author: Love :

text:
    Florence Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10383.
    Promulgated December 12, 1927.

      Wm. M. Williams, Esg., and E. B. Quiggle, Esq., for the petitioner.

      George G. Witter, Esq., and E. O. Algire, Esq., for the respondent.
   OPINION.

Love :

The sole question in this proceeding is whether the amount of $55,992.38, the contract price of the goods which the petitioner alleges were rejected within the fiscal year ended September 30, 1920, should be included in the petitioner’s gross income for that year.

It should be noted at the outset that the total contract price of the goods was $58,023.19, while the goods charged back amounted to $55,992.38. In view of the fact, however, that it is alleged by the petitioner that the amount of $55,992.38 was erroneously included in its taxable income for the year in question and that the respondent in his answer denied he committed error in so doing, we presume that with respect to the difference of $2,030.81, there is no dispute as to those goods or as to the treatment of their selling price. We will confine our inquiry, therefore, to the question as to whether the goods charged back by the petitioner should or should not be included in its closing inventory for the fiscal year 1920.

After entering into the contract for the sale of the goods in question and sometime during the fiscal year 1920, the petitioner in pursuance of its bookkeeping methods, accrued on its books the contract price thereof. However, the petitioner in making its return for the year in question deducted from gross sales the amount of the goods which it alleges were rejected, and returned those goods to inventory. In support of its action in this respect, the petitioner takes the position that where a contract has been entered ipto for the sale of goods on sample during the taxable year and the goods shipped to apply on the contract have been rejected by the vendee and thrown back on the hands of vendor before the close of the taxable year, the vendor, being on the accrual basis, should deduct from gross sales the price of any goods returned. The respondent agrees with this contention but he urges that the goods in question were not rejected and that the petitioner did not consider them as rejected.

Whether the petitioner considered the goods as rejected is not, in our opinion, controlling. The sales agreement clearly indicates that the parties thereto contemplated that the goods might be rejected. Therefore, if, as a matter of fact, the goods in question were rejected prior to the close of the fiscal year, it is clear that they should be included in petitioner’s inventory for the reason that petitioner had only a cause of action against the buyer, the outcome of which was, of course, uncertain and, consequently, not accruable.

By the terms of the sales agreement the buyer had thirty days within which to reject the goods. On September 25, 1920, B. Freeman & Co. wrote to petitioner’s agent, complaining about the quality of the goods and stated:

Unless you are agreeable to getting together on the lines outlined above, in an effort to sift the good from the bad, there is only one position open for us, and that is we must ask you to immediately call for the return of all of the hundred cases of merchandise.

It will also be observed that on December 17, 1920, petitioner was advised by its agent that B. Freeman & Co. declined to accept the goods as good delivery or to pay for them.

Considering the letter of September 25, 1920, in the light of subsequent events, we are of the opinion that by that letter B. Freeman & Co. intended to exercise and did exercise the option to reject the goods in question as provided for in the sales agreement.

The goods in question having been rejected prior to the close of the fiscal year, we conclude that the respondent erred in determining that the amount of $55,992.38 should be included in petitioner’s income for the fiscal year ended September 30, 1920.

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

Considered by TRttssell, Smith, and Littleton.


source: Caselaw Access Project

license: Public Domain

text:
    Logue Brothers & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9931.
    Promulgated December 12, 1927.

      K. M. Parkinson, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

Love :

Section 200 of the Revenue Act of 1918 provides in part:

The term “personal service corporation” means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * • *.

The petitioner contends that it comes within this provision of the statute and that it is entitled to classification as a personal service corporation.

The petitioner alleges that capital, either invested or borrowed, was not a material income-producing factor for the year in question. This allegation was specifically denied by the respondent, the burden, therefore, was on the petitioner in respect of this issue.

The record discloses that the petitioner had an authorized capital stock of $25,000, divided into 500 shares, and that during 1919, 476 shares of stock were outstanding. We are not informed for what the stock was issued. It is further shown that prior to 1919, petitioner had invested part of its surplus and we are not informed as to the amount of such investment, or the amount of income, if any, received in 1919 from such investments. Neither are we informed as to whether the petitioner borrowed money for use in conducting its business during the year in question. Thirty per cent of petitioner’s income came from activities of subagents. See Joseph Emsheimer Insurance Agency, 1 B. T. A. 649.

We are of the opinion, therefore, that the petitioner has failed to prove that it meets the requirements of the statute and, consequently, we approve the respondent’s determination in regard thereto.

Judgment will be entered for the respondent.

Considered by Trussell, Smith, and Littleton.


author: Love:

text:
    North American Service Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Interstate Highways Service Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9654, 9655.
    Promulgated December 12, 1927.

      Hiram B. Radish, G. P. A., for the petitioners.

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

Love:

We do not deem it necessary to enter into an extended discussion of the issue herein presented.

It is an established fact that for personal reasons A. E. Duncan, at the time of the organization of the Interstate Highways Service Co. did not want any stock issued in his name, and on account thereof 191 shares were issued to Mrs. F. I. Brumbaugh, the certificates for all of which were immediately endorsed, assigned, and delivered to Duncan who, it is clear, could cause at any time the reissuance of the shares in his name.

