necessary to the successful operation of the plant that an adequate school building be erected.
    No part of the fund was expended for any purpose during 1919. The fund was left on deposit in the bank subject to the check of the directors.
   OPINION.

TRAmmell:

With respect to the question as to whether the taxpayer is entitled to have its taxes assessed under the provisions of section 328, the taxpayer has introduced no evidence from which the Board can find that there were any abnormalities affecting income or invested capital during the years involved. The deficiency letter states that the Commissioner had assessed taxes for 1918 under the provisions of section 328. We have no evidence that the Commissioner did not comply with the statute in the selection of comparatives and we are unable to find that the tax liability for that year was not correctly determined by the Commissioner.

For 1919, Docket No. 9531, the two questions involved are whether the taxes for 1918 should be prorated and deducted in determining invested capital for 1919, and the deductibility of an alleged donation of $25,000. On the first question section 1201 of the Revenue Act of 1926 is controlling. That section is as follows:

The computation of invested capital for any taxable year under the Revenue Act of 1917, the Revenue Act of 1918, and the Revenue Act of 1921, shall be considered as having been correctly made, so far as relating to the inclusion in invested capital for such year of income, war-profits, or excess-profits taxes for the preceding year, if made in accordance with the regulations in force in respect of such taxable year applicable to the relationship between invested capital of one year and taxes for the preceding year.

In view of this provision of the statute we must hold that the action of the Commissioner, with respect to the reduction of invested capital is correct.

The check which the taxpayer issued in the amount of $25,000 for the purpose of the erection of the school building, was issued on December 31, 1919, to the board of directors of the corporation. No part of the fund was paid during 1919 for any purpose, so that the question is whether the taxpayer actually made a donation during 1919 for the purpose of erecting the school building. The fund was separated from the funds of the taxpayer only in that it was credited in the name of the directors of the corporation rather than in the name of the corporation itself. We are of the opinion that the board of directors were merely acting for and in behalf of the corporation when it received the check. The funds did not leave the control of the corporation until the money was paid out in the construction of the building. In order to constitute a gift or contribution there must be an actual delivery of the gift; that is, the gift must be complete. There must be a donee who receives the gift, either actually or constructively, and the donor must become divested of ownership and control over it. Partridge v. Kearns, 53 N. Y. S. 154.

Under the provisions of chapter 21 of Pell’s Code of North Carolina, the directors of a corporation are its managers. They are considered to be the agents of the corporation through which it carries on its business transactions. Coble v. Beall, 130 N. C. 533; 41 S. E. 793.

The payment of $25,000 by the corporation was made to its managers and agents. A delivery to a third person as the agent of the donor is insufficient to meet the requirements of a gift or contribution until there is an actual delivery to the donee or the donee’s agent. Bickford v. Mattocks, 50 Atl. 894.

In view of the foregoing, it is our opinion that there was no actual gift or contribution made by the taxpayer during 1919. For that reason it is our opinion that the taxpayer is not entitled to a deduction on account of the $25,000 paid to its directors during 1919 for the purpose of the erection of a school building. It is unnecessary for us to determine whether the contribution is deductible in determining the taxpayer’s net income for 1920, since that year is not before us.

Judgment for the Commissioner.


author: TRÁmmell

text:
    AMERICAN PRESS COMPANY, LTD., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1412.
    Decided September 23, 1926.
    1. The valuation of an Associated Press franchise determined for invested capital purposes.
    2. Seld, under the evidence, that withdrawals by officers were not dividends.

      Isom J. Guillory Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      War'd Loveless, Esq., for the respondent.
    This is an appeal from the determination of income and profits taxes for the calendar years 1917, 1918, and 1919, in the amount of $2,858.34. For the years 1917 and 1918 no deficiency has been determined but an overassessment for each of those years was determined by the Commissioner.
    The taxpayer alleges twenty-two err'ors on the part of the Commissioner as the basis of its appeal.
    At the hearing the taxpayer waived certain issues and certain other allegations of error were admitted by the Commissioner in his answer. This leaves for consideration only three questions, all of which involve invested capital.
    The first question is what amount, if any, the taxpayer should be entitled to include in invested capital with respect to Associated Press franchises acquired by the taxpayer at its organization. Second, what amount, if any, the taxpayer should be allowed in invested capital with respect to amounts expended in j^ears prior to 1917 in building up a circulation structure. Third, whether amounts withdrawn by two officers of the corporation are to be treated as dividends or included in invested capital as accounts receivable.
    The Commissioner raised the question of the jurisdiction of the Board with respect to the years 1917 and 1918 in that for those years the Commissioner determined no deficiencies.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of Louisiana with its principal place of business at Lake Charles. It was organized in the first part of 1910 and issued its capital stock of the par value of $47,500 to Beatty and Jones in exchange for assets which those two individuals had acquired in November or December of 1909. Beatty and Jones bought the business and equipment of two newspapers published in Lake Charles, La., including the As-sociateel Press franchise and accounts receivable. They paid for those assets about $47,500. When they turned the assets over to the taxpayer corporation in exchange for its capital stock, they assigned a value of $10,000 to the Associated Press franchise which they had acquired, and it was the understanding of these two men that $10,000 par value of stock was to be specifically attributed to and issued for such franchise. The balance of the capital stock was issued for the other properties which the two individuals had acquired from the two newspapers. A considerable part of the machinery and equipment acquired by the taxpayer from the two individuals was abandoned very soon after its acquisition and was replaced with other and more modern machinery and equipment. One of the principal reasons that the two individuals had in acquiring the assets of the newspapers which they turned over to the taxpayer was to obtain the Associated Press franchise.
    In April, 1911, 25 shares of the capital stock of the taxpayer were sold at par. At the close of 1918 and 1919, respectively, the taxpayer had upon its books accounts receivable of Beatty, president of the company, and Smith, secretary and treasurer, of $8,108.62 and $9,-723.66, respectively. These amounts had been withdrawn by the two individuals from the corporation. Payments on account were made each year in excess of the balance due at the beginning of that year.. Both of these officers were financially responsible and able to pay the amount shown in the accounts. Numerous entries, both debits and credits, were made in the accounts each year. In 1918 Beatty owned 430 shares and Smith owned 120 shares. There was no change in the stock ownership of these two individuals during 1919. During 1918 there were other stockholders who owned stock as follows:
    Shares.
    T. S. Troy-CO
    J. W. Gardner_23
    A. M. Mayo- 5
    J. J. Blaclie_'_!_ 3
    C. C. Gauthier_ 1
    G. D. Moss_ 1
    S. T. Woodring_ 5
    During 1919, five of the smaller stockholders sold their stock. The amounts withdrawn by the two individuals were not carried in a dividend account. A portion of the amount charged to the officers represented accounts due the company which had been assumed by such individuals and had been charged to their account. Other items represented withdrawals and payments to the individuals during the year. They were carried in a current account. The amounts withdrawn by the officers represented accounts receivable.
   OPINION.

