author: Littleton:

text:
    Appeal of Emma B. Brunner, Executrix, Estate of Arnold W. Brunner.
    Docket No. 3719.
    Promulgated January 20, 1927.
    1. The decedent, an architect, was engaged by contracts between .himself and the Commonwealth of Pennsylvania and the cities of Albany and New York, N. Y., for work, not permanent or continuous in character, in connection with construction and alterations of public buildings and the construction of a bridge. His duties were prescribed and his compensation fixed by the contracts. Held,, that the compensation paid to him was subject to Federal income tax.
    2. The salary received by the decedent from the City of Cleveland, Ohio, as a member of the Board of Supervisors in the Erection of Public and Municipal Buildings in Cleveland, Ohio, to ■which office he was appointed and commissioned by the Governor of Ohio under authority of an act of the General Assembly of that State, was exempt from Federal taxation.

      Lewis M. Isaacs, Esg., for the petitioner.

      A. B. Marrs, Esg., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax for the calendar years 1917 to 1922, inclusive, as follows:
    1917_$2,653.96
    1918- 2, 226. 02
    1919- 11, 672.95
    1920- 5,537.92
    1921- 17, 776. 80
    1922_17,141. 80
    Total. 57,009.45

      The question presented is whether certain amounts received by decedent from the Commonwealth of Pennsylvania and the cities of Cleveland, Ohio, Albany and New York, N. Y., were subject to income tax.
    FINDINGS OP PACT.
    Arnold W. Brunner died a resident of New York in 1924. He was an architect of wide experience, especially in the field of planning public buildings. He was employed by the Commonwealth of Pennsylvania and the municipalities of Cleveland, Ohio, Albany and New York, N. Y., to perform certain services for the Commonwealth of Pennsylvania in the designing and laying out of Capitol Park, and the planning and supervising of alterations to, and the construction of certain State buildings at Harrisburg, Pa., and by the municipalities of Cleveland, Ohio, Albany and New York, N. Y., and to perform similar work in connection with municipal buildings. In addition, he was employed by the Commonwealth of Pennsylvania to furnish drawings and to supervise the construction of the Soldiers’ and Sailors’ Memorial Bridge at Harrisburg.
    The facts concerning these several transactions and the compensation received therefor were as follows:

      Pennsylvania. — On December 7, 1916, the Governor, the Auditor General, and the Treasurer, of the Commonwealth of Pennsylvania, constituting the Board of Commissioners of Public Grounds and Buildings, entered into an agreement with the decedent as follows:
    WHEREAS, it Ras been determined, pursuant to law, by tbe parties hereto that a contract of employment of Arnold W. Brunner, as designer for tbe Capitol Grounds of Harrisburg, Pennsylvania, shall be made directly between tbe Board of Public Grounds and Buildings and tbe said Arnold W. Brunner.
    NOW THIS AGREEMENT WITNESSETH:
    That tbe said Arnold W. Brunner, party of tbe second part, for tbe consideration hereinafter mentioned and agreed to be paid to him by tbe party of the first part, acting in behalf of tbe Commonwealth of Pennsylvania, doth hereby, for himself, his heirs, executors and administrators, covenant, promise, stipulate and agree with tbe Commonwealth of Pennsylvania that he will complete, within two years from the date of this contract, the following work:
    That the said Arnold W. Brunner will act as designer for the Capitol Grounds at Harrisburg, Pennsylvania, and make general studies of the various solutions of the work there to be done; he will present the best of these studies to the party of the first part for discussion and approval, so that the various questions that arise may be carefully considered before final drawings are made; he will make drawings showing the general plan, with elevations, sections and perspectives, and numerous explanatory sketches. These will indicate the entire scheme, showing the location, general outline, and controlling characteristics of the buildings, location of trees, foliage, lawns, walks, etc. He will make working drawings of the steps, balustrades, terraces, etc., and sketches of important features of design that cannot be shown on the main drawings. The drawings for the buildings will not be working drawings, but will be sufficient to clearly indicate tbeir arcbiteetural character and general disposition. It is understood that tbe drainage and all underground work will be done by tbe Commonwealth of Pennsylvania.
    Tbe said work will include designs for—
    Tbe approach from the west to tbe plaza in front of tbe Capitol Building.
    Tbe illumination of the Capitol Grounds.
    Tbe planning of tbe streets bordering tbe Capitol Grounds.
    Tbe planning of offices accommodating approximately 150,000 square feet of available floor space.
    Tbe location for future buildings to include an Educational Building; a Laboratory Building, a Printing Binding, Storage and Distribution of Documents Building and a Power Plant.
    He will also advise about tbe character of tbe Armory Buildings or other buildings to be erected on streets bordering on tbe Capitol Grounds. He will employ Mr. Warren H. Manning, as Consulting Landscape Architect, for which employment tbe Commonwealth of Pennsylvania is to allow him Two Thousand Five Hundred Dollars ($2,500.00) per year, which is to be paid to tbe party of tbe second part and by him turned over to Mr. Warren H. Manning. Tbe Commonwealth of Pennsylvania is to pay the cost of tbe preparation of tbe drawings, which is not to exceed tbe sum of Five Thousand Dollars ($5,000.00) per year, and is also to pay tbe cost of traveling and subsistence between tbeir homes and Harrisburg, Pennsylvania, and while in Harrisburg, of tbe said party of tbe second part, Mr. Warren H. Manning and tbeir employees while engaged in labor for tbe Commonwealth of Pennsylvania.
    Tbe party of tbe second part shall and will proceed with tbe said undertaking in a prompt and diligent manner, and shall and will let and complete said work according to tbe terms of this contract, within two years from tbe date hereof unless prevented by illness or other unavoidable necessity.
    Tbe party of tbe second part shall not assign or transfer this contract or any interest therein without tbe written consent of tbe Board of Commissioners of Public Grounds and Buildings. * * *
    It is mutually agreed between tbe parties hereto that tbe sum to be paid by the Commonwealth of Pennsylvania to tbe said Arnold W. Brunner for tbe undertaking herein indicated, set forth and described shall be tbe sum of Ten Thousand Dollars ($10,000.00) per year for two years, payable quarterly, also quarterly payments of tbe cost of tbe preparation of drawings, as above provided and to tbe said Arnold W. Brunner, for tbe employment of Warren H. Manning, tbe sum of Two Thousand Five Hundred Dollars ($2,500.00) per year for tbe period of two years, said payments to be made quarterly, and at tbe time of making quarterly payments, tbe traveling expenses and subsistence of the said Arnold W. Brunner and Mr. Warren H. Manning shall also be paid by the Commonwealth of Pennsylvania.
    Tbe said party of tbe second part hereby agrees with the said party of the first part that be will at all times during tbe continuance of this contract, and until tbe final acceptance of the work herein undertaken by him, be under good and sufficient bond with sureties satisfactory to the party of tbe first part in tbe sum of Twenty Thousand Dollars ($20,000.00) conditioned for tbe faithful performance and fulfillment in all respect of this contract.
    On March 12, 1919, decedent’s employment was continued for another year and on March 30, 1920, for two years, at the same salary.
    In January, 1922, his employment was continued for two years from January 1, 1922, at a salary of $4,000 per annum.