We are of the opinion, therefore, that Duncan exercised complete dominion and control over approximately 43 per cent of the stock of the Interstate Highways Service Co., and we are of the further opinion that by reason of this divergence in interest and control of the stock of the petitioners the Commissioner was correct in denying affiliation thereto.

Judgment will be entered for the respondent.

Considered by Tiutssell, Smith, and Littleton.


author: Geeen :

text:
    Entress Brick Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10006.
    Promulgated December 13, 1927.

      8. Leo Ruslcmder, Esq., for the petitioner.

      J. B. Harlacher, Esq., for the respondent.
   OPINION.

Geeen :

The first issue is as to the residual value of the Atterbury tract after the removal of all of the clay. The respondent adheres to his original valuation of $6,375 and the petitioner contends that after the clay has been removed the tract will be practically worthless. The evidence convinces us that the contention of neither party is correct as to the residual value of the property. Confronted with this situation, we have weighed the evidence — meager and conflicting as it is — and fixed a value of $3,000.

The respondent reduced petitioner’s invested capital during the exhaustion of a certain clay bank, by the amount of $9,533.33, which amount equaled the total of the allowances for depletion theretofore made, instead of by the amount of $5,400 which was the actual cost of the exhausted asset. We assume that the discrepancy between the total of the depletion allowances and the cost results from the fact that the March 1, 1913, value of the depleted asset exceeded the cost. We think the Commissioner’s action in this regard is erroneous. In computing invested capital, this asset was, during its existence, properly included at its cost and there is no reason upon its exhaustion for reducing invested capital by more than this amount. In the case of assets acquired prior to March 1, 1913, depletion for invested capital purposes and depletion for the purpose of computing the annual deduction from income may be two totally different things and should never be confused. We take it that the respondent would not contend, if the depletion allowances were less than cost, that the invested capital should be reduced only by the amount of such depletion allowances. This is but another example of fact that the computation of invested capital may not be made to depend entirely upon the theory of the income-tax statutes.

With reference to the third issue in this proceeding, it would appear that additional stock was issued; a portion, it is now contended, was properly issued for assets which were acquired by the petitioner from two< of its stockholders without compensation. The records of the petitioner corporation clearly indicate that the additional stock was issued for a totally different purpose. Nor are we satisfied that the stockholders in fact contributed property worth $2,300 in addition to that for which stock had been theretofore issued. Under such circumstances we must affirm the Commissioner.

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

Considered by Sternhagen and Arundeel.


author: Sternhagen :

text:
    Edwin Dumble Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 13723.
    Promulgated December 15, 1927.

      M. Jdblow, Esq., for the petitioner.

      A. E. Fast, Esq., for the respondent.
   opinion.

Sternhagen :

The expenditures made by petitioner for work and materials necessary to fit the freehold to its permanent use were not ordinary and necessary expenses of carrying on its trade or business within section 234 (a) (1) of the Revenue Act of 1918 and the Revenue Act of 1921. It may be that some part of the amount claimed was spent for ordinary recurring repairs, but such part is not in evidence and hence the entire amount must fall. The mere fact that a permanent improvement does not immediately cause an increase to be made in the assessed valuation for local property-tax purposes does not justify its treatment as an ordinary and necessary expense. The respondent allowed depreciation after treating the expenditure as capital. This is sustained both for 1920 and 1921. The same is true of the expenditures upon the leasehold property, and respondent is sustained.

The petitioner claims for 1921 a deduction in respect of bad debts which is not clear enough to act upon. From the evidence it is impossible to find the amount of deduction properly allowable to petitioner or whether any part thereof has been disallowed by respondent. Because of this uncertainty the respondent is sustained.

Judgment will be entered for the respondent.

Considered by Lansdon, Green, and Aeundell.


author: Akundell :

text:
    Benson Timber Co. and Benson Lumber Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 16311, 19519.
    Promulgated December 15, 1927.

      A. 0. Sham, Esq., for the petitioners.

      George G. Witter, Esq., for the respondent.
   OPINION.

Akundell :

We have no hesitancy in reaching the conclusion that the purchase from Benson in the first instance was by Lynch on behalf of himself and his colleagues, Hanna, and Evenson, and was not a direct purchase by the Benson Timber Co. Both the option and the contract of sale ran to Lynch, and at the time of the exercise of the option and the execution of the contract of sale it had not even been definitely determined whether or not a corporation would be organized. Its subsequent organization and the transfer to it of the property for stock can not be related back so as to treat the transaction as one occurring directly between Benson and the Benson Timber Co.. In so holding the Commissioner erred.

With the preliminary question disposed of, our whole problem is in determining the value of the property paid in to the corporation for stock in June, 1911, and its value on March 1; 1913, for the purpose of determining the proper basis for allowing the Benson Timber Co. its depletion and depreciation granted by the statute. The value of the plant and equipment as of June, 1911, and as of March 1, 1913, has been agreed to in the amount found in the findings of fact and we think the evidence amply supports a value of $25,000 for the West-port mill site on these dates. Our real problem is to determine the value of the timber and of the land in the years 1911 and 1913. The record from which our conclusion has been drawn is voluminous and contains the testimony of men recognized as thoroughly qualified to place a value on the growing timber of the Northwest on the dates with which we are concerned.