TRÁmmell

: On one of the issues involved, that is, with respect to the amounts expended in building up a circulation structure, no competent testimony was offered and consequently no finding of fact was made with respect thereto.

With respect to the amount to be included in invested capital on account of the acquisition of the Associated Press franchise by the taxpayer in exchange for shares of its capital stock, the evidence discloses that the taxpayer issued its stock for the franchise. It also appears that at the time of the acquisition thereof the individuals who had acquired it made a segregation of the franchise from the other assets, and when they turned over the assets to the corporation they assigned a value of $10,000 to the franchise and it was their intention to allocate that amount of stock thereto. The individuals who purchased the assets of the two newspapers which were turned over to the taxpayer paid about $47,500 for the assets, including the franchise. The franchise was the principal thing which they desired. This is evidenced by the fact that most of the machinery, fixtures and equipment which they acquired were abandoned and scrapped and were replaced by new and more modern machinery, equipment and fixtures very soon after the organization of the taxpayer corporation. The two individuals, when they acquired the assets of the two newspapers, had in mind the organization of the corporation to take over the assets and they turned them over to the corporation for stock of the same par value as the consideration they had paid therefor. Approximately one year after the organization of the company this stock sold on the open market at par.

From a consideration of all the evidence we are of the opinion that the Associated Press franchise acquired by the taxpayer for stock had a value of not less than $10,000 and that amount should be included in invested capital on account of the acquisition of such franchise.

Without restating the facts relating to the accounts of the two officers, we are of the opinion, considering all the facts, that the amounts represented accounts receivable and should be included in invested capital.

On the jurisdictional question raised by the Commissioner with respect to the years 1917 and 1918, it is our opinion that we have no jurisdiction to determine whether the over assessments for those years should be increased, it appearing that the Commissioner has not asserted a deficiency for either of those years. See Appeal of R. P. Hazzard Co., 4 B. T. A. 150.

The taxpayer in its petition alleged that invested capital was overstated by $2,142.86 on account of depreciation which had not been deducted. It is also conceded by the Commissioner that invested capital should be increased by $451.57 on account of the fact that the Commissioner computed the income and profits taxes for 1917 in excess of the amount properly due.

The Commissioner in his answer also admitted that invested capital for 1919 was understated by $1,063.97 representing additional income tax for 1917 which had been erroneously deducted twice from invested capital for 1919.

Order of redetermination will be entered on 10 days' notice, under Bule 50.


author: Littleton

text:
    Appeals of HENRY F. McCREERY; ANNIE L. PURCELL, Executrix, Estate of JOSEPH PURCELL; THEODOSIA JOHNSON, Executrix, Estate of JOHN E. JOHNSON, Jr.; JEANNE EDMONDS, Executrix, Estate of JOHN W. EDMONDS.
    Docket Nos. 3557, 3838, 3839, 3940.
    Decided September 23, 1926.
    1. Upon tlie evidence, held, that the sale by a partnership, composed of the petitioners, of its businesses, including its tangible and intangible assets, was a single transaction and the gain or loss upon the sale of the good will may not he computed separately.
    2. On April 30, 1919, the partnership sold its entire businesses and assets on hand at that date for $6,093,284.34. The net earnings of the partnership for the period from January 1 to April 30, 1919, amounted to $1,397,256.09, and this amount was included in the assets sold on the last-mentioned date. The Commissioner held that the partners’ distributive shares of the $1,397,256.09 constituted income taxable to them for 1919, and in determining the gain or loss to the partnership upon the sale of its businesses and assets, included the $1,397,256.09 as a part of the cost of the assets sold. Approved.

      Sanford Robinson, Esq., and Truman Henson, Esq., for the petitioners.

      M. N. Fisher, Esq., for the Commissioner.
    The four above-entitled appeals came on for hearing, and, it appearing that the facts and the issues involved in each appeal were identically the same except as to the amounts of the deficiencies, the hearings were consolidated by agreement of counsel. The Commissioner has asserted deficiencies in taxes, for the taxable year 1919, against the several petitioners named in the appeals as follows:
    Henry IT. McCreery_•_$68, 577.17
    Annie L. Purcell, Executrix, Estate of Joseph Purcell - 59, 077.37
    Theodosia Johnson, Executrix, Estate of John E. Johnson, Jr- 54, 645.19
    Jeanne Edmonds, Executrix, Estate of John W. Ed-monds _ 23, 836. -24