      For the performance of the work specified in the foregoing contract, the decedent received the following compensation from the Commonwealth:
    1917_$7,500
    1918_12,500
    1919_ 7,500
    1920_ 7, 500
    1921_12,500
    1922_ 6, 500
    On June 16, 1919, the Legislature passed an act (P. L. 243) relating to the Board of Commissioners of Public Grounds and Buildings, sections 45-48 thereof providing as follows:
    Section 45. It shall be the duty of the board, in connection with the expenditure of each and every fund appropriated by legislative act for the building, repairing, or improving of State institutions, to employ, for each separate construction, a capable superintendent of construction, under whose personal supervision such funds shall be expended.
    Section 46. It shall be the duty of the superintendent of construction, in case of the erection of new buildings and in case of repairs or additions being made to present buildings, to give his time and personal supervision to the work under process of construction, in order that the State shall receive full value for the amount of expenditure to be so made.
    In case of the erection of new buildings and repairs and additions being made to present buildings, it shall be the duty of the superintendent of construction to see that the plans and specifications of the architect prepared and adopted for such new buildings, additions, and repairs, shall be faithfully carried out by the contractor for the work. He shall define, determine, and decide all questions of the proper interpretation of the plans and specifications which may be raised by the contractor or architect during the progress of the work.
    Section 47. The superintendent of construction shall be the direct representative of the State, and shall be responsible to, and be required to report to, the board, at such times and in such manner as may be prescribed by the board, as to the progress of, and condition of, the work under his charge.
    Section 48. The superintendent of construction shall be paid a per diem salary out of the fund appropriated for the improvement which he is to supervise in like manner as superintendents are now paid out of the said fund by the architect or trustees of the institution so benefited.
    The amount of compensation to be paid to the superintendent of construction, together with the term of his office, shall be determined by the board, and the superintendent of construction shall be required to give bond to the Commonwealth, in such amount as the board shall deem sufficient, for the faithful performance of his duties.
    On August 5,1919, the Board of Commissioners of Public Grounds and Buildings entered into the following agreement with the decedent:
    WHEREAS, it has been determined, pursuant to law, by the parties hereto that a contract of employment of Arnold W. Brunner, as Architect for the Terraces bordering the Forecourt at East of Capitol, the Office Space under the Terraces, and the two Office Buildings in Capitol Park, at Harrisburg, Pennsylvania, shall be made directly between the Board of Public Grounds & Buildings and the said Arnold W. Brunner.
    NOW THIS AGREEMENT WITNESSETH: That the said Arnold W. Brunner, party of the second part, for the consideration hereinafter mentioned and agreed to be paid to him by the party of the first part, acting in behalf of the Commonwealth of Pennsylvania, doth hereby for himself, his heirs, executors and administrators, covenant, promise, stipulate and agree with the Commonwealth of Pennsylvania that he will complete in the shortest possible time consistent with accuracy and efficiency, the following work:
    All preliminary drawings, working drawings, full size details, specifications and superintendence for the Terraces, Office Space and the two Office Buildings at Harrisburg, Pennsylvania.
    In consideration of the party of the second part performing the work agreed upon, the party of the first part agrees to pay to the party of the second part as compensation for his services, a fee of six (6%) per cent on the total cost of the Terraces, Office Space and the two Office Buildings.
    Payments shall be made by the party of the first' part to the party of the second part as follows:
    (a) Upon completion of preliminary studies, one (1%) percent of the estimated cost of the work.
    (b) Upon completion of working drawings and specifications ready for securing bids, two (2%) percent of the estimated cost.
    (c) Upon completion of detail drawings one (1%) percent of the estimated cost.
    (d) One (1%) percent, when one-half of the sum due shall be paid to the contractor, and the balance, one (1%) percent, subject to the adjustment between the estimated and actual cost, is to be paid upon the completion and final acceptance of the work.
    The party oí the second part agrees to make a deduction of Twenty Thousand ($20,000) Dollars from the amount of this contract in consideration of the sketches, studies, etc., for the Terraces and Office Buildings already included in his designs for Capitol Park, $10,000 of which is to be deducted from the first payment under this contract and $10,000 from the second payment.
    The party of the first part agrees to pay the salary of a competent Clerk of the Works, who shall be selected by and under the control of the party of the second part.
    It is mutually agreed and understood that the party of the first part is to pay all Railroad arid Pullman carfares to the said party of the second part between his home and Harrisburg, Pennsylvania, and the cost of board and lodging while in Harrisburg, and to pay also the Railroad and Pullman carfares and the cost of board and lodgment for all of the necessary 'employees of the party of the second part brought to Harrisburg in connection with said work, but it is understood that the party of the first part is not to pay the cost of subsistence of the Clerk of the Works while in Harrisburg, payments for traveling expenses, and board and lodging, to be made upon presentation of the proper vouchers.
    The party of the second part shall not assign or transfer this contract or any interest therein without the written consent of the Board of Commissioners of Public Grounds & Buildings.
    * * * * * * *
    The compensation received by the decedent for the work specified in the above-mentioned agreements will be included in the amounts received for services rendered in connection with the Soldiers’ and Sailors’ Memorial Bridge hereinafter mentioned.
    Pursuant to the legislative authority, the Board of Commissioners of Public Grounds and Buildings on April 8, 1919, employed the decedent to furnish plans and drawings and supervise the construction of the Soldiers’ and Sailors’ Memorial Bridge, by agreement as follows:
    WHEREAS, It has been determined, pursuant to law, by the parties hereto that a contract of employment of Arnold W. Brunner and J. E. Greiner & Company, as Architect and Engineers for the Soldiers’ and Sailors’ Memorial Bridge, at Harrisburg, Pennsylvania, shall be made directly between the Board of Public Grounds and Buildings and the said Arnold W. Brunner and J. E. Greiner & Company.
    NOW THIS AGREEMENT WITNESSETH:
    That the said Arnold W. Brunner and J. E. Greiner & Company, parties of the Second part, for the consideration hereinafter mentioned and agreed to be paid to them by the party of the first part, acting in behalf of the Commonwealth of Pennsylvania, do hereby for themselves, their heirs, executors and administrators, covenant, promise, stipulate, and agree with the Commonwealth of Pennsylvania, that they will complete in the shortest possible tintó consistent with accuracy and efficiency the following work:
    All architectural and engineering services in connection with the preparation of the necessary surveys, preliminary studies, general drawings, plans, specifications and detailed working drawings for the Soldiers’ and Sailors’ Memorial Bridge at Harrisburg, Pa., and its approaches, and also all necessary and requisite architectural and engineering services in the carrying out of the same, including the supervision and detailed inspection of the construction thereof until completion.
    In consideration of the parties of the second part performing the work agreed upon the party of th'e first part agrees to pay to the parties of the second part as compensation for their services, a fee of six (6) per cent, of the actual total cost of the bridge constructed complete as covered by the plans and specifications, excepting only the cost of the sculpture and the interior memorial decoration of the pylons and cost of field inspection.
    Payments shall be made by the party of the first part to the parties of the second part, as follows:
    (a) Upon the completion of the surveys, situation plans and the approval of the preliminary studios, on'e (1%) per cent, of the estimated cost.
    (b) Upon the completion of the plans and specifications ready for obtaining bids, excepting the pylons and architectural treatment above the floor level, two (2%) per cent of the estimated cost.
    (c) Upon the completion of the detailed working plans for the various parts of the structure, including the pylons and architectural treatment above the level of the floor one (1%) per cent, of the estimated cost.
    (d) One (1%) per cent, when one-half of the sum due shall be paid to the contractor, and the balance, one (1%) per cent, subject to the adjustment between the estimated and actual cost, is to be paid upon the completion and final acceptance of the bridge.
    The parties of the second part further agree to design and prepare all drawings for and superintend the Memorial Interiors of the pylons,- th'e pedestals, etc., for the sculpture so as to harmonize the architecture and sculpture, and the party of the first part in compensation for this special work agrees to pay to the parties of the second part a fee of ten (10) per cent of the total cost of the Memorial Interiors and Sculpture.
    Payments shall be made by the party of the first part to the parties of the second part, as follows:
    (a) When the drawings and specifications are ready for estimating, one-half of the commission based on the estimated cost.
    (b) The balance when the work is completed ready for the sculpture.
    The parties of the second part also agree to furnish all resident engineers, inspectors, clerks of the work, and such other persons as may be required for the proper supervision and management of the construction of said bridge, exclusive of the Memorial Interiors and Sculpture for the pylons, also including the cost of the maintenance of an office for the resident superintendent to be maintained at the works, and the party of the first part agrees to pay as compensation for the performance of this work the actual cost thereof to the parties of the second part, as evidenced by vouchers.
    It is mutually agreed and understood that the party of the first part is to pay all traveling expenses and subsistence of the said parties of the second part between their homes and Harrisburg, Pa., and while in Harrisburg, and the traveling expenses and subsistence of their employees while engaged in labor in connection with the bridge but it is understood that the party of the first part is not to pay the cost of subsistence of resident engineers and superintendents while in Harrisburg. Payments to be made upon presentation of the proper vouchers. No extra fee shall be charged on this item by the party of the second part.
    The parties of the second part shall not assign or transfer this contract, or any interest therein, without the written consent of the Board of Commissioners of Public Grounds and Buildings.
    In case of the death or mental or physical disability of Arnold W. Brunner or J. E. Greiner, it is hereby agreed that this contract shall remain in force and that the survivor shall complete the architectural or engineering work of the Memorial Bridge with the office force, equipment and organization of the deceased or incapacitated party, and with such other associates satisfactory to the party of the first part as may be found necessary.
    In case of the death or mental or physical disability of Arnold W. Brunner and J. E. Greiner and failure of the parties of the second part to comply with the terms of this agreement, or to complete the work herein stipulated to be performed by the parties of the second part, then and in such ease the party of the first part shall have the right to the possession and use, until the work herein referred to is completed, of all sketches, drawings, plans, specifications, memoranda made or begun to be made by said parties of the second part in any way relating to the work referred to, and said sketches, drawings, plans, specifications and memoranda to be and remain the property of and to be returned to the parties of the second part or their legal representatives upon the completion of said work.
    The work specified in the last three above mentioned contracts was performed by the decedent, and as compensation therefor he received the following net amounts after deducting office and other necessary expenses:
    1919-$41,249.52
    1920- 17, 589.25
    1921- 45,290.00
    1922- 23,462. 64

      Cleveland, Ohio. — On May 6, 1902, the General Assembly of the State of Ohio enacted a statute providing as follows:
    Section 1. That whenever any city in the state of Ohio, having a population of more than 380,000, or the county in which the city is located, contemplates the erection of buildings for public, municipal, or county purposes within the boundaries of such city, such city by its council may request the governor of the state of Ohio to appoint a board of supervision composed of three experts, two at least of whom shall be architects, the members of which board shall receive salaries not exceeding five thousand dollars each per annum, to be fixed by the city authorities prior to making request upon the governor for appointment and paid by the city requesting such appointment.
    Section 2. Such board when appointed shall have the supervision and control of the location of all public, municipal or county buildings to be erected upon ground previously acquired within the limits of the city, and shall have control of the size, height, style and general appearance of all such buildings, for the purpose of procuring, in their location and erection, the greatest degree of usefulness, safety and beauty.
    Section 3. No plans shall be adopted and no work carried on by such city or county, wherein such board shall be appointed, in the erection of such public, municipal or county buildings within the boundaries of such city, until all plans, specifications and locations shall have first been submitted to and approved by such board or a majority thereof.
    Section 4. Such board shall be appointed for such time as shall be requested by the city, and the governor, at the request of the city, may remove any member of such board and appoint a new member to fill the vacancy thus created, if in his judgment it is wise so to do.
    Pursuant thereto the Governor of Ohio on June 20, 1902, appointed and commissioned the decedent a member of the Board of Supervisors in the erection of public and municipal buildings, as evidenced by the following agreement:
    TO ALL TO WHOM THESE PRESENTS SHALL OOME GREETING:
    KNOW YE, That whereas, ARNOLD W. BRUNNER of NEW YORK COUNTY, NEW YORK, has been duly appointed to the office of MEMBER OE THE BOARD OE SUPERVISORS IN THE ERECTION OE PUBLIC AND MUNICIPAL BUILDINGS IN CLEVELAND, OHIO:
    THEREFORE, By virtue of the authority vested in the Governor by the Constitution, and in pursuance of a provision of the Statutes, I do hereby Commission him, the said ARNOLD W. BRUNNER, to be MEMBER OE SAID BOARD, authorizing and empowering him to execute and discharge, all and singular, the duties appertaining to said office, and to enjoy all the privileges and immunities thereof.
    IN TESTIMONY WHEREOE, I have hereunto subscribed my name and caused the Great Seal of the State of Ohio to be affixed at Columbus, the 20 day of June in the year of our Lord one thousand nine hundred and two.
    (Sgd) GEO. K. NASH.
    (SEAL) (Sgd) LEWIS C. LAYLIN

      Seoterary of State.