There is a practical unanimity of opinion that the timber on this land, marketable in the Columbia Liver market, was in June, 1911, worth $3 per thousand feet and that the same timber at March 1, 1913, was worth $3.50 per thousand feet. If we are to give any credence whatever to the evidence, we must accept these values as established. Benson, who undoubtedly knew the timber better than anyone else, and who since 1911 has had no financial interest in the enterprise, was unequivocal in his testimony that the value in June, 1911, was $3 per thousand, and on March 1, 1913, $3.50 per thousand. The parties have stipulated the amount of timber on the land in 1911 and on March 1,1913, and it would seem at first blush that the matter of determining the value would now be a mere mathematical calculation. The difficulty, however, arises from the fact that the persons testifying to values had not themselves cruised the timber and the stipulation as to the quantity of timber goes rather to the quantity on which depletion should be allowed and does not definitely state that the quantity so stipulated is merchantable timber in the Columbia River market. The difficulty is made apparent from the testimony of Benson in which he gives as his opinion that the value in June, 1911, was $3 per thousand, but in making the sale he accepted the quantity of timber on the land as 700,000,000 feet. We have found, however, from the stipulated facts that there were 805,000,000 feet. The actual cutting experience, both prior to the sale of the timber by Benson and subsequent thereto, showed an overrun of some 15 per cent over the estimate on which Benson dealt and this quantity was corroborated by the check cruise made by Conyers for Lynch during the option period. It was made possible undoubtedly by the greater utilization incident to the shipment of the timber to the San Diego mill and to the fact that with the passage of time timber measuring less at the stump found an increasing market. Most of the witnesses who testified to the value of $3 and $3.50 a thousand feet of timber stated that such values were to be applied to the quantity of timber considered merchantable in the Columbia River market. From this it appears that the method of determining the value of a timber tract adopted by owners or purchasers of standing timber was to use a certain rate or value per thousand feet of timber and apply such rate to certain grades and sizes of timber in the tract, and thus arrive at a figure which represented the value of all of the timber in the tract. Since this method is used by the witnesses it is necessary to make a correction to the quantities of timber admitted to be on the property in 1911 to which these values apply.

Witness Evenson stated that from 5 to 10 per cent of the timber shipped from the property would be considered unmerchantable in the Columbia River market. It is also admitted by stipulation that a part of the 15 per cent overrun was due to the shipment of timber considered unmerchantable in the Columbia River market. In view of this testimony we believe that the quantities of timber of 805,330,571 feet in 1911 and 714,457,000 feet in 1913 should be reduced by 7y% per cent, the mean between the estimate of 5 per cent and 10 per cent, for the purpose of applying the $3 and $3.50 values, respectively, in arriving at the total values of the timber. This results in a value of timber in 1911 of $2,234,792.61 and in 1913 of $2,313,043.54. The unit rates based on the total quantities of timber on the property would be, in 1911, $2,775 a thousand and in 1913, $3.2375 a thousand.

The values ascribed to cut-over lands by the witnesses ranged from $8 to $15 an acre, and lands under timber were valued from practically nothing to $15 an acre. After a careful review of all of this testimony we are of the opinion that at June, 1911, and at March 1, 1913, the cut-over land other than the mill site, which has been valued separately, was worth $10 an acre and the land under timber was worth $6 an acre.

The value of the Benson Timber Co.’s property in 1911 and 1913 was as follows:

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

Considered by LaNsdoN, SterNhageN, and Green.


text:
    Lockport Paper Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4872.
    Promulgated December 17, 1927.

      Joseph A. Albrecht, Esq., and Franh J. Maguire, Esq., for the petitioner.

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

Love:

The evidence is clear and uncontroverted that the Commissioner reduced by the aggregate amount of $83,519.51 the depreciation originally claimed by the petitioner in the years 1909 to 1916, inclusive, and that this sum was added to income and taxes assessed thereon. The petitioner’s claim is, that it should be restored to surplus and invested capital thereby increased in the years now under consideration.

Upon the facts thus far stated, that contention appears to be sound. The respondent, however, alleges in his supplemental answer that the total depreciated value of petitioner’s property was not in excess of the book value on January 1, of each of the years here under consideration, respectively, and that the excessive depreciation taken in the years from 1909 to 1916, was less than the depreciation sustained and not written off prior to 1909. The petitioner contends that these are affirmative defenses, the burden of proving which is on the respondent.

It is unnecessary to pass upon this claim of petitioner. The evidence offered by petitioner in depositions shows that prior to 1909 the depreciation of its property was made good by charging renewals and certain additions and betterments to expenses. This evidence is sufficient to satisfy us that the cost of such renewals, and additions and betterments, was at least equal to the depreciation that occurred in that period.

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

Considered by Teussell, Smith, and LittletoN.


author: Lansdon :

text:
    C. C. Ogilvie, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17769.
    Promulgated December 17, 1927.