      The issues presented by these appeals concern the Commissioner’s action (1) in treating the transaction involving the sale of the partnership assets and businesses as severable into two parts — computing the loss and gain on the good will and the tangibles separately, and in refusing to allow a loss of $1,500,000 alleged to have been sustained upon the sale of the good will as an offset against the gain arising from the sale of the tangible assets; (2) in failing to take into consideration, for the purpose of computing the gain or loss resulting from the sale of the partnership assets and businesses, the March 1, 1913, value of certain of those assets which were acquired prior to that date; (3) in holding that the sale of the partnership assets and businesses constituted a closed and completed transaction for the year 1919; and (4) in holding that the earnings of the part-jiership for the period January 1 to April 30, 1919, should be included in the net income of the partnership in respect of which the petitioners are liable for income tax for the year 1919, according to their respective distributive shares therein.
    STNDIliGS 03? FACT.
    Petitioners are citizens of the United States and residents of the State of JSTew 'York. Under date of October 24, 1918, Henry F. McCreery, Joseph Purcell, John E. Johnson, Jr., John W. Edmonds, and William F. Plartranft entered into an agreement of co-partnership to carry on the business of shipping, importing, and dealing in coffee and other articles generally handled by wholesale grocers, and brokerage, under the firm name and style of Hard and Rand, for the period beginning January 1, 1919, and continuing until January 1, 1922, and thereafter from year to year until terminated as therein provided.' These same persons were members of the firm of Hard, Rand and Co., a co-partnership constituted under the laws of the Republic of Brazil. The interests of each were identical in both firms, and were as follows:
    Percentage
    Henry IT. McCreery- 26
    Joseph Purcell_ 26
    John E. Johnson, Jr_ IS
    John W. Edmonds- 12
    William F. Plartranft_ 18
    Joseph Purcell died on October 23, 1919, John E. Johnson, Jr.. died on March 23, 1922; and John W. Edmonds died on August 26, 1923. Article XIY of the partnership agreement provided, with respect to the termination of the partnership by death of one of the members, as follows:
    In the event of the death of any partner, his interest and the interest of his estate in the business shall not cease until the end of the current fiscal year on the 31st day of the following December * * *.

      The business to which this partnership succeeded was first established in or about the year 1875 and thereafter was carried on by several successor partnerships, all bearing the same firm name and style of Hard and Rand. The business was successful from the start. Commencing with a capital of approximately $100,000 in 1875 the business continued to grow until at the time of the sale in 1919, hereinafter referred to, the capital employed exceeded $5,000,000. All of the partners had grown up in the business, which had become world wide, with valuable agencies and connections in all of the principal foreign countries. The net earnings, the average tangible capital employed in the business, and the percentage of return those earnings represent upon the tangible capital, for the five fiscal years ended April 30, 1912, are as follows:

    During the fiscal years 1908 to 1912, inclusive, there were six partners, and the fair and reasonable salary to each partner for services rendered was $8,000 per annum. The average annual earnings for the above five-year period, after deducting the sum of $48,000 per annum for partners’ salaries, was $339,100.78, which amount represented an average annual return of 22.17 per cent on the tangible capital employed in the business.
    Under date of May 1, 1919, the partners entered into an agreement with the Mercantile Oversea Corporation to sell to that corporation—
    * * * their entire businesses and all appurtenances including the firm name, goodwill, and all corporations owned by them, and all the assets, except the following:
    Proceeds of coffee in British Prize Courts valued April 30, 1918 at $340,064.66
    Amounts in the hands of agents of the Vendors at Genoa, Italy, (approximately 6,000,000 liras)
    About 4500 bags bf coffee held unsold in Genoa, Italy.
    So far as pertinent to the subject matter under inquiry the provisions of the sale agreement are quoted below:
    Fikst: The Vendors hereby sell, assign and transfer to the Purchaser said entire businesses, including goodwill and firm name, and all assets, except those above specifically excluded, and the Purchaser hereby accepts and purchases the same and assumes all the liabilities of said Vendors appearing upon their boots as of April SO, 1919, subject to the above representations of the Vendors as to the extent of said liabilities. * * *
    Second : Por the purpose of giving effect to the foregoing, the Vendors shall forthwith place the Purchaser in possession of said businesses and of all their offices; but the Vendors hereby agree that subject to the instructions of the Purchaser, they, or such of them as the Purchaser may request so to do, will continue to conduct or assist in the conduct of said business for the account of the Purchaser during such period not exceeding six months from April 30, 1919, as the Purchaser may determine. Bach of the said Vendors so employed by the Purchaser as aforesaid, shall be compensated at the rate of $8,000 per annum during the period of his actual employment.
    ***** * #
    Pourth : Por the purpose of making effective the sale herein provided of the assets and businesses of the Vendors, the Vendors shall, as and when required by the Purchaser or its assigns or nominees, make, execute, and deliver, or Cause to be made, executed and delivered to the Purchaser or its assigns or nominees, such bills of sale, 'deeds of conveyance, and/or other instruments of transfer, and in such form as the Purchaser shall require * * *.
    Pifth : The price to be paid by the Purchaser, or its assigns or nominees, for the businesses and assets aforesaid, shall be as follows:
    (a) Por the goodwills of said businesses, the sum of Two hundred and fifty thousand dollars ($250,000), and
    (b) Por the assets sold as aforesaid, an amount equal to the value of such assets on Ap'ril 30, 1919, over and above the liabilities of the Vendors on said date, as those values and liabilities appear on the books of the Vendors as of said date:
    Por this purpose, a full and correct inventory as of said date shall be prepared by the Vendors as soon as may reasonably be possible, such inventory to be in the same general form and upon the same conservative basis as has heretofore been observed by the Vendors in the preparation of their annual inventories and balance sheets.
    Sixth : The purchase price above mentioned shall be payable as follows:
    (a) The $250,000 above mentioned representing the price to be paid for the goodwills of said businesses shall be paid in four equal annual instalments of $62,500 each, commencing April 30, 1920, with interest at 6% from May 1, 1919;
    (b) A further sum to be paid forthwith upon the execution and delivery of this agreement by the retransfer and redelivery to the Vendors of the items inventoried under the following headings:
    Investment Account
    Atlantic Mutual Insurance Co. scrip
    Liberty Loans
    United States Certificates of Indebtedness
    The Vendors agree to accept the above in part payment of the purchase price at the inventoried values thereof as of April 30, 1919;
    (e) The balance, that is to say, th balance of the value of the assets transferred as of April 30, 1919, over and above the liabilities on that date as aforesaid shall be paid in cash within six months after the transfers herein provided shall have been completed, and the correctness of the inventories and balance sheets to be prepared by the Vendors as aforesaid shall have been verified to the satisfaction of the Purchaser. * * *