    The salary attached to this office, originally $3,000 per annum, was reduced during the years involved to $1,000 per annum. The decedent performed the duties of the office and the amounts received as compensation therefor were as follows:
    1917_ $250.00
    1918_ 2,000. 00
    1919_ 500.00
    1920_ 1,000.00

      Albany, N. IT. — On January 15, 1912, the Common Council of the City of Albany, N. Y., enacted an ordinance authorizing the Commissioner of Public Works to employ an expert to prepare a City plan, reading in part as follows:
    Section 1. The Commissioner of Public Works is hereby authorized and empowered to employ an expert who shall prepare a design or plan which shall be a guide and aid to the city authorities in carrying into effect public improvements. Such design or plan shall show such matters relating to streets, parks and other public places; public buildings, works of art, and other structures intended for the beautification of the city; the arrangement of street and other railroads, including the appurtenances thereto; the location and plans of residences and other buildings, and such other matters as may properly be included in such design or plan.
    * * * * * * *
    Section 3. Whenever the expert shall have completed a design or plan he shall submit the same to the Commissioner of Public Works, together with such explanation thereof as may be necessary, and the same shall be filed with the Commissioner of Public Works and become a public record.
    Section 4. The sum of five thousand dollars ($5,000) or so much thereof as may be necessary is hereby appropriated out of any moneys in the city treasury derived from any source other than by municipal tax, and not otherwise appropriated, to pay the expenditures authorized by this ordinance.
    On April 29, 1912, tbe Commissioner of Public Works advised the decedent as follows:
    In accordance with the authority of an ordinance of the Common Council passed January 15,1912, I herewith accept your proposal to act as an expert for the City of Albany, in carrying into effect certain public improvements for the fee, or honorarium, of five thousand dollars ($5,000) per year, the City to pay the cost of traveling expenses, draftsmanship and other expenses in connection with the preparation of the necessary drawings.
    I sent you a few days ago two copies of the Chamber of Commerce Report and the plans and specifications for the Recreation Pier, for which I have your acknowledgment of April 26.
    In a few days I will send you a plan of the river front improvement at a scale of 40 feet to the inch and a plan of the entire city at a scale of 400 feet to the inch.
    On February 3,1915, the decedent was advised of his employment by the Board of Estimate and Apportionment of the City of Albany, as follows:
    The Board of Estimate and Apportionment yesterday decided to retain you at the nominal salary of $1,000 a year and expenses. Of course if the duties should be larger than we anticipate the matter of compensation can be adjusted.
    The decedent accepted such employment on February 4, 1915.
    On April 3, 1917, the Board of Contract and Supply of the City of Albany, composed of the Mayor, Comptroller, Commissioner of Public Works, Corporation Counsel and the City Engineer, appointed the decedent Consulting Architect for the alterations in the City Hall, and advised him of such action, as follows:
    At a meeting of the Board of Contract and Supply held April 2nd, you were formally appointed consulting architect for the alterations to the City Hall and your fee was fixed at one and one-half (1 ½%) per cent on the total cost of the building, with traveling expenses.
    I am advising Messrs. Ogden & Gander, the architects to the. same effect.
    The decedent accepted this employment and performed the services required.
    For the personal services rendered under his employment, decedent received the following compensation:
    1917-$3,277.65
    1918 - 3, 500.00
    1919- 1, 000.00
    1920- 1, 000.00
    1921- 1, 000.00
    1922 - 416. 66

      New York, N. Y. — The decedent performed certain services for the City of New York in connection with city planning. He received $124.85 during 1917 and $24.36 during 1918.
   OPINION.

Littleton:

It is contended by the executrix that Arnold W. Brun-ner was an officer or an employee of the Commonwealth of Pennsylvania and the municipalities of New York and Albany, N. Y., and Cleveland, Ohio, and that compensation received by him from such States and municipalities was exempt from Federal taxation.

In the opinion of the Board the decedent was not an officer or employee of the Commonwealth of Pennsylvania or the municipalities of New York and Albany, N. Y., within the meaning of the statute and decisions of the courts that compensation of officers or employees of States and municipalities is not subject to Federal income tax. The decedent was not a part of the regular governmental force of the Commonwealth of Pennsylvania or the municipalities of New York and Albany. He was an independent contractor and his rights, duties, and compensation were fixed by the contracts. The case of Metcalf & Eddy v. Mitchell, 269 U. S. 514, involved the question whether compensation received by consulting engineers under contracts with certain municipalities was taxable under the provisions of the Revenue Act of 1917. The court said (p. 519):

We think it clear that neither of the plaintiffs in error occupied any official position in any of the undertakings to which their writ of error in No. 183 relates. They took no oath of office; they were free to accept any other concurrent employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute. ■ We therefore conclude that plaintiffs in error have failed to sustain the burden cast upon them of establishing that they were officers of a state or a subdivision' of' a state within the exception of § 201 (2).

At page 524 the court further stated:

* * * But here the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. The tax is imposed without discrimination upon income whether derived from services rendered to the state or services rendered to private individuals. In such a situation it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way. Railroad Co. v. Peniston; Gromer v. Standard Dredging Co.; Baltimore Shipbuilding Co. v. Baltimore; Fidelity & Deposit Co. v. Pennsylvania; Choctaw, O. & G. R. R. Co. v. Mackey, supra.
As was said by this Court in Baltimore Shipbuilding Co. v. Baltimore, supra, in holding that a state might tax the interest of a corporation in a dry dock which the United States had the right to use under a contract entered into with the corporation:
“ It seems to us extravagant to say that an independent private corporation for g£#n, created by a State, is exempt from state taxation either in its corporate person, or its property, because it is employed by the United States, even if the work for which it is employed is important and takes much of its time.” (p. 382.) [25 Sup. Ct. 52.]
And as was said in Fidelity & Deposit Co. v. Pennsylvania, supra, in holding valid a state tax on premiums collected by bonding insurance companies on surety bonds required of United States officials:
“ But mere contracts between private corporations and the United States do not necessarily render the former essential government agencies and confer freedom from state control.” (p. 323.) [36 Sup. Ct. 300.]
These statements we deem to be equally applicable to private citizens engaged in the general practice of a profession or the conduct of a business in the course of which they enter into contracts with government from which they derive a profit. We do not suggest that there may not be interferences with such a contract relationship by means other than taxation which are prohibited. Railroad Co. v. Peniston, supra, at p. 36, recognizes that there may. Nor are we to be understood as laying down any rule that taxation might not affect agencies of this character in such a manner as directly to interfere with the functions of government and thus be held to be void. See Railroad v. Peniston, supra, page 36; Farmers Bank v. Minnesota, supra, p. 522; Choctaw & Gulf Railway Co. v. Harrison, supra, p. 272.
But we do decide that one who is not an officer or employee of a state, does not establish exemption from federal income tax merely by showing that his income was received as compensation for service rendered under a contract with the state; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings. Cf. Central Pacific Railroad v. California, 162 U. S. 91, 126 [16 Sup. Ct. 766; 40 L. Ed. 903].

In the opinion of the Board the facts in this appeal, so far as it relates to the compensation received by the decedent from the Commonwealth of Pennsylvania and New York and Albany, N. Y., bring it within the decision of the court in Metcalf & Eddy v. Mitchell, supra. The Commissioner’s determination in this regard is therefore approved. See, also, Lyons v. Reinecke, 10 Fed. (2d) 3.

As to the compensation received by the decedent from the City of Cleveland, Ohio, a different situation exists. On June 20, 1902, he was appointed and commissioned by the Governor of Ohio as a member of the Board of Supervisors in the Erection of Public and Municipal Buildings in Cleveland, Ohio. ' This was a statutory office which he held subject to the pleasure of the Governor. He held this office and performed the duties thereof from 1902 to and including 1920.

It was not in his individual or private capacity that he performed the duties of the office as a member of the Board of Supervisors. He was not a contractor to perform work for the municipality. His rights, duties, habiliments, and emoluments of office were fixed and prescribed by statute and the commission of the Governor under authority of the constitution of the State.

When the decedent was commissioned as a member of the Board of Supervisors he became an instrumentality of the municipality in the performance of its governmental duties in the general administration of affairs incident to every state or municipal government. States and municipalities, like other corporate bodies, can act and perform their functions only through their duly authorized agents, and one who holds an office such as this decedent held, barren of any contractual relation, his acts in the discharge of his duties are the acts of the State or municipality in the performance of those functions, upon which the Federal Government may not place a burden through taxation. The nature of the decedent’s relation to the municipality of Cleveland was not changed by the fact that the duties of the office were not so arduous as entirely to preclude the carrying on generally by him of his profession as an architect.