      II. D. Minor, Esq., for the petitioner.

      W. Fra/nk Gibbs, Esq., for the respondent.
   OPINION.

Lansdon :

Section 1211 of the Revenue Act of 1926 is as follows:

Seo. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

If petitioner received the salary the taxation of which is here involved as “ compensation for personal services ” either as an officer or as an employee of the State of Tennessee, any taxes imposed by the Revenue Acts of 1921 or 1924 are abated under the provisions of this section. The only questions before us for decision are,

(1) Were the payments of salary herein received by petitioner “ for personal services as an officer ” of the State of Tennessee?, and

(2) Were they received “ for personal services as an employee ” offthe State?

Petitioner alleges that he is an officer of the State of Tennessee. Each’ State in the Federal Union determines, for itself, the qualifications of its officers. Tennessee, among other qualifications, has declared in Article 10 of its Constitution, adopted in 1870, at Section 1:

Every person who shall be chosen or appointed to any office of trust or profit under this constitution, or any law made in pursuance thereof, shall, before entering on the duties thereof, take an oath to support the constitution of this state, and of the United States, and an oath of office. Shannon, 1916.

Special oaths of office are prescribed by law for clerks of court and their deputies, constables, coroners, county entry takers, county registers, county standard keepers and sealers of weights and measures, county surveyors and deputies, county trustees, judges, justices of the peace, notaries public, public administrators, public guardians, and sheriffs. Deputies are required to take the same oaths as their principals.

Neither the petitioner nor the commissioners, under whose appointment he holds, nor any one of them, has taken any oath to support the constitution of the State of Tennessee, or the United States of America, nor has any one of them taken an oath of office as such director or commissioner. This is indicative of a belief on their part and, we think, on the part of the chief executive and chief law enforcement officer of the State, that they have not been “ chosen or appointed to any office of trust or profit under the state constitution, or any law made in pursuance thereof.” We can not presume, or even suppose, that they have been holding such offices through a period of more than 20 years in violation of the constitution and laws of the State.

There are other reasons, however, more convincing than the mere fact that for a score of years they have not taken, or been required to take the oaths enjoined by the state constitution upon all its appointed or otherwise chosen officers. All state offices are created either by its fundamental law or some statutory enactment made in accordance with its requirements or authorization for the performance of some state function. The office of Commissioner of Goodwyn Institute was created by the testator under the will. The will, having been accepted by the State and made a part of its statutory law, must be followed. But, in following it, the State was neither creating new offices nor appointing new state officers. Nor was it delegating any part of its authority to agents, for it had no authority in this regard save and alone to reject the proffered trusteeship or to take and perform the action directed in the will as there directed. Having accepted either in part or in full and no more, it must perform the duties specified in the will and no more. It had no discretionary duties under the will. It must accept or reject; and, having accepted, it must either perform as required by the will of the decedent or refuse to perform. Its duties were purely fiduciary.

This practically disposes of the second question. There is, however, a further consideration which we deem important. While the legal title to the land and other property of the decedent passed, under the will and the deed, to the State, it was only the naked legal title. The will provides that “ the title to the lot purchased and all other property shall be in the name of the State for the purposes of this trust solely.” The equitable title passed to and remains in the cestuis que trust. Not one cent of the funds bestowed has ever gone into the state treasury, nor have any of the expenses incident to the trust been paid by appropriation from the treasury, nor can they be. The will provides that “ all of the rents, profits, and income derived [from the trust] shall be faithfully used and applied together with any part of this legacy not used in purchasing or building (after payment of repairs, expenses, insurance et cetera) to pay lecturers, and the purchase of books, charts, maps, and apparatus.” Petitioner is an employee of the trust. His employment is not a function of the sovereign State of' Tennessee, nor is he an employee of the State.

Judgment wiU be entered for the respondent.

Considered by Sternhagen, AruNdell, and Green.


author: Littleton :

text:
    J. E. Murphy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7137, 26472.
    Promulgated December 17, 1927.

      B. J. O'Connor, Esq., for the petitioner.

      Donald D. Shepard, Esq., for the respondent.
   OPINION.

Littleton :

Petitioner had been the owner of the land and the oil and gas rights for more than two years prior to the execution and delivery of the leases and deeds, and is, therefore, entitled to have his income taxed under section 206 of the Revenue Act of 1921 provided it was gain from the sale of “ capital assets ” as therein defined.

The oil and gas leases are similar to those involved in Henry L. Berg et al., 6 B. T. A. 1287. Upon decision of the Board in that proceeding the action of respondent in refusing to tax income derived from the leases under section 206 is approved. To the same effect see John T. Burkett, 7 B. T. A. 580, and D. R. McDonald, 7 B. T. A. 1078; Rosenberger v. MoGaughn, 20 Fed. (2d) 139.

In the Berg case, supra, the Board left open the question whether gain from an outright sale of oil and gas underlying land owned for more than two years is “ capital gain ” as that term is defined by section 206. By each warranty deed petitioner sold and conveyed subject to a prior oil and gas lease, an undivided interest in the oil and gas underlying the tract described. Since each conveyance was subject to a prior oil and gas lease, the immediate effect of such conveyance was to assign an interest in the royalty, but it is clear that this right grew out of the absolute sale and conveyance of an undivided interest in the oil and gas. The question reserved in the Berg case, supra, is presented here.