      By supplemental agreement of May 20, 1919, the vendors reserved and excepted from the assets agreed to be sold Liberty bonds of the fourth issue, to an amount at par of $200,000. A further supplemental agreement was entered into under date of November 24, 1920, the pertinent provisions of which are as follows:
    Whekeas, payment has been made of part of the purchase price as provided in sub-division (b) of Article Sixth of said May 1st, 1919, agreement; and
    Whereas, the amount of the balance of the purchase price, including the sum payable for the goodwill has now been determined and agreed upon; and
    Whereas, the parties hereto desire to make new arrangements with reference to payment thereof and also to provide for the continuance of the conduct of said business by the Vendors pending such payments.
    Now, therefore, the parties hereto covenant and agree to and with each other as follows:
    First : The balance of the purchase price payable under the provisions of the above mentioned agreement of May 1st, 1919, including the amount to be paid for goodwill under said agreement, is hereby agreed upon and fixed at the sum of $5,242,422.46, on account of which there has been paid to the Vendors through withdrawals in accordance with the above mentioned agreement of May 1st, 1919, the sum of $1,569,724.31; leaving unpaid a balance of $3,672,698.15 as well as interest from April 30th, 1919, which interest, calculated to November 1st, 1920, is hereby agreed upon and fixed at the sum of $395,950.87.
    Second: The purchaser shall simultaneously with the execution hereof pay to the Vendors the amount of the interest to November 1st, 1920, as aforesaid, viz: $395,950.87 with interest thereon at 8% per annum from November 1st, 1920.
    Third : The above mentioned sum of $3,672,698.15 being the unpaid portion of the balance of the purchase price as aforesaid, shall be paid by the Purchaser to the Vendors in instalments as follows:
    Simultaneously with the execution hereof_ $62, 500.00
    On January 3rd, 1921_ 465,137. 84
    On April 1st, 1921_ 465,137. 85
    On December 31st, 1921_ 2, 679, 922.46
    The sale of the business was consummated and the purchase price paid by the purchaser precisely as provided by the sales agreement and its supplementary agreements of May 20, 1919, and November 24,1920. The total selling price of the business amounted to $6,093,-284.34, of which the partnership received the sum of $850,861.88 during the year 1919, through the retransfer and redelivery of certain securities enumerated in article 6 of the sales agreement; the further sum of $1,569,724.31 over the period May 1, 1919, to November 24, 1920, through withdrawals which the partners were permitted to make and which were to be applied by the purchaser toward the payment of the purchase price; the further sum of $62,500 on or about November 24,1920, upon execution of the supplemental agreement of that date'; and the remainder, to wit, $3,610,198.15, in the year 1921.
    The book value of the partnership assets, exclusive of good will, as shown by the partnership books at December 31, 1918, was $4,428,-192.10. The book value of the assets specifically reserved from the sale was $584,824.64. The capital additions previously charged to expense on the books and not- included in the above stated net worth, but which were disallowed by the Commissioner as deductions in computing taxable net income, amounted to $83,730.26. The March 1, 1913, value of the tangible properties located in Brazil exceeded the value at which said properties were carried on the partnership books by the sum of $151,982.29. The net value on March 1, 1913, of all tangible assets then on hand and transferred by the sale, plus the cost of tangibles acquired subsequent to that date up to December 31, 1918, less depreciation, is $4,079,080. 01.
    The tangible assets transferred to the Mercantile Oversea Corporation included coffee on hand in the inventory on May 1, 1919, at the market prices of such coffee as of that date, and represented an appreciation or write-up above cost of such coffee amouiiting to $205,-650.83 in the New York inventory and $52,567.35 in the London inventory. The increase in the partnership transactions for the four-month period from January 1 to April 30,1919, amounted to $1,655,-474.27, which includes this appreciation in the coffee inventories. Said increase in partnership transactions of $1,655,474.27 was credited on the partnership books, during the month of December, 1919, as of April 30, 1919, to the partners’ accounts, according to their distributive shares, with the notation “ This amount can not be realized until the terms of the agreement, dated May 1, 1919, for the sale of the business, have been fulfilled.”
    The partnership’s annual accounting period was the calendar year. Its accounting records were maintained upon the accrual basis.
    For the purpose of computing the gain or loss realized by the partnership upon the sale of its assets and businesses to the Mercantile Oversea Corporation, the Commissioner separated the transaction into two parts, computing the gain or loss on the tangibles and the good will separately; and held that the partnership realized a taxable gain of $260,712.35 from the sale of the tangibles; that it realized neither a gain nor a loss from the sale of the good will; and that the petitioners are liable for taxes according to their respective distributive shares in said gain of $260,712.35. The gain computed by the Commissioner represents the excess of the selling price over book value, which the Commissioner deemed to be the cost of the assets, without regard to the March 1, 1913, value, which was greater than cost. Further, the Commissioner held that the petitioners are liable for taxes, according to their distributive shares, on the increase in the partnership transactions for the four-month period from January 1 to April 30, 1919.
   opinion.