We think the decedent was an agency through which the municipality immediately and directly exercised its sovereign powers; that he was so intimately connected with the exercise of power and the performance of a public duty by the municipality as to bring him within the purview of those decisions holding that the Federal Government may not tax the instrumentalities of a State or a subdivision thereof, and that, as such instrumentality, his income, to the extent that it was derived from such source, was immune from taxation. Section 201 (a) of the Revenue Act of 1917 and section 1211 of the Revenue Act of 1926.

Judgment will he entered on 15 days’ notice, voider Bule 50.


source: Caselaw Access Project

author: Korner, Chairman:

license: Public Domain

text:
    Plains Buying and Selling Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9983.
    Promulgated January 24, 1927.
    1. The Board does not have jurisdiction to hear and determine a proceeding filed with it pursuant to the provisions of section 279 (b) of the Revenue Act of 1924, if prior to the filing of the petition there has been an adjudication of bankruptcy of the petitioner.
    2. The Board is not deprived of jurisdiction where adjudication of bankruptcy of the petitioner occurs subsequent to the filing of a petition with the Board. In such cases the jurisdiction of the courts and of the Board is concurrent.
    3. The Board has jurisdiction to hear and determine a proceeding filed with it pursuant to the provisions of section 274 (a) of the Revenue Act of 1924, whether such petition was filed prior or subsequent to adjudication of bankruptcy of the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    Proceeding for the redetermination of income and profits taxes for the fiscal years ended November 30, 1919, and November 30, 1920. The respondent moved to dismiss on the ground that the petitioner is in bankruptcy and that the Board is therefore without jurisdiction in the premises. The facts are set out in the opinion.
   OPINION.

Korner, Chairman:

The issue presented here is the jurisdiction of the Board to hear and determine this proceeding. The respondent alleges in his motion to dismiss that the petition was filed with the Board subsequent to an adjudication of bankruptcy of the petitioner, on voluntary petition, by the United States District Court for the District of New Mexico. The petitioner denies the allegation of the respondent in this regard, and alleges that it filed its petition with the Board prior to the date of its adjudication in bankruptcy. Respondent insists that notwithstanding the allegations of the petitioner, the Board is deprived of jurisdiction by section 282 (a) of the Revenue Act of 1926 when the petitioner is adjudicated a bankrupt.,

The case was submitted on the pleadings and the facts are very meagre. The Board has not had the benefit of briefs from either side on the law or the facts. From the record it appears that an incomplete petition was filed with the Board on December 15, 1925. That petition contains no information bearing on the issue here. Respondent served notice that he would move to dismiss under the Board’s rules on March 29, 1926. On March 23, 1926, an application for leave to file amended and supplemental petition was filed. This application was signed “O. C. Cox, Attorney for Petitioner and Trustee in Bankruptcy.” It was verified by J. B. McGhee, trustee in bankruptcy. This application avers that the petitioner was, on November 21, 1925, adjudicated a bankrupt, on voluntary petition, in the United States District Court for the District of New Mexico, and that on or about November 21, 1925, a petition had been filed with this Board on behalf of the petitioner. Leave was granted to the petitioner to file amended and supplemental petition, and this was done on April 29, 1926. This amended petition likewise alleges the bankruptcy of'the petitioner on November 27, 1925, and is signed by the attorney for the trustee and is verified by the trustee. On motion therefor, time was granted the respondent to answer or move with respect to the petition. On October 10, 1926, respondent moved to dismiss on the ground that the Board is without jurisdiction. The petitioner joined issue on the motion of the respondent and alleged that it “has filed no petition for redetermination with the Board after the adjudication in bankruptcy, but on the contrary,” it filed an amendment to “a petition theretofore filed by the taxpayer > * * .* a long time prior to its adjudication in bankruptcy.”

Attached to the amended petition is a copy of the statutory deficiency notice of October 19, 1925. The portion of that letter which is material here is as follows:

An examination of your claim for abatement of $547.35, representing additional tax assessed in accordance with Section 274 (d) of the Revenue Act of 1924 and your return for the fiscal year ended November 30, 1920, discloses a deficiency of $547.36 as outlined in office letter dated July 27, 1925, as shown in attached statement. The claim will, therefore, be disallowed in full.
In accordance with the provisions of Section 279 (b) of the Revenue Act of 1924, you are allowed sixty days from the date of this letter within which to file an appeal to the Board of Tax Appeals contesting in whole or in part the correctness of this determination.

From the foregoing it appears that, for the fiscal year 1919, assessment was made pursuant to section 274 (d) of the Revenue Act of 1924, and that abatement claim was filed and rejected on October 19, 1925. Thus, the petitioner’s right of appeal arose under section 279 (b) of the Revenue Act of 1924. That Act is entirely silent as to the Board’s jurisdiction in the situation presented here. However, that difficulty is solved by reference to section 283 (k) of the Revenue Act of 1926, wherein it is provided:

(k) Where before the enactment of this Act a jeopardy assessment has been made under subdivision (d) of section 274 of the Revenue Act of 1924 (whether of a deficiency in the tax imposed by Title II of such Act or of a deficiency in an income, war-profits, or excess-profits tax imposed by any of the prior Acts enumerated in subdivision (a) of this section) all proceedings after the enactment of this Act shall be the same as under the Revenue Act of 1924, as amended by this Act, except that—
* * * * * * *
(3) In the consideration of the case the jurisdiction and powers of the Board shall be the same as provided in this Act in the ease of a tax imposed by this title.

To the extent, then, of the controversy growing out of the rejection of the petitioner’s abatement claim for the fiscal year 1919, the jurisdiction and powers of the Board must be found in section 282 (a) of the Revenue Act of 1926, under the circumstances existing here.

In the same statutory deficiency letter of October 19, 1925, the Commissioner notified petitioner of a deficiency in tax for the fiscal year 1920. The right of appeal therefrom likewise arose under the Revenue Act of 1924. The Revenue Act of 1926, however, makes specific provision for the jurisdiction and powers of the Board under such circumstances. Such provision is found in section 283 (b) of the last-mentioned Act.

In view of the fact that there are three distinct phases of the jurisdictional question presented here, arising under and governed by different sections of the Revenue Act of 1926, we shall take them up separately and discuss in order the jurisdiction of the Board (1) in the case of the rejection, pursuant to the Revenue Act of 1924, of petitioner’s abatement claim filed against a jeopardy assessment, when the petitioner was in bankruptcy at the time of the filing of its petition, (2) in the case of the rejection, pursuant to the Revenue Act of 1924, of petitioner’s abatement claim filed against a jeopardy assessment, when the adjudication of bankruptcy occurs subsequent to the filing of the petition with the Board, and (3) in the case of the determination of a deficiency pursuant to section 274 (a) of the Revenue Act of 1924 and appeal therefrom filed pursuant to that Act, when the adjudication of bankruptcy occurred either before or after the filing of a petition with the Board.

We have shown above that the first phase of,this question is controlled by section 282 (a) of the Revenue Act of 1926. That Act does not leave open to question the fact that the Board is without jurisdiction of a proceeding wherein the petition (filed pursuant to that Act) was filed subsequent to an adjudication of bankruptcy. That section says: “No petition for any such redetermination shall he filed with the Board after the adjudication of bankruptcy or the appointment of the receiver.” But what if the petition had been already filed pursuant to a prior Act? For the answer to this query recourse is had to other provisions of the Revenue Act of 1926. We have shown above that, in the case of a jeopardy assessment, assessments made pursuant to section 274 (d) of the Revenue Act of 1924, the jurisdiction and powers of the Board shall be the same as provided in the Revenue Act of 1926 in the case of a tax imposed by that Act. (Revenue Act of 1926, section 283 (k).) It should be borne in mind that the provision just mentioned is limited and does not have application to appeals filed under, and from determinations pursuant to, section 274 (a) of the Revenue Act of 1924. That phase of the question will be discussed later under paragraph 3 of this opinion.

The language of section 282 (a) of the Revenue Act of 1926 is not so specific with reference to the jurisdiction of the Board in a case where a petition is filed with the Board prior to bankruptcy. It does not, in specific terms, cover such a case. It provides that, in the event of bankruptcy, the Commissioner shall immediately assess, despite the provisions of section 274 (a). The section then continues:

Olaim for the deficiency and such interest, additional amounts and additions to tlie tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Board * * *.

The foregoing might indicate that in such event the court and the Board would have concurrent jurisdiction, and that the Commissioner might file claim with the bankruptcy court or abide the determination of the issue in the proceeding before the Board. However, the language just quoted does not specifically indicate what becomes of the proceeding before the Board in the event claim is filed in the bankruptcy court, or in the event of a motion such as we now have before us. It is necessary to review the legislative history of section 282 for light on this point.

Section 282 did not appear in the Revenue Bill as adopted by the House and introduced in the Senate, in so far as it relates to matters of bankruptcy and receivership. It first appeared as an amendment offered by the Finance Committee of the Senate and reported by Senator Smoot to the Senate on January 16, 1926. (H. R. 1, Report No. 52, 69th Cong., 1st Sess.) Section 282 (a), as constituted by the amendment referred to, contained the following:

If any proceeding for redetermination of such deficiency under the provisions of this Act is pending before the Board at the time of such adjudication of bankruptcy or appointment of a receiver and no decision of the Board, final or otherwise, has been rendered therein, then such proceeding shall be dismissed by the Board. (Ibid, p. 149.) (Italics ours.)