Petitioner contends that since he had owned the land under which the oil and gas laid for more than two years prior to each conveyance, he was the owner of such minerals and, therefore, possessed at the date of sale a capital asset. On the other hand, respondent asserts that oil and gas, being of a fugitive nature, are, until reduced to possession at the surface, incapable of private ownership, and following this line of thought he argues that petitioner could not acquire and hold for two years that which no private individual could own.

It is obvious that respondent’s contention if carried to its logical conclusion would result in the establishment of the rule that oil and gas in place are incapable of private ownership and therefore belong to the public at large. Before discussing this question the legal consequences resulting from the application of such a rule should be stated.

Suppose the petitioner had purchased a farm on which oil was subsequently discovered and after such discovery, sold his land and oil rights for a vastly larger amount than he had originally paid for the land. Could it be seriously contended that, since by far the larger portion of the purchase price was attributable to the oil, such price should be divided into two parts and the vendor deprived of the benefit of section 206 to the extent of that portion of the purchase price allocable to the oil? It is obvious that in such case the moving cause for the sale would be the oil and not the land. Assume that the owner should sell the surface to one person and the oil to another. Would there be any difference in the legal aspects of the two cases ? What would result if such owner should sell the oil and reserve the land? The last mentioned question is the one involved in this proceeding and the solution thereof depends upon a determination as to the rights of an owner in fee to oil and gas beneath his land. These rights were discussed at length in Ohio Oil Co. v. Indiana (No. 1), 177 U. S. 190. The issue involved in this case is thus stated by the court:

The assignments of error all in substance are resolvable into one proposition ; which is, that the enforcement of the provisions of the Indiana statute as against the plaintiff in error, constituted a taking of private property without adequate compensation, and therefore amounted to a denial of due process of law in violation of the Fourteenth Amendment. * * *

The statute involved in effect forbade the waste of gas and imposed penalties for its violation. The court, after pointing out that to a certain extent there was an analogy between oil and gas and animals ferae natwrae, but that such analogy was subject to certain limitations, said:

* * * In things ferae naturae all are endowed with the power of seeking to reduce a portion of the public property to the domain of private ownership by reducing them to possession. In the case of natural gas and oil no such rights exists in the public. -It is vested only in the owners in fee of the surface of the earth within the area of the gas field. This difference points at once to the distinction between the power which the lawmaker may exercise as to the two. In the one, as the public are the owners, every one may be absolutely prevented from seeking to reduce to possession. No divesting of private property, under such a condition, can be conceived because the public are the owners, and the enacting by the State of a law as to the public ownership is but the discharge of the governmental trust resting in the State as to property of that character. Geer v. Connecticut, 161 U. S. 519. On the other hand, as to gas and oil, the surface proprietors within the gas field all have the right to reduce to possession the gas and oil beneath. They could, not he absolutely deprived of this right which belongs to them loithout a taking of private property. But there is a co-equal right in them all to take from a common source of supply, the two substances which in the nature of things are united, though separate. It follows from the essence of their right and from the situation of the things, as to which it can be exerted, that the use by one of his power to speak to convert a part of the common fund to actual possession may result in an undue proportion being attributed to one of the possessors of the right, to the detriment of the others, or by waste by one or more, to the annihilation of the rights of the remainder. Hence it is that the legislative power, from the peculiar nature of the right and the objects upon which it is to be exerted, can be manifested for the purpose of protecting all the collective owners, by securing a just distribution, to arise from the enjoyment by them, of their privilege to reduce to possession, and to reach the like end by preventing waste. This necessarily implied legislative authority is borne out by the analogy suggested by things ferae naturae, which it is unquestioned the legislature has the authority to forbid all from taking, in order to protect them from undue destruction, so that the right of the common owners, the public, to reduce to possession may be ultimately efficaciously enjoyed. Viewed, then, as a statute to protect or to prevent the waste of the common property of the surface ovmers, the law of the State of Indiana which is here attacked because it is asserted that it divested private property without due compensation, in substance, is a statute protecting private property and preventing it from being taken by one of the common owners without regard to the enjoyment of the others. Indeed, the entire argument, upon which the attack on the statute must depend, involves a dilemma, which is this: If the right of the collective owners of the surface to take from the common fund and thus reduce a portion of it to possession, does not create a property interest in the common fund, then the statute does not provide for the taking of private property without compensation. If, on the other hand, there be, as a consequence of the right of the surface owners to reduce to possession, a right of property in them, in and to the substances contained in the common reservoir of supply, then as a necessary result of the right of property, its indivisible quality and the peculiar position of the things to which it relates, there must arise the legislative power to protect the right of property from destruction. To illustrate by another form of statement, the argument is this: There is property in the surface owners in the gas and oil held in the natural reservoir. Their right to take cannot be regulated without devesting them of their property without adequate compensation, in violation of the Fourteenth Amendment, and this, although it be that if regulation cannot be exerted one property owner may deprive all the others of their rights, since his act in so doing will be damnum absque injuria. This is but to say that one common owner may devest all others of their rights without wrongdoing, but the lawmaking power cannot protect all the owners in their enjoyment without violating the Constitution of the United States. * * * (Italics ours.)