Littleton

: In his computation of the gain or loss realized by the partnership upon the sale of its assets and businesses, the Commissioner separated the transaction into two parts, computing the gain or loss on the tangibles and on the good will separately. He held that the selling price of the good will was at least equal to the March 1,1913, value thereof and in excess of cost, and that upon this part of the transaction the partnership realized no gain or loss. He determined that the partnership had realized a taxable gain of $260,712.35 upon the sale of the tangible assets and asserted a tax against the petitioners based upon their respective interests therein. The Commissioner believes his action in computing the gain or loss on the tangibles and the good will separately is justified by the fact that the sale contract provides for the payment of a specific sum for the good will and a further sum, to be determined later in accordance with the provisions of the contract, for the tangible assets. We think this action of the Commissioner, and the premise therefor, is in error. The first clause of the sale contract expresses a sale and purchase, and binds the contracting parties to a transfer and acceptance of the partnership’s entire business, including good will and firm name. It evidences an intent on the part of the vendor and vendee to sell and purchase, respectively, the entire businesses as a whole at one time and by the same transaction. All that follows thereafter in the contract are matters of mere computation and detail as to the manner in which the price to be paid by the vendee is to be determined and the time and manner of payment thereof. The contract expresses no intention to sell the tangibles and the good will as separate things, and is not susceptible of such a construction. We consider it of no importance, in this connection, that the contract provides for the payment of a specific amount for the good will and the payment of a further sum, to be determined in the manner therein set forth, specifically for the tangible assets, but regard this as a mere agreement of the parties as to the manner in which the purchase price to be paid for the entire businesses, including good will and firm name, is to be determined. The gain or loss realized by the partnership upon the sale of its assets and businesses should be determined by comparing the selling price with the cost and the March 1, 1913, value of the entire assets, tangible and intangible, taken as a whole.

The petitioners’ contention that the partnership sustained a loss of $1,500,000 upon the sale of the good will is based upon a claimed value thereof at March 1, 1913, of $1,750,000, and upon the fact that the contract provided for the sale and purchase thereof for the sum of $250,000. From the evidence before us, we conclude that the March 1, 1913, value of the partnership good will was $930,000. There is no evidence to show that the good will was acquired at any cost to the partnership, hut, rather, the record indicates that it came into existence because of the character, industry, and ability of the partners, and the services they rendered in transacting the partnership business. Since the good will was not sold as a separate thing, but as a part of the entire assets and businesses, the gain or loss resulting from the sale thereof can not be determined separately. •As previously stated, the gain or loss realized by the partnership upon the sale must be determined by treating the sale of all the assets as one transaction. The total selling price should be compared with the cost and the March 1, 1913, value of the combined assets, tangible and intangible; and for the purpose of the conxpari-son the cost of the good will is to be regarded as nil, while the March 1,1913, value thereof, to be added to the value of the tangibles at the same date, is $930,000.

In the computation of the gain or loss resulting from the sale of the partnership assets, the Commissioner has resorted to book values, as representative of cost, and has disregarded the March 1, 1913, value of the assets, which was greater than cost. The parties have stipulated that the March 1, 1913, value of certain properties located in Brazil was $151,982.29 in excess of the cost of those properties, and by the stipulation the Commissioner admits that on the basis of the March 1, 1913, value the gain derived from the sale of those properties was less, by the said amount of $151,982.29, than the gain theretofore computed by him. The gain or loss derived from this transaction should be computed by comparison of the selling price with the cost and March 1, 1913, value (whichever the case may be), a fact now conceded by the Commissioner.

The parties have stipulated that the increase in partnership transactions for the four-month period from January 1 to April 30, 1919, amounted to $1,655,474.27, and that this amount was computed by the use of a closing inventory valued on the basis of market, though market exceeded cost by the sum of $258,218.18. The Commissioner has held that this increase in partnership transactions is taxable to the several petitioners according to their respective distributive shares therein. We understand the words “increase in partnership transactions,” as used in the stipulation, to mean the net earnings of the partnership during the period January 1 to April 30, 1919, including appreciation in the market value over cost of the inventory on hand at the latter date, without taking into account the gain or loss, if any, resulting from the sale of the partnership assets and businesses. The petitioners contend that this increase in partnership transactions was neither distributed nor made available to them at any time, but, on the contrary, was merged in the sale and became the property of the purchaser; hence, the net income of the partnership for the year 1919, in respect of which they are liable for taxes according to their respective distributive shares, consists entirely of the gain, if any, realized by the partnership upon the sale of its assets and businesses.

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

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

Section 224 of the Revenue Act of 1918 provides:

That every partnership shall make a return for each taxable year, stating specifically the items of its gross income affd the deductions allowed by this title, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed * * *.

The deductions referred to are those specified by section 214 of the statute. Thus, we find that the net income of the partnership, in respect of which the petitioners are liable for income tax according to their respective distributive shares, is the gross income from all sources, including the gain, if any, from the sale of its capital assets, less the statutory deductions, the latter including the loss, if any, sustained upon the sale of the partnership assets.