The Report of the Committee on Finance, accompanying H. R. 1, at page 31, contains the following:

If petition for a redetermination has been presented to the board but is not an appeal therefrom, the proceedings shall be dismissed and the deficiency assessed and claim therefor presented to the bankruptcy or equity court. If proceedings for determination of a deficiency are on appeal before the Circuit Courts of Appeal or the United States Supreme Court, the committee deems it advisable to permit these courts finally to determine the deficiency rather than dismiss the proceeding. Pending such final decision on appeal, claim for the amount of the déficiency may be presented to the bankruptcy or equity court in the amount allowed by the board, or if decision is reached by such appellate courts prior to the termination of the receivership or bankruptcy proceedings, then such claim may be modified to accord with the decision. (Italics ours.)

The amendment comprising section 282 (a) underwent a change in the Senate. As the Act passed the Senate on February 1, 1926, the provision quoted above from the Act as it was reported to the Senate by the Finance Committee was dropped from the Act. The Act as it was passed in the Senate, agreed to in conference between the Senate and the House, and finally enacted into law, was as follows:

Sec. 282. (a) Upon the adjudication of bankruptcy of any taxpayer in any bankruptcy proceeding or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) determined by the Commissioner in respect of a tax imposed by this title upon such taxpayer shall, despite the provisions of subdivision (a) of section 274, be immediately assessed if such deficiency has not theretofore been assessed iar accordance with law. Claim for the deficiency and such interest, additional amounts and additions the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Board; but no petition for any such redetermination shall be filed with the Board after the adjudication of bankruptcy or the appointment of the receiver. (See H. B. 1, February 1, 1926, as passed by tbe Senate on that date; H. R. 1, as agreed to in Conference, February 22, 1926.)

In commenting on the Act as it was reported out of conference, the managers on the part of the House made the following statement:

Amendment No. 89: The Senate amendment adds a new section, the House bill containing no corresponding provisions. The House recedes with an amendment mating a clerical change. The provisions of the Senate amendment are summarized in the following paragraphs.
During bankruptcy proceedings or State or Federal receivership proceedings the assets of the taxpayer come within the control of the bankruptcy or equity court whenever the taxpayer has been finally adjudicated a bankrupt by the bankruptcy court or the receiver has been finally appointed by the equity court. If a deficiency is determined by the commissioner during the pendency of such proceedings, the amendment permits the deficiency to be assessed and the bankruptcy or receivership proceedings to continue despite the prohibitions of section 274 (a). If a petition for the redetermination of a deficiency has been filed with the board prior to the adjudication of bankruptcy or the appointment of a receiver, the amendment permits the proceedings for the redetermination of the deficiency to be continued simultaneously with the bankruptcy or receivership proceedings. The daim for the amount of the deficiency may, or course, be filed with the bankruptcy or equity court In case of final decision of the board before termination of the bankruptcy or receivership proceedings, a copy of the decision could be filed with the bankruptcy or equity court and the decision would presumably be followed by such courts. During the pendency of the bankruptcy or receivership proceedings a deficiency may be assessed in accordance with the final decision of the board, but the amount thereof may not be collected by distraint against the assets while under the jurisdiction of the bankruptcy or equity court, (gee Conference Report, Report No. 356, House of Representatives, Feb. 22, 1926, p. 45.)

The foregoing legislative history is strongly indicative of the intention of Congress to confer concurrent jurisdiction in the court and in the Board in the event that a petition for a redetermination is pending before the Board at the time of adjudication of bankruptcy. It should be noted that the filing of the claim in the bankruptcy court is permissive in the Commissioner. The language used by the Conference Committee, in so far as it interprets the intent of Congress, seems almost conclusive on the matter of jurisdiction, wherein it is said: “In case of final decision of the board before termination of the bankruptcy or receivership proceedings, a copy of the decision could be filed with the bankruptcy or equity court * * If the Board is required to dismiss the proceeding in the advent of bankruptcy, there could be no final decision of the Board before termination of the bankruptcy, and the foregoing exposition of congressional intent is meaningless. To like effect, the following sentence: “During the pendency of the bankruptcy or receivership proceedings, a deficiency may be assessed in accordance with the final decision of the board, but the amount thereof may not be collected by distraint against the assets while under the jurisdiction. of the bankruptcy or equity court.” This would seem plainly to indicate that the Board may pursue the case to completion and render judgment, and that the Commissioner may, pursuant to such judgment, make assessment of the deficiency; but that he can then go no further in the matter of collection while the assets are in the hands of the bankruptcy court. But perhaps the plainest indication of congressional intent is found in the deliberate deletion from the Act of the language expressly providing that a proceeding should be dismissed by the Board upon the incidence of bankruptcy.

In view of the legislative history of section 282 (a) of the Revenue Act of 1926, we conclude (1) that in the case of the rejection, pursuant to the Revenue Act of 1924, of petitioner’s abatement claim filed against a jeopardy assessment, when the petitioner had been adjudicated bankrupt at the time of filing of its petition, under the Revenue Act of 1924, the Board is without jurisdiction to hear and determine the proceeding, and (2) that under similar circumstances, but where the adjudication occurs subsequent to the filing of the petition with the Board, the Board retains jurisdiction and that such jurisdiction is concurrent in the Board and in the bankruptcy court.

Applying these conclusions to the facts in the instant case, we are of opinion that the proceeding should be dismissed, for lack of jurisdiction, as to the fiscal year 1919. The allegations as to the facts are in conflict, but the record bears out the finding that the original petition filed on December 15, 1925, was filed subsequent to the adjudication of bankruptcy.

We come now to the discussion of the last phase of this question, viz, the jurisdiction of the Board in the case of the determination of a deficiency pursuant to section 274 (a) of the Revenue Act of 1924 and appeal therefrom pursuant to that Act, where bankruptcy ensues before the filing of the petition with the Board. We have shown above that, as to the fiscal year 1920, the Commissioner found a deficiency pursuant to section 274 (a) of the Revenue Act of 1924. The petition was filed with the Board on December 15,1925, pursuant to that Act but subsequent to bankruptcy.

As we pointed out above, the Revenue Act of 1924 is silent as to the Board’s jurisdiction in the event of bankruptcy. We likewise called attention to the fact that section 282 (a) of the Revenue Act of 1926 applies to proceedings arising under the Revenue Act of 1924 only in so far as such proceedings arise under appeals from jeopardy assessments — specifically covered by section 283 (k) of the Revenue Act of 1926. So, we find that the last-mentioned section, as well as section 282 (a) of that Act, does not apply to this phase of the case.

However, section 283 (b) of the Revenue Act of 1926 does apply. That section provides:

(b) If before tbe enactment of tbis Act any person bas appealed to tbe Board of Tax Appeals under subdivision (a) of section 274 of tbe Revenue Act of 1924 (if such appeal relates to a tax imposed by Title II of such Act or to so much of an income, war-profits, or excess-profits tax imposed by any of the prior Acts enumerated in subdivision (a) of this section as was not assessed before June 3, 1924), and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal. In all such cases the powers, duties, rights, and privileges of the Commissioner and of the person who has brought the appeal, and the jurisdiction of the Board and of the courts, shall be determined, and the computation of the tax shall be made, in the same manner as ircovided in subdivision (a) of this section, except as provided in subdivision (j) of this section and except that the person liable for the tax shall not be subject to the provisions of subdivision (d) of section 284.

The language of the section just quoted is quite broad and comprehensive. It has precise application to the facts of the instant case in so far as the fiscal year 1920 is concerned. It makes no exceptions as to proceedings filed subsequent to bankruptcy and provides for no ouster of jurisdiction as to proceedings pending at the incidence of bankruptcy. We conclude, therefore, that the Board has jurisdiction to hear and determine a proceeding filed with it pursuant to the provisions of section 274(a) of the Revenue Act of 1924, whether the petition in such proceeding was filed prior or subsequent to adjudication of bankruptcy of the petitioner.

The proceeding is dismissed as to the fiscal year 1919. The respondent's motion is denied as to the fiscal year 1920. Appropriate orders will J>e entered accordingly.


text:
    Joseph Goodnow & Co., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7895.
    Promulgated January 24, 1927.
    1. By unanimous consent of all the stockholders corporate net profits may be divided and distributed among the stockholders other than ratably according to stockholdings.
    2. The evidence in the instant case discloses the intent of the only two stockholders of the petitioner to divide the net profits between them without regard to stock holdings, and the proceeds of such division did not constitute additional salaries to the recipient.

      Frank J. Mbus, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    The deficiencies here in question are for the fiscal years ending January 31, 1919, and January 31, 1920, and arise under section 234 (a) (1) of the Revenue Act of 1918. They aggregate $1,602.60, as appears from the respondent’s deficiency notice of August 12,1925.