This case was followed in Lindsley v. Natural Carbonic Gas Co., 220 U. S. 61, involving a New York statute; in Oklahoma v. Kansas Natural Gas Co., 221 U. S. 229, involving an Oklahoma statute, and in Walls v. Midland Garbon Co., 254 U. S. 300, involving a Wyoming statute. The court in the Lindsley case based its opinion on the rule laid down in the Ohio Oil Co. case, and added, “ But were the question an open one we should still solve it in the same way.” From these cases the following rules may be deduced: The right to reduce to possession gas and oil underneath one’s land is a property right protected by the Fourteenth Amendment. Oil and. gas do not belong to the state but constitute the common property of all owners of the soil that lies above the oil and gas deposit. This common ownership is subject to the right of individual ownership, when the oil or gas is reduced to possession by any one of the common owners. Such common ownership is the private property of the owners of the soil and as such may be protected by statute.

All the property rights above enumerated had been acquired and held by petitioner for more than two years prior to the date of each conveyance. Under the facts the Board is of the opinion that the oil and gas conveyed by petitioner to his grantee were “capital assets,” as defined in section 206. To hold otherwise would be to give to a relief statute a narrow construction which would do violence to the intention of Congress as expressed both in the words of the section and the report of the Committee on Yfays and Means of the Blouse of Representatives. See Henry L. Berg et al, supra.

Petitioner is entitled to have so much of his income as resulted from a gain derived from sales of oil, gas and other minerals, taxed under the provisions of section 206.

Reviewed by the Board.

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


author: Littleton:

text:
    Trustees for Ohio & Big Sandy Coal Co., United Thacker Coal Co., and Federal Gas, Oil & Coal Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7888.
    Promulgated December 17, 1927.

      Lyle T. Alverson, Esq., and Wayne B. Johnson, Esq., for the petitioners.

      A. E. Fast, Esq., for the respondent.
   OPINION.

Littleton:

Sections 322 and 323 of the TJ. S. Revised Statutes, section 1301(a) of the Revenue Act of 1918, and section 1 of the Urgent Deficiency Appropriation Act, October 6, 1911, 40 Stat. 348, provide for the appointment of deputy commissioners and an assistant to the Commissioner of Internal Revenue. These provide that the deputy commissioner shall act as Commissioner of Internal Revenue in case of the absence of that officer. Like duties were prescribed for the assistant to the Commissioner. Section 1 of the Act of October 6, 1917, 40 Stat. 348, provides that—

The Commissioner of Internal Revenue is authorized to assign to Deputy Commissioners such duties as he may prescribe, and the Secretary of the Treasury may designate any one of them to act as Commissioner of Internal Revenue during the Commissioner’s absence.

Nothing appears in the record of this proceeding to indicate that the placing of the signature of the Commissioner of Internal Revenue approving .the consents extending the statute of limitation was not a valid act. See Wilcox v. Jackson, 13 Peters 498; Chicago, Milwaukee & St. Paul Railway Co. of Idaho v. United States, 244 U. S. 351; Commonwealth v. Slifer, 25 Pa. St. 23; 64 Am. Dec. 630; Hartwell v. Root, 19 Johns. (N. Y.) 345.

The consents were delivered to the Commissioner and they have at all times since remained in his official files and the evidence shows that from December 28, 1923, to the date of the mailing of the deficiency notices the Commissioner and the petitioners have recognized that valid consents were on file with the Commissioner. Conferences between the petitioners and the Commissioner concerning the petitioners’ tax liability for the taxable period involved were held from time to time and apparently both relied upon the fact that the written consents were effective. The several letters very clearly show that the Commissioner’s office considered the consents as valid. This fact was stated in every letter that was mailed to the petitioners including the Commissioner’s final notice to the petitioners of his determination under the statute.

The Commissioner is presumed to discharge his official duties in a proper and legal manner and such presumption is not overcome by the mere showing that the signature of the Commissioner upon the consent is not in his personal handwriting. It is a general principle to presume that public officials act correctly, in accordance with the law and their instructions, until the contrary appears. Griffin v. American Gold Mining Co., 136 Fed. 69, 73, citing Ross v. Reed, 1 Wheat. 482, 484, and Gonzales v. Ross, 120 U. S. 605, 622.

In Erhardt v. Ballin, 150 Fed. 529, the Circuit Court of Appeals said:

In order to overcome the presumption that a collector of customs in selecting a merchant appraiser of imported merchandise under Section 2930, Rev. St., made a proper appointment, it is not enough to create a mere uncertainty. It must be clearly shown that the appointee did not meet the statutory requirement of being “familiar with the character and value of the goods in question.”