Whether, for the purpose of computing the partnership net income, we adopt the method advocated by the Commissioner which first ascertains the profits from operations to the date of the sale, then adds the amount of those profits to the cost of the assets at December 31, 1918, to arrive at the cost of the assets at the date of the sale, then, by comparison of the selling price-with the cost thus ascertained and the March 1, 1913, value of the assets, determines the statutory gain or loss, if any, resulting from the sale of the assets, and then arrives at the partnership net income by adding to or deducting from the profits of operations the gain or loss, as the case may be, resulting from the sale of the assets; or whether the method advocated by the petitioners, which treats the profits of operations to' the date of the sale as having been passed on to the purchaser of the assets and, therefore, not accrued to the partnership, and which computed the partnership net income by a comparison of the selling-price with the cost of the assets at December 31, 1918, and the value thereof at March 1, 1913-, as a matter of cold figures, we reach the same result. This is demonstrated by the following illustrations:

Commissioner’s method.
Profits from operations to date of sale_$1,397,2S6.09
Add: Gain from sale of business and assets:
Selling price-$6,093, 284.34
Book value of assets at
12/31/18_$4, 428,192.10
Capital additions disallowed as expense by Commissioner- 83, 730.26
Assets acquired detween January 1 and April SO, 1919_ 1, 397, 256.09
5, 909,178. 45
Assets reserved from sale_ 584, 824. 64
- 5,324,353.81
-- 768, 930. 53
Net income of partnership_ 2,166,186. 62
Petitioners’ method.
Selling price of assets and business_$6,093,284. 34
Deduct: Cost of assets sold:
Book value of assets at 12/31/18_$4, 428,192.10
Capital additions disallowed as expense by Commissioner_ 83, 730.26
4, 511, 922. 36
Assets reserved from sale_ 584, 824. 64
——-—-— 3, 927,097. 72
Net income of partnership_ 2,166,186. 62

The computation of the gain or loss on the sale of the assets and businesses, in the foregoing illustrations, is based upon cost. If the computations were based upon the March 1, 1913, value of the assets, plus the cost of subsequent additions, the illustrations would be as follows:

Commissioner’s method.
Profits from operations to date of sale_$1, 397, 256.09
Deduct: Loss from sale of business and assets:
Stipulated value of assets at March 1, 1913,
plus additions to December 31, 1918_$4, 079,080.01
March 1, 1913, value of good will_ 930,000.00
Assets acquired between January 1 and April 30, 1919_ 1, 397, 256. 09
6,406,336.10
Selling price of assets and business_ 6, 093,284. 34
- 313, 051. 76
Net income of partnership. 1, 084,204.33
Petitioners’ method.
Selling price of assets and business-$6,093,284.34'
Deduct: March 1, 1913, value of assets plus cost of subsequent additions to 12/31/18:
Stipulated value of assets at March 1, 1913,
plus additions to December 31, 1918-$4,079,080.01
March 1, 1913, value of good will- 930, 000.00
- 6,009,080.01
Net income of partnership_ 1, 084, 204.33

The difference in the net income of the partnership as computed under the second illustration of the Commissioner’s and the petitioners’ methods and that computed under the first illustration of their methods is accounted for as follows:

Net income of partnership under second illustration-'_$1, 084, 204. 33
Add: March 1, 1913, value of good will- 930,000.00
March 1, 1913, value of tangibles in excess of booh value_ 151, 982.29
Net income of partnership under first illustration_ 2,166,186.62

The statute prescribes the basis for the determination of the gain or loss resulting from the sale or exchange of property. The selling price must be compared with the cost and the March 1, 1913, value of the assets sold. If the selling price exceeds both the cost and the March 1, 1913, value of the assets, to the extent that the selling price exceeds the higher of these factors, the partnership has realized a taxable gain; or if the selling price is less than the cost and the March 1, 1913, value of the assets, then, to the extent that the lower of these two factors exceeds the selling price, the partnership has sustained a deductible loss; but if the selling price is greater than the cost and less than the March 1, 1913, value of the assets, then the partnership has realized neither a gain nor a loss. Therefore, a proper computation of the partnership net income will involve either a combination of the Commissioner’s method in the first and second illustration or a combination of the petitioners’ method in the same illustration. The following shows the results obtained by the use of both methods:

Commissioner’s method. Petitioners’ method.
Cost_ $6, 324,363. 81 $3, 927, 097/72
March 1, 1913, value. 6,406, 336.10 5, 009, 080. 01
Selling price_ 6, 093,284. 34 6, 093, 284. 34
Gain_ None. 1, 084, 204. 33
Earnings_ 1, 397,266. 09 None.
Net income_ 1, 397, 256. 09 1, 084, 204. 33

The difference in the partnership net income as computed under the two methods is $313,051.76; and it will be noted from the second illustration of the Commissioner’s method that this amount represents the difference between the March 1, 1913, value of the assets, as computed by the Commissioner, and the selling price, which does not represent a deductible loss because the selling price falls between the cost and the March 1, 1913, value of the assets. It is precisely this situation that the petitioners are attempting to circumvent through the use of the method which they advocate, but it is quite clear that in this they can not succeed for the following reasons:

First: The comparison which the petitioners make under their method is the selling price with the cost of the assets at December 31, 1918, and the March 1, 1913, value of the assets plus subsequent costs to December 31, 1918, while the comparison which the statute contemplates is the Selling price with the actual cost and the March 1. 1913, value plus actual subsequent costs, which, in each instance, must include the cost to the date of the sale, to wit, April 30, 1919.

Second: The cost of the assets to the date of the sale and the cost of additions subsequent to March 1,1913, must necessarily include the profits of the four-month period ended April 30, 1919, just the same as they include the profits of any other prior accounting period; and since the increase in the cost of the assets between December 31, 1918, and April 30, 1919, is attributable, not to appreciation, but to actual earnings, the increase is taxable to the partnership as earnings for the period in which earned.

The fallacy of the petitioners’ method lies in their failure to take account of the fact that the partnership contracted to sell, and did sell, the earnings, which were contained in its asset accounts, for the four-month period ended April 30, 1919, which must have belonged to it before they could become the property of anyone else. The fact is that before the earnings became the property of the purchaser they were income to the seller, within the meaning of the law, and as such nmst be included in the partnership net income in respect of which the petitioners are liable for income tax according to their respective distributive shares therein.