      FINDINGS OF FACT.
    The petitioner is a Massachusetts corporation with its principal office at 294 Causeway Street, Boston. The stockholders of the taxpayer are W. H. Palmer and F. G. Boggs, the former owning one-third of the stock and the latter owning two-thirds of the stock.
    The corporation was organized on February 1,1914, and succeeded a partnership formerly operated by Palmer and Boggs. Palmer, the president, acted in the capacity of manager, buyer, sales manager, and financial manager and devoted his entire time to the business. Boggs, the treasurer, devoted only a portion of his time to the business of the corporation.
    Records of a special meeting held January 18, 1915, by the board of directors read as follows:
    A special meeting of the Board of Directors was held at the office of the Treasurer, at No. 110 State Street, Boston, Massachusetts, on January 18, 1915, Monday, at 1:30 o’clock in the afternoon, in pursuance of the foregoing waiver of notice signed by all three Directors, and filed herewith said waiver of notice, waiving notice and accepting same as stated in the waiver.
    The President, Winfield H. Palmer, called the meeting to order and presided ; and the clerk kept the records.
    All three Directors were present and the President therefore declared that a quorum was present and participating in the meeting.
    The clerk then read the records of the last meeting of the Board of Directors, in the meeting held January 8, 1914, the original meeting of the Directors at the time of incorporation of the company.
    Upon motion duly seconded, it was unanimously
    Voted: That the records of the last meeting of the Board, viz, the meeting held January 8, 1914, be approved as recorded by the clerk.
    The President then presented the meeting and read a preliminary draft and estimate of the figures showing expected profits from the operation of the business for the fiscal year, this being the first year of business under the corporate existence.
    Upon motion, duly seconded, it was unanimously
    Voted: That the salary of the Treasurer be designated as three thousand nine hundred dollars ($3,900) per year, beginning as of January 31, 1914.
    No further business coming before the meeting, it was unanimously
    Voted: To adjourn.
    Adjourned.
    The following is a statement with reference to profits of the company and their distribution appearing on the minute books of the corporation under date of January 18, 1915:
    This company was incorporated in January 1914, and was formerly carried on as a co-partnership. As Francis G. Boggs has other interests corporate existence was decided upon. It is the intention of the owners of the business, however, that this method of distribution of profits be continued, the stock-holding being for the purpose of assuring control of the business.
    It has heretofore been the custom to designate a salary which would be drawn on during the year, and at the end of the business year after an audit, the profits would be divided equally between Francis G. Boggs and the Manager of the business at the time. It has always been an understood custom in this business enterprise that the equal distribution of the net profits be made and that it is part of the remuneration of the managers of the business.
    The matter of return on money invested in the business is to be continued as heretofore.
    The designated salary is allowed so that the managers of the business may have an account which can be drawn on periodically between accounting periods.
    This report is made by the Clerk as a memorandum of the discussion of the business at the meeting but on which no actual vote was deemed necessary except the votes designating the salary amounts which have been used during the year.
    F. Chester Everett,
    Clerk.
    In accordance with the above minutes, it has been the consistent policy of the corporation to distribute equally between the two stockholders the net income of the corporation regardless of, and without respect to, the stock holdings. Under this policy each stockholder received $6,600 during the year ended January 31, 1919, and $11,100 during the year ended January 31, 1920, which amounts excluded the $3,900 paid to each in accordance with the minutes quoted above. In other words, the $6,600 received by each stockholder during the year ended January 31, 1919, and the $11,100 received by each stockholder during the year ended January 31, 1920, did not include any part of the $3,900 paid to each in accordance with the minutes. The $3,900 paid to each stockholder during each year has been allowed by the Commissioner as a deduction from gross income in arriving at the net taxable income of the corporation.
    When reporting amounts received from the petitioner, the individuals consistently reported $3,900 as salary and the balance as dividends. The Commissioner allowed $3,900 to each stockholder as salary but considered the equal distribution in excess of the $3,900 as dividends and refused to allow the petitioner to deduct any part thereof as additional compensation to Palmer.
    Petitioner filed income and profits-tax returns for each of the taxable years in question and in the return for each year took deduction for officers’ salaries in the amount to $7,800. Attached to each return, were supporting schedules, and among these schedules appeared the following in the case of each of such returns-:
    Schedule A-13
    •Compensation of Officers
    W. H. Palmer, Pres. (1/J, stock)_$3,900.00
    F. G. Boggs, Treas. (¾ stock)- 3,900.00
    Total_$7,800.00
    Entire Time Given to Business.
   OPINION.

Korner, Chairman:

It appears that petitioner filed tax returns for the years here in question, reporting and taking deduction for salaries for Palmer and Boggs in the amount of $3,900 each — a total in each year of $7,800. The respondent allowed these deductions without question, but made certain other adjustments resulting in a deficiency. Those adjustments are not complained of by the petitioner. In its petition it specifically waives them. It appears, however, that the petitioner sought to have the respondent make a further adjustment by allowing one-half of Palmer’s share of the divided net profit to be deducted from income by the petitioner on the ground that such share of the profits represented additional salary to Palmer. This the respondent declined to do. The statement supporting the deficiency notice of August 12, 1925, is not in the record and we are unable to learn whether the entire deficiency here appealed from grew out of the adjustment made, to which no exception is taken, or whether all or any part of it grows out of the refusal of the respondent to allow the petitioner’s contention as to Palmer’s salary. It would seem, however, from an inspection of the petition that the former is the true state of facts. If such be the case, the deficiency here in question is predicated on adjustments about which there is no dispute- and which are conceded to be proper by the petitioner. However, there is a deficiency notice the basis of which is uncertain, and the parties have filed a stipulation of facts and ask for a determination of the issue thereon. To the extent that the deficiency must stand or fall on our determination of the issue presented by the stipulation, we arrive at a determination thereof as a basis for such deficiency. To the extent that the deficiency in question is not predicated on the facts set out in the stipulation, our resolution of the issue therein presented does not affect the deficiency.

Boiled down to its essence, the fact here is that Palmer owned one-third of the stock of the petitioner, while Boggs owned two-; thirds. Palmer devoted his entire time to the business while Boggs devoted a portion only of his time. (This fact is not borne out, however, by the petitioner’s notation in Schedule A-13 attached to its return.) Palmer had an authorized salary of $3,900 per year and Boggs had a yearly salary in an equal amount. At a meeting of the stockholders on January 18, Í915, it was agreed that the net profits of the business should be equally divided between Palmer and Boggs because this method had been employed by them in a partnership which was the predecessor to the petitioner corporation.

The petitioner contends that it is entitled to a deduction from-gross income of one-half of $6,600 for the year ended January 31, 1919, and one-half of $11,100 for the year ended January 31, 1920. The amounts just mentioned represent Palmer’s one-half share of the net profits of the petitioner for those years pursuant to a division in accordance with corporate minutes of January 18, 1915. The petitioner contends that the amounts it seeks to deduct represent additional salaries paid to Palmer in the taxable years in question. It bases this contention on the fact that Palmer rendered more service to the petitioner than did Boggs. It argues that this equal distribution of net profits could not be a dividend, because dividends must be distributed in ratio to stock holdings, and that on that basis Boggs’ share would be twice as much as Palmer’s. As a corollary it is argued that, because Palmer did more work than Boggs, he should have proportionately more salary. Neither of these contentions is ipso facto true. By unanimous agreement among the stockholders of a corporation, the profits may be divided and distributed other than ratably according to stock holdings. 6 Fletcher on Corporations, p. 6114, sec. 3674; 14 C. J. 815; Breslin v. Fries-Breslin Co., 70 N. J. L. 274; 58 Atl. 313, 318. It is also true that by agreement or contract the corporation may secure the services of one man at less than they are worth, and at the same time pay a greater salary to another man who, in fact, does less work for it. If the salary paid to the latter is a reasonable salary, it does not follow that the former must necessarily receive a greater salary.

It is true, and we have held, that salaries may be paid which depend for their amount on the profits of the business. Coghlin Electric Co., 3 B. T. A. 1071; Block & Kohner Mercantile Co., 4 B. T. A. 673. In our view of it, these cases are not in point here but are clearly distinguishable on their facts. What is the situation here? The record does not disclose any authorization for salaries except the salaries of $3,900, unless it be found in the minutes of the corporation of January 18,1915. There is no such specific authorization in those minutes, but the petitioner urges that such authorization is contained in the sentence: “ It has always been an understood custom in this business enterprise that the equal distribution of the net profits be made and that it is a part of the remuneration of the managers of the business.” We think that when this sentence is read in the light of the context, it is not conclusive of the contention made for it.

From the context we conclude that the real state of facts was about as follows: Palmer and Boggs were partners. They divided all profits equally between them. Boggs had other interests and corporate existence was decided upon. Why the share holdings of the two were not the same is not disclosed by the record. It is apparent, however, from the record that they desired to continue the equal distribution of the profits. In the beginning they voted equal salaries to Palmer and Boggs. Soon, thereafter, a declaratory minute was entered stating, in effect, that it had been the policy theretofore to divide the net profits equally between Palmer and Boggs and that it was the intention to continue this policy. In making tax returns thereafter this policy appears to have been borne in mind, for we find that the petitioner reported as annual salary $1,800, i. e., $3,900 each to Palmer and Boggs. This was done in both of the taxable years in question here. Those returns showed net profits after all deductions, and that is the net profit or portion of which the petitioner now seeks to have deemed as salary and deducted from income.

We are not convinced from this record that there was an authorization of the additional salary contended for here. In our opinion it was what the parties denominated it — a division of the net profits after deduction of salaries and other expenses. When Clothing Co., 1 B. T. A. 973. The petitioner itself appears to have so considered it, as evidenced by its tax returns.

Judgment will be entered for the Commissioner.


author: Marquette:

text:
    Jones Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3275.
    Promulgated January 25, 1927.
    The debts herein were ascertained to be worthless and were charged off within the taxable year. Selci properly deductible from gross income.