In Nofire v. United States, 164 U. S. 657, cited and approved in United States v. Royer, 268 U. S. 398, the court said:

The fact that an official marriage license was issued carries with it a presumption that all statutory prerequisites thereto had been complied with. This is the general rule in respect to official action, and one who claims that any such prerequisite did not exist must affirmatively show the fact. Bank of the United States v. Dandridge, 12 Wheat. 64, 70; Rankin v. Hoyt, 4 How. 327; Butler v. Maples, 9 Wall. 766; Weyauwega v. Ayling, 99 U. S. 112; Gonzales v. Ross, 120 U. S. 605; Callaghan v. Myers, 128 U. S. 617; Keyser v. Hitz, 133 U. S. 138; Know County v. Ninth National Bank, 147 U. S. 91, 97.

In Rankin v. Hoyt, 4 How. 335, the court said:

In saying that the appraisers had no right to act without the previous request of the collector, and that no such request appears in the evidence, nothing is stated beyond the truth. But, in the absence of testimony to the contrary, the legal presumption is, that the appraisers and collector both did their duty, he requesting their action, as by law he might, and they complying.
Besides this, it is conceded that he adopted their doings and such a subsequent ratification of them is undoubtedly tantamount to having requested them.

Even if it could be assumed, from the mere showing that the consents were not personally signed by the Commissioner of Internal Revenue, that they did not then become effective so as to suspend the running of the statute, the record is sufficient to show that the Commissioner’s office considered the consents valid and that the Commissioner himself, even if he had not done so before, ratified and approved that which had been done when he made his final determination of the deficiencies and mailed notices thereof to the petitioners.

The Board is of the opinion that the claim of the petitioners that the consents were void and of no effect is not well taken.

Petitioners further claim that assessment and collection of any tax from the Ohio Company was barred on July 1, 1921, because of failure of the Commissioner to discover any additional tax within three years after the time the return was due and that assessment and collection of any tax from the Thacker Company was barred on September 1, 1921, for the same reason. There has been no showing that the Commissioner did not discover the understatement of income within three years after the returns were due. Furthermore, the Board has held that section 1106 of the Revenue Act of 1926 is not retroactive and, also, that the taxpayer and the Commissioner may enter into a valid consent for the assessment and collection of a tax after the expiration of the statute of limitation. Joy Floral Co., 7 B. T. A. 800. Section 250(d) of the Revenue Act of 1921 provides that the amount of income, excess-profits, or war-profits taxes due under any return made “ under prior income, excess-profits, or war-profits tax Acts, or under section 38 * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax.” The evidence shows that consents for a later determination and assessment of the tax were entered into before the expiration of the five-year period prescribed in the Revenue Act of 1921. The claim of the petitioners that the tax is barred upon this ground is denied.

It is next argued on behalf of the petitioner that in any event the right of the Commissioner to make assessment of the 1917 tax terminated under the several consents on March 15, 1925. The first joint consent of January 16, 1923, extended the period for assessment and collection until April 1, 1924. The second consents of January 8, 1924, extended the period for assessment and collection to March 15, 1925. Thereafter, on November 24, 1924, the Ohio Company and the Thacker Company entered into consents with the Commissioner for a further extension of the statutory period of limitation. These consents providéd that—

This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of tax may be made for the year or years mentioned or the statutory period of limitations as extended by section 277 (b) of the Revenue Act of 1924 or by any waivers already on file with the Bureau.

The Commissioner’s determinations were made in August and September, 1925. The appeal was filed with this Board on October 7, 1925. All before the expiration of the period agreed upon.

We think these consents operate to extend the period within which the Commissioner might make his determination in respect of the tax for 1917 to March 15, 1926, a period of one year after the expiration of the time agreed upon in the consents then on file with the Commissioner.

Finally, it is insisted on behalf of the petitioners that even though the consents of November 24, 1924, served to extend the limitation to March 15, 1926, there is no provision in the Revenue Act of 1926 that would operate to further extend the period beyond that date notwithstanding on March 15, 1926, a proper and valid appeal was and has since been pending before the Board. The substance of the petitioners’ claim is that section 277 (b) of the Revenue Act of 1926 providing for the suspension of the limitation period, does not apply to a case in which a deficiency notice was mailed prior to the enactment of the Revenue Act of 1926.

Section 283 (b) of the Revenue Act of 1926 provides:

If before the enactment of this Act any person has appealed to the Board of Tax Appeals under subdivision (a) of section 274 of the 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 provided in subdivision (a) of this section, * * *.

Section 283(a) of the 1926 Act provides that if after the enactment of the Act the Commissioner makes a determination under any prior revenue act, he is authorized to send by registered mail to the person liable for such tax notice of the amount proposed to be assessed, which notice shall be considered a notice under subdivision (a) of section 274 of this Act, and that “ in the case of any such determination the amount * * * shall, except as provided in subdivision (d) of this section, be computed as if this Act had not been enacted, * *

Section 274(a) of the 1926 Act provides for the mailing of the deficiency letter. It further provides that no assessment, except in jeopardy cases, shall be made until the decision of the Board has become final in all cases where appeals have been taken to the Board.