We agree, in principle, with the Commissioner’s action in holding that the earnings from operations to the time of the sale of the partnership assets and businesses must be included in the partnership net income, and taxed to the partners in accordance with their respective distributive shares. It is clear, however, that the Commisisoner’s determination that said earnings amounted to $1,655,474.27 is in error, since this amount-was computed through the use of a closing inventory valued on the basis of market when cost afforded a lower basis of valuation. In his brief filed subsequent to the hearing, the Commissioner admits error in this respect. If the difference between cost and market, to wit, $258,218.18, i's deducted from the above amount, the remainder is $1,397,256.09, which is the correct amount of earnings for the period ended April 30, 1919.

The parties have stipulated that the book value of the partnership assets, exclusive of good will, was at December 31, 1918, the sum of $4,428,192.10; that the book value of the assets specifically reserved from the sale was $584,824.64; that the cost of capital additions previously charged to expense on the books, but disallowed by the Commissioner as deductions for income tax purposes, amounted to $83,-730.26, and that the March 1, 1913, value of the assets sold and transferred, exclusive of good will, plus the cost of subsequent additions to December 31, 1918, amounted to $4,079,080.01. From these facts we draw the conclusion that the cost of the assets sold and transferred was $5,324,353.81, computed as follows:

Book value of assets at December 81, 1918_$4, 428,192.10,
Acid: Capital additions charged to expense on books but disallowed as expense deductions for income tax purposes_ 83,730.26
Profits from operations to date of sale_!_ 1, 397,256. 09
5, 909,178.45
Deduct.: Assets reserved from sale_ 584,824. 64
Cost of assets sold and transferred_ 5, 324,353. 81

We also conclude that the March 1, 1913, value of the assets sold and transferred, plus the cost of subsequent additions to the date of the sale, was $6,406,336.10, computed as follows:

Book value of assets at December 31, 1918_$4,428,192.10
Add: Capital additions charged to expense on books but disallowed as expense deductions for income tax purposes_ 83,730.26
Profits from operations to date of sale_ 1,397,256.09
March 1, 1913, value of Brazilian properties in excess of book
value_ 151,982.29
March 1, 1913, value of good will- 930, 000.00
6, 991,160.74
Deduct: Assets reserved from sale_ 584,824.64
March 1, 1913, value of assets sold and transferred- 6,406,336.10

Since the selling price is greater than the cost but less than the March 1, 1913, value, as said cost and value are above computed, we conclude that the partnership realized no taxable gain or deductible loss from the sale of its assets and businesses; and that the partnership net income, in respect of which the several petitioners are taxable according to their respective distributive shares, is the amount of the earnings for the four-month period ended April 30, 1919, to wit, $1,397,256.09.

The last issue to be considered concerns the Commissioner’s action in holding that the sale of the partnership’s assets and businesses constituted a completed transaction for the year 1919, and that any gain or loss realized therefrom should be reflected in the partnership net income for that year. The petitioners contend that since there was no determination within the year 1919 of the actual amount to be paid by the purchaser for the partnership assets and businesses, and that final payment was not made by the purchaser until December, 1921, the sale was not completed until the year 1921, and any gain or loss resulting therefrom should be reflected in the partnership net income for the latteu year. The books of the partnership were maintained upon the accrual basis. According to the terms of the sale contract, the purchaser, on May 1, 1919, took possession of the business and of all offices, and thereafter the partners conducted the businesses for the account of the purchaser. The transaction was completed so far as the partnership was concerned and, in the event of the purchaser’s failure to make payment according to the terms of the contract, the partnership could not have repossessed the properties, but would have been limited to an action to enforce payment under the contract to pay. It appears that it was not until some time later than the year 1919 that the specific amount to be paid by the purchaser for the partnership assets and businesses was determined. But, all circumstances considered, we do not think this fact sufficient to justify the postponement until a. later year of the accounting for the gain or loss realized from the sale. The sale was consummated in the year 1919; the liability of the purchaser to pay the purchase price arose in that year; and, in our opinion, whatever gain or loss resulted from the sale accrued to the partnership in the same year. If the purchase price had not been accurately determined at. the close of the partnership accounting period for 1919, the partnership net income should have been determined on the basis of the best possible estimate of what the purchase price would be; and if subsequent developments demonstrated the original estimate to be in error, the situation might have been remedied by proper adjustments within the statutory period of limitations, based upon the correct partnership net income.

Order of redetermination will Toe entered on ■ 15 days' notice, under Rule 50.

Smith dissents.


author: Maeqtjette

text:
    Appeal of CHARLES E. NAUSS.
    Docket No. 6717.
    Decided September 23, 1926.

      Joseph E. Kohan, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the Commissioner.
   Maeqtjette

: This appeal is from the determination of a deficiency in income tax for the year 1921 in the amount of $571.63.

FINDINGS OF FACT.

The petitioner is an individual residing in New York City.

Wendolin J. Nauss, the father of the petitioner, died testate on October 26, 1918. His last will and testament provided that after the payment of his just debts, funeral and testamentary expenses, and the erection of a mausoleum, the petitioner and Edwin N. Nauss should each receive one-sixth of the rest, residue and remainder of his estate.

On December 18, 1919, while the administration of the estate of Wendolin J. Nauss was still pending, Edwin N. Nauss died testate, leaving his entire estate in equal shares to four persons, of whom the petitioner was one.

Wendolin J. Nauss died seized of' certain securities which were appraised for the purposes of the Federal estate tax at $180,270.61. On June 14, 1921, the legatees under his last will and testament, pursuant to the laws of the State of New York, filed a written consent in the Surrogate’s Court for New York County, New York, in which the estate of Wendolin J. Nauss was being administered, fixing the value of the securities mentioned as of June 14, 1921, at $162,849.85 and agreeing that they should be distributed among said legatees at that value, and that the difference between the value of the securities as fixed for Federal estate-tax purposes and their value on June 14, 1921, should be credited in the accounts of the executors against the principal of the estate. The securities were distributed according to the consent so filed and the difference between said values, to wit, $17,420.76, was credited in the executor’s account against the principal of the estate.