      Paul Kayser, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $2,985.48. Only so much of the deficiency is in controversy as arises from the disallowance by the respondent of deductions claimed by the petitioner on account of debts alleged to have been ascertained to be worthless and charged off in the taxable year.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Texas with its principal office at Houston. It is, and was during the year 1921, engaged in the business of selling lumber.
    In the year 1921, J. M. Sullivan and J. C. Sparks, two carpenters, took a contract to build a house. The petitioner furnished them, on credit, the lumber that was used in constructing the house. The contract price was not sufficient to pay for the material and labor used in the construction of the house and Sullivan and Sparks were not able to pay the full amount due the petitioner, and at the conclusion of the transaction they owed the petitioner approximately $3,000. The petitioner reduced the indebtedness to judgment, but has been able to collect only about $280 from Sullivan and Sparks. Sullivan and Sparks have, and had at December 31, 1921, no property, and they support themselves and their families by day labor. On December 31, 1921, the petitioner charged off the amount of the debt as it then existed — $2,721.55, as worthless and deducted that amount in computing its net income for the year 1921.
    The petitioner also sold lumber to' the amount of $195.98 to an individual who represented that he was going to establish a business in Houston under the name of the Houston-Tampico Steamship Co. A short time later the person who purchased the lumber left Houston and the petitioner has never been able to locate him or to collect anything on his account for the lumber sold. The account was charged off as worthless on December 31, 1921, and was deducted from the petitioner’s gross income for that year.
    The Commissioner, upon audit of the petitioner’s income and profits-tax return for the year 1921, disallowed both of the deductions set forth herein.
   OPINION.

Marquette:

Upon consideration of the evidence herein, we are of the opinion that the debts in question were worthless on December 31, 1921, and that they were ascertained to be worthless and charged off within the year 1921. The petitioner is, therefore, entitled to deduct the amount of the debts in computing its net income for the year 1921.

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


author: Sternhagen:

text:
    Capitol Park Hotel Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7705.
    Promulgated January 25, 1927.

      Ferdinand Tannenbaum, Esq., for the petitioner.

      Robert A. Littleton, Esq-, for the respondent.
    Deficiency of $311.66 income and profits tax for 1920, the respondent having allowed 2 per cent depreciation on a building instead of the 3 per cent claimed by petitioner.

      FINDINGS OF FACT.
    The petitioner owns the Capitol Park Hotel in Washington, D. C. The building was constructed in 1913, of brick, steel, and stone. It has seven stories, 150 rooms and 94 baths. The land upon which it stands is steadily increasing in value. A reasonable allowance for exhaustion, wear and tear, including obsolescence, of the building is 3 per cent.
   OFINION.

Sternhagen:

The evidence consists of the testimony of three witnesses who described the building and the surrounding conditions affecting its probable life and usefulness and within their qualifications expressed their opinions in respect thereof. This being a question of fact, it is unnecessary to set forth the supporting evidence. It has been given full consideration and justifies the conclusion that the building may reasonably be expected to have a useful life of not more than 33½ years, thus establishing the reasonableness of the petitioner’s claim for an allowance of 3 per cent exhaustion, wear and tear, and obsolescence. We reverse the Commissioner.

Judgment will 5e entered on 15 days’ notice, wider Buie 50.


author: Arundell:

text:
    Terrace Drive Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7438.
    Promulgated January 26, 1927.

      Arthur B. Foye, C. P. A., for the petitioner.

      John D. Foley, Esq., for the respondent.
   Arundell:

The Commissioner has determined a deficiency in income tax for the calendar year 1921 in the amount of $1,354.91 and overassessments amounting to $13,066.70 for the calendar years 1919, 1920, and 1922. The appeal was taken for all four years, but on the date the case was heard the taxpayer conceded that, under authority of the Board’s decision in the Appeal of W. H. Morefield, 4 B. T. A. 394, the Board would not have jurisdiction over the years in which overassessments were found, and it made no further contention with reference thereto.

The deficiency is based on the profits alleged to have been made by petitioner from the sale of certain lots constituting a portion of a large tract of land acquired by it at the time of its incorporation in 1917. The Commissioner determined the value of the property at the date of its acquisition by petitioner at $190,000 and used that figure as a basis for determining gain on the sale of certain lots in the tract, leaving in dispute only the question of the proper allocation of the cost of the lots sold. Thereafter, the Commissioner filed an amended answer in which he denied that the value of the property at the time of its acquisition was $190,000, but asserted that the value was $80,000. He, however, failed to offer any proof in support thereof and later withdrew the affirmative part of his answer alleging the valuation of $80,000, thus leaving the valuation as originally determined in the deficiency letter, viz, $190,000. At the time of the hearing the following stipulation was filed:

It is hereby stipulated by and between the parties to this appeal, the Appellant, Terrace Drive Company, and Respondent, Commissioner of Internal Revenue, that in the hearing of this appeal and trial of the issues therein, and for all purposes in this proceeding, the following facts shall be deemed to be true, and shall be accepted by the Board as established, and may be read into the record by either party with the same force and effect as if the same had been proved and established by competent testimony and evidence, namely:
(1) The Terrace Drive Company was incorporated under the laws of the State of Oklahoma, as of July 16, 1917, and immediately thereafter, in consideration of its entire issue of capital stock of $25,000.00 par value, acquired a tract of land known as the “ Terrace Drive Addition,” located in the City of Tulsa, Oklahoma.
(2) Said Terrace Drive Addition was recorded on the books of the company at the date of its acquisition at a value of $80,000.00.
(3) In determining the profit on lots sold during the year 1921, including lots in said Terrace Drive Addition based on the value of $80,000.00 as used in the tax return, the cost of all lots sold was $14,265.05.
(4) The cost of lots sold during the year 1921, including the lots in said Terrace Drive Addition, as used in determining the taxable income set forth in the deficiency letter was $15,534.82.
(5) The cost of the lots sold during the year 1921, including the lots in said Terrace Drive Addition, based on a value of $190,000.00 at date of acquisition, would be $28,100.68.
(6) That if the value at acquisition of the Terrace Drive Addition is de-' termined by the United States Board of Tax Appeals to be $190,000.00, the net taxable income shown in the deficiency letter for the year 1921 shall be decreased $12,565.86.

In view of the foregoing, it is the conclusion of the Board that the net taxable income of petitioner as determined by the Commissioner for the year 1921 should be decreased $12,565.86.

Judgment will be entered on IS days’ notice, voider Rule 50.


text:
    Rudolph Gras, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2340.
    Promulgated January 25, 1927.

      Robert Ash, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    The Commissioner has determined a deficiency in income tax for the calendar year 1922 in the amount of $366.67, which arises from the disallowance of certain alleged traveling expenses.
    FINDINGS OF PACT.
    During the taxable year petitioner was a traveling salesman working entirely on a commission basis. He was on the road thirty weeks during the year, making four round trips from New York to the Pacific Coast and vicinity. On two of the trips he returned by way of Texas and other southern States, ending the business of the trips at Atlanta, Ga., from which point he returned to New York City.
    In his income-tax return for the year 1922 petitioner claimed as a deduction for traveling and entertainment expenses $7,600, and also deducted office expenses at the Grand Hotel in New York in the amount of $250. The Commissioner has allowed as deductions $2,345.62, made up of railroad fare in the amount of $971.48, Pullman fare amounting to $306.04, and excess baggage charges in the amount of $1,068.10. The Commissioner did not allow railroad and Pullman fare on two trips made by petitioner from New York City to Atlanta, Ga., totaling $64, and made no allowance for expenses incident to the renting of hotel and sample rooms, amounts paid for meals while on the road, tips and entertainment expenses, sample room in New York City, etc. The petitioner usually required two rooms in which to display his samples, unless he was able to get an exceptionally large room. It was his practice to occupy one of the rooms so rented as a bed room. The cost of the rooms occupied while on the road averaged $8 per day and petitioner’s meals averaged $4 per day.
   OPINION.

Arundell:

In his petition the taxpayer enumerated expenses claimed by him as follows:

Hotels, sleeping and sample rooms-$1, 500
Entertainment on road- 1, 500
Hauling baggage from the trains- 450
Meals and other personal expenses-'- 1,250
New York sample room- 300
Entertainment customers, New York- 500
Railroad fares- 2, 300
7,800

The evidence presented was not as satisfactory or as definite as is desirable. This was to be expected as no detailed records were kept of the moneys expended. Petitioner was on the road thirty weeks during the year, and we are satisfied from the testimony that he expended at least $2,100 for hotel rooms and meals. There should also be allowed as a deduction the amount of $64, representing railroad and Pullman fare from Atlanta to New York. No testimony was offered in support of the claimed deductions for entertainment on the road amounting to $1,500 and entertainment in New York City amounting to $500, nor was any testimony offered with reference to the renting of sample room in New York or the amounts paid for hauling baggage to and from trains. On the record we reach the conclusion that the Commissioner should allow as deductions expenses in the amount of $2,164, in addition to the amount heretofore allowed by him.

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


text:
    E. F. Cremin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9197.
    Promulgated January 25, 1927.
    1. Tlie Board has no jurisdiction of an overassessment not arising from the allowance in part of a claim in abatement.
    2. A taxpayer making his return on a cash basis may not report as income for 1919 salary received in 1920.
    3. A stockholder in a corporation who receives his proportionate share of the corporate assets through a liquidating dividend in 1920 and returns the same as income for that year, and who subsequently is required to pay his proportionate share of additional income and profits taxes assessed against the corporation, is entitled to have the amount so received and returned by him as income for that year reduced by the amount of the additional tax he was required to pay on behalf of the corporation.
    4. The reasonable allowance for exhaustion, wear and tear of drilling equipment determined.