Section 277 (b) of the 1926 Act provides that the statute of limitations “ shall (after the mailing of a notice under subdivision (a) of section 274) be suspended for the period during which the Commissioner is prohibited from making the assessment, * *

Considering together the several provisions of the 1926 Act, the Board is of the opinion that since an appeal was pending at the time of the enactment of the 1926 Act, and the limitation period as extended by waivers had not then expired, the limitation period is suspended during the pendency of the cáse before the Board whose decision had been asked prior to the enactment of the 1926 Act and the right to have which was preserved and secured to both parties by section 283(b) of the Act, which specifically confers jurisdiction on the Board of such appeals. In the opinion of the Board, “ the mailing of a notice under subdivision (a) of section 274 ” of the 1926 Act is not a condition precedent to the continued suspension of the running of the statutory period of limitation or the period of limitation specified in the mutual consent of the parties, where a deficiency notice has been mailed (as in the instant case) and an appeal has been taken therefrom and is pending before the Board at the time of the enactment of the 1926 Act.

It is the opinion of the Board that these provisions of the 1926 Act operate to continue the suspension of the limitation period until after the decision of the Board has become final.

As indicating what Congress intended, it is stated in the report of the Conference Committee on the Revenue Act of 1926 at page 48, as follows:

Section 277(b) of the bill as agreed to in conference provides for the suspension of the running of the statute of limitation on assessments and collections during the time when the hands of the Commissioner are tied, not only in the cases of tax imposed by this title, but also (by reason of the provisions of section 283) in the cases of taxes under prior Acts, whether a deficiency letter under the 1924 Act has been sent out or not.

As further indicated on the same page of the conference report, section 283(1) of the 1926 Act was an additional provision relating to the suspension of the limitation period.

The deficiencies are not barred and the plea of the statute of limitation is denied.

The proceeding will be restored to the calendar for hearing on the merits in due course.

Reviewed by the Board.

Order will be entered accordingly.


text:
    Appeal of R. M. Waggoner. Appeal of Ada Waggoner.
    Docket Nos. 5880, 5881.
    Promulgated December 17, 1927.

      Harry 0. Weeks, Esq., for the petitioners.

      Bruce A. Lowe, Esq., for the Commissioner.
   Littleton:

Reargument was had in those proceedings upon motion of the petitioners subsequent to the publication of the Board’s findings of fact, opinion, and interlocutory decision on January 26, 1927.

Petitioners contend first that the Board should set aside its conclusion as to the Waggoner-Greene-Noble & Co. transaction relating to a three-eighths oil and gas interest as a completed sale in 1919, giving rise to the receipt of a total taxable profit of $222,607.15 in that year, and, secondly, that the evidence in the record is not sufficient to support the conclusion that petitioners’ depletion deduction should he computed upon 280,523.71 barrels of oil as affirmatively claimed by the Commissioner in his answer instead of 435,429.10 barrels as set forth in the deficiency notices.

Concerning the Noble transaction, the facts showed that the contract of sale dated November 26, 1919, provided that Waggoner and Greene, the sellers, were given until December 11,1919, to furnish an abstract of title to the property; that Noble & Co., purchaser, was given one week or until December 18 within which to examine the abstract and point out any defects therein and that the sellers should have an additional two weeks, or until January 1,1920, within which to cure any defects which might be pointed out by the purchaser. A partial abstract was furnished shortly prior to December 20, 1919. This was returned by counsel for Noble & Co., with request that the same be brought down to November 26, 1919. Completed abstract was furnished on or about December 27,1919. This abstract showed good title in the sellers. The Board concluded that the contract of sale did not give Noble & Co. one week from December 27, 1919, within which to examine the abstract and that inasmuch as the evidence justified the conclusion that the abstract and title furnished on that date showed good and merchantable title, the sale became completed.

Upon further consideration of the record in the case and argument of counsel, the Board is of the opinion that it erred in holding that the sale was completed and that the profit was realized in the year 1919. Since this decision the Board has had occasion to consider a similar question as to whether income was derived in 1916 or 1917 in the proceeding of North Texas Lumber Co., 7 B. T. A. 1193. In that proceeding the Board said, “ We do not question that equitable title passed to the purchaser at the time the option was exercised and a contract to sell came into effect, so that any loss or damage to the property would have been the loss or damage of the purchaser. We do not understand, however, that because equitable title may have vested, the vendor then has a legal right to recover the purchase price, which is the principal question here involved since the books of the petitioner were kept upon an accrual basis.”

Waggoner and Greene employed the cash receipts and disbursements method of accounting. Further the Board said “ Ordinarily one who has entered into a contract for the sale of property, whether real or personal, has no right to recover the purchase price until the delivery of the property sold. In the case of real property a right to recover by way of an action for specific performance may exist when a proper tender has been made. Here there was no delivery of the property to the purchaser either by giving it possession of the property, by delivery of a deed, or otherwise, until January 5, 1917, and no tender or delivery, and it was not until 1917 that any right to demand or receive payment of the purchase price arose.” While in this proceeding the purchaser took possession of the property when the contract of sale was made on November 26, 1919, the deed and the purchase price given were placed in escrow, and Waggoner and Greene had no right to demand it until the purchaser had examined the abstract furnished by them. This did not take place until the year 1920. See, also, Davis v. Fant (Tex. Civ. App.) 93 S. W. 193; Leonard v. King (Tex. Civ. App.) 164 S. W. 1110; Jones v. Taylor 7 Tex. 240; Roos v. Thigpen (Tex