The executors of the estate of Wendolin J. Nauss filed an income-tax return for the year 1921 showing a net income of $48,050.53. No deduction was claimed on account of the shrinkage in value of the securities mentioned.

The petitioner filed an income-tax return for the year 1921 and claimed as a deduction from gross income the amount of $3,397.90, representing the shrinkage in value between the date of the death of Wendolin J. Nauss and June 14, 1921, of the portion of said securities to which he was entitled under the last will and testament of Wendolin J. Nauss and the last will and testament of Edwin N. Nauss. The Commissioner disallowed the deduction and determined that there is a deficiency in tax for the year 1921 in the amount of $571.63.

Judgment for the Commissioner.


author: Marquette

text:
    Appeal of WENDOLIN J. NAUSS, JR.
    Docket No. 6718.
    Decided September 23, 1926.

      Joseph H. Kohan, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the Commissioner.
   Marquette

: This appeal is from the determination of a deficiency in income tax for the year 1921 in the amount of $549.90.

FINDINGS OF FACT.

The petitioner is an individual residing at New York City.

Wendolin J. Nauss, the father of the petitioner, died testate on October 26, 1918. His last will and testament provided that after the payment of his just debts, funeral and testamentary expenses, and the erection of a mausoleum, the petitioner and Edwin N. Nauss should each receive one-sixth of the rest, residue and remainder of his estate.

On December 18, 1919, while the administration of the estate of Wendolin J. Nauss was still pending, Edwin N. Nauss died testate leaving his entire estate in equal shares to four persons, of whom the petitioner was one.

Wendolin J. Nauss died seized of certain securities which were appraised for the purpose of the Federal estate tax at $180,270.61. On June 14,1921, the legatees under his last will and testament, pursuant to the laws of the State of New York, filed a written consent in the Surrogate’s Court for New York County, New York, in which the estate of Wendolin J. Nauss was being administered, fixing the value of the securities mentioned as of June 14, 1921, at $162,849.85 and agreeing that they should be distributed among said legatees at that value, and that the difference between the value of the securities as fixed for Federal estate-tax purposes and their value on June 14,1921, should be credited in the accounts of the executors against the principal of the estate. The securities were distributed according to the consent so filed and the difference between said values, to wit, $17,-420.76, was credited in the executor’s account against the principal of the estate.

The executors of the estate of Wendolin J. Nauss filed an income-tax return for the year .1921 showing a net income of $48,050.53. No deduction was claimed on account of the shrinkage in value of the securities mentioned.

The petitioner filed an income-tax return for the year 1921 and claimed as a deduction from gross income the amount of $3,507.10 representing the shrinkage in value between the date of the death of Wendolin J. Nauss and June 14, 1921, of the portion of the said securities to which he was entitled under the last will and testament of Wendolin J. Nauss and the last will and testament of Edwin N. Nauss. The Commissioner disallowed the deduction and determined that there is a deficiency in tax for the year 1921 in the amount of $549.90.

Judgment for the 0onvnvissioner.


author: Maeqttette:

text:
    Appeal of SECURITY TRUST COMPANY, Executor, and MICHAEL J. GALLAGHER, Bishop of the Roman Catholic Church of the Diocese of Detroit, Residuary Legatee of the Estate of MARY CAPLIS, Deceased.
    Docket No. 6720.
    Decided September 23, 1926.
    An amount paid by tbe executor in satisfaction of a note of tbe decedent allowed as a deduction in determining tbe net estate.

      Ben Jenkins, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in respect of an estate tax in the amount of $13,544.88.
    findings of fact.
    Mary Caplis, a resident of Michigan, died testate on January 3,1924. Her last will and testament provided that the rest , and residue of her estate after the payment of certain bequests not material here, should be held by the Security Trust Company of Detroit, Mich., as trustee, the income therefrom to be paid to the decedent’s brother, Thomas McCreery, for and during the period of his natural life, and that Upon the death of Thomas McCreery the residue of the trust property should be paid over to the Roman Catholic Church of the Diocese of Detroit, Mich., to be disposed of under the direction of the Bishop of such diocese. The last will and testament of the decedent also provided that if, on account of accident, illness, or other extraordinary circumstances, the trustee deemed such action advisable, it was authorized to use for the benefit of said Thomas McCreery such portions of the corpus of said trust property as it might deem proper.
    The executor of the estate of Mary Caplis, during the administration of said estate, paid to ©ne Thomas Markey the amount of $1,500, which was owing to him by the said Mary Caplis on a certain promissory note. The payment of said note by said executor was approved by the Probate Court for Wayne County, Mich., in which the administration of said estate was pending, on November 10, 1925.
    The Commissioner, upon audit of the Federal estate-tax return filed for the estate of Mary Caplis, refused to allow as deductions from the gross estate the amount of $324,825.98, representing the residue of the estate aforesaid, and the amount of $1,500 paid by the executor to the said Thomas Markey, and determined that there is a deficiency in tax in the amount of $13,544.88.
   OPINION.

Maeqttette:

The amount of $1,500 paid by the executor of the estate of Mary Caplis to Thomas Markey, as set forth in the findings of fact, should be allowed as a deduction in determining the net estate subject to the Federal estate tax. At the hearing, the peti; tioners abandoned their claim for the deduction of the amount of $324,825.98, representing the residue of decedent’s estate now held by the Security Trust Co. as trustee under the terms of the decedent’s last will and testament.

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