      R. L. Slaughter, Esq., for the petitioner.

      R. A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination' of deficiencies in income tax in the amount of $4,870.09 for the year 1920, and $1,307.60 for the year 1921, and an overassessment of $385.76 for the year 1919.

      FINDINGS OF FACT.
    The petitioner is an individual, residing at Tulsa, Okla. He is, and has been for about thirty years, engaged in the business of drilling-oil wells.
    During the years 1919 and 1920 the petitioner was a stockholder of the Eastern Torpedo Co., a corporation, and was also an officer of the company at a salary of $10,000 per year. He was not, however, actually paid any salary for the year 1919 until January 1, 1920, at which time he was paid the entire amount of $10,000. The corporation, during the year 1919, had earned sufficient money to pay the petitioner’s salary. The corporation, in its income and profits-tax return for the year 1919, claimed no deduction on account of salaries paid or accrued to its officers and in fact did not actually pay or accrue any such salaries in that year. In the year 1919 the corporation paid the petitioner $4,500, which was due him as salary for the year 1918. In adjusting the tax liability of the corporation for the years 1916 to 1919, inclusive, the Commissioner, in the year 1925, permitted the corporation to rewrite its books upon what is known as the accrual basis, to file amended returns, and to accrue upon its books and deduct from gross income for the year 1919 the amount of $10,000 paid to the petitioner on January 1,1920, as salary for the year 1919.
    In the year 1920 the Eastern Torpedo Co. was dissolved and its assets were distributed to its stockholders, of which the petitioner was one, as liquidating dividends. The corporation did not set up a reserve to take care of additional income and profits taxes that were subsequently, in the year 1925, found to be due for the years 1916 to 1919, inclusive, in the amount of $12,972.86. On the liquidation of the corporation, the petitioner received his pro rata share of the assets, and in the year 1925 he paid, on behalf of the dissolved corporation, his pro rata share, or $3,154.05, of the additional taxes for the years 1916 to 1919, inclusive. The petitioner, in his income-tax return for 1920, included in his gross income the entire amount received by him as a liquidating dividend from the corporation.
    During the years 1919, 1920, and 1921, the petitioner was a member of the partnership of Cremin and Jameson, and during the years 1919 and 1920 he was also a member of the partnership of Cremin and Rockwell. These partnerships were engaged in the business of drilling oil wells and they owned tools and drilling equipment for that purpose. The partnership of Cremin and Rockwell was dissolved in the year 1920, and its drilling equipment, which had been in use for at least three years, was abandoned because it was not considered to have any further useful value. Some of the equipment was new when acquired by Cremin and Rockwell and some of it was second-hand. The equipment belonging to Cremin and Jameson was used about five years and was abandoned in the year 1921 because it was considered to have no further value. The average useful life of the equipment was about five years.
    The petitioner kept his books and filed his income-tax returns for the years 1919 and 1920 on the cash receipts and disbursements basis. Upon audit of the returns for those years, the Commissioner included as income for the year 1919 the amount of $4,500 paid to the petitioner in that year by the Eastern Torpedo Co., as salary for the year 1918, and included in income for the year 1920 the amount of $10,000 paid to the petitioner in that year by the Eastern Torpedo Co. as salary for the year 1919. The Commissioner also allowed only a rate of 10 per cent for depreciation of drilling equipment belonging to the partnerships of Cremin and Rockwell and Cremin and Jameson, of which the petitioner was a member.
   OPINION.

Marquette:

The petitioner alleges that he is entitled to relief in the following respects: (1) That his net income as determined by the Commissioner for the year 1919 should be reduced by the amount of $4,500 paid to him in that year by the Eastern Torpedo Co. as salary for the year 1918. (2) That his income for the year 1920 should be reduced by the amount of $10,000 paid to him in that year by the Eastern Torpedo Co. as salary for the year 1919, and that said amount of $10,000 should be included in his income for 1919. (3) That the amount included in income for the year 1920, as liquidating dividends received from the Eastern Torpedo Co., should be reduced by the amount of income and profits taxes which be subsequently paid on behalf of the company. (4) That the partnerships of Cremin and Rockwell and Cremin and Jameson, of which petitioner was a member, should be permitted to take deductions for depreciation of drilling equipment for the years 1919, 1920, and 1921, computed at.the rate of 25 per cent, and the petitioner’s distributive share of the income of the partnerships for those years adjusted accordingly.

The record herein discloses that the Commissioner has not determined a deficiency in tax against the petitioner for the year 1919, but that, on the contrary, he has determined that there is an over-assessment for that year. There is nothing in the record to indicate that the overassessment arises from the allowance in part of any claim for abatement of any additional assessment. Therefore, 'under the Revenue Act of 1926, we have no jurisdiction of this proceeding in so far as it relates to the petitioner’s tax liability for the year 1919. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The first questión presented, as to the deficiency for the year 1920, is whether or not the amount of $10,000 paid to the petitioner by the Eastern Torpedo Co. on January 1, 1920, under the circumstances set forth in the findings of fact, should be included in his income for that year. The record discloses that in the year 1919 the corporation apparently attempted to keep its books on the cash receipts and disbursements basis, and that the petitioner’s salary for. the year 1919 was neither accrued on the corporation’s books nor paid to him in that year, although, the corporation had ample funds available for that purpose. The corporation was subsequently permitted by the Commissioner to rewrite its books for the year 1919 on the accrual basis and to file an amended return. On the books as rewritten, the petitioner’s salary for the year 1919 was accrued as of that year and was deducted from gross income in the amended return.

Notwithstanding the fact that the corporation was permitted to rewrite its books on the accrual basis and to accrue and deduct from gross income for the year 1919 the salary in question, we are of the opinion that amounts so accrued and deducted constituted income to the petitioner for the year 1920. We would be impelled to the same conclusion even if the corporation’s books had been originally kept on the accrual basis and the petitioner’s salary for the year 1919 accrued on the books in that year. The petitioner was on the cash receipts and disbursements basis and there is nothing in the record to show that the salary paid to him in 1920 was available to or could have been drawn by him in 1919, although the corporation had ample funds from which payment could have been made. The situation here presented is very similar to that in the Appeal of J. M. Edmunds, 1 B. T. A. 998. The facts in that appeal were that the taxpayer was, during the year 1918, a stockholder and employee in the International Planter’s Corporation. Sometime in December, 1918, the directors of the corporation adopted a resolution authorizing the payment of $20,000 to the taxpayer, as additional compensation for services rendered during the years 1917 and 1918. On December 31, 1918, at its offices in New York, the corporation issued its check in the amount of $20,000 to the taxpayer and charged the same to him on its books of account as of that date. At that time the corporation was solvent and had ample funds in the bank for the payment of checks so issued and charged. The taxpayer kept his books on the cash receipts and disbursements basis. He received the check in January, 1919, and in making his income-tax return for 1919 he included the amount of the check in his gross income for that year. Upon audit of the taxpayer’s income-tax returns for 1918 and 1919, the Commissioner held that the check for $20,000 issued to the taxpayer on December 81, 1918, was constructively received by him on that date. Accordingly, the Commissioner deducted the amount of $20,000 from the taxpayer’s gross income for 1919 and increased his gross income for 1918 in the same amount. The taxpayer appealed to this Board and contended that the amount of $20,000 in question was income to him for the year 1919. His contention was sustained. Upon the authority of our decision in that appeal, we hold that the amount of $10,000 paid to the petitioner herein by the Eastern Torpedo Co. on January 1,1920, as salary for the year 1919, was income for the year 1920.

The second question presented is whether or not the petitioner is entitled to reduce the amount included in his income for the year 1920 as liquidating dividends received by him in that year from the Eastern Torpedo Co. by the amount of additional taxes he subsequently paid for that company. The identical question here presented was before the Board in the Appeal of O. B. Barker, 3 B. T. A. 1180. The facts in that appeal were that the taxpayers were stockholders in the Barker-Jennings Hardware Co. The corporation was dissolved in the year 1917 and its assets distributed to the stockholders. Subsequently, in the year 1923, the stockholders paid additional income and profits taxes, which were assessed against the corporation by the Commissioner. The Board, in holding that each stockholder was entitled to set off against the amount received by him in liquidation of the corporation the portion thereof which he was subsequently required to refund by way of payment of taxes of the corporation, said (p. 1186) :

The payment made by Barker in 1923 on account of the corporate taxes was not an obligation incurred or a loss sustained by him in 1023, but was a repayment by him of corporate assets paid to him to which he had no equitable title. It was in the nature of a repayment of money received under a mistake of fact upon which a trust had been impressed and, to the extent to which the amount received was subject to the trust, was not income. Appeal of Carey Van Fleet, 2 B. T. A. 825. The amounts received by him in liquidation of the corporation should be reduced by the amount returned in payment of taxes of the corporation, the amount so returned being set off against the latest distributions received by the taxpayer.

It follows, from what we have said, that the amount heretofore included in the petitioner’s income for the year 1920, as liquidating dividends received from the Eastern Torpedo Co., should be reduced by the amount of income and profits taxes which he was subsequently required to pay on behalf of the company.

With reference to the amount of the allowances for depreciation of oil-well drilling equipment to which the partnerships of Cremin and Rockwell and Cremin and Jameson are entitled for the years 1920 and 1921, we are satisfied from the evidence that tbe equipment in question fiad a useful life of not to exceed 5 years and that the allowances for depreciation thereof should be computed at the rate of 20 per cent. At the hearing it was agreed by the parties to this proceeding that the bases upon which the depreciation should be computed are the costs shown by reports made by revenue agents, which reports were introduced in evidence at the hearing as Commissioner’s Exhibits A and B.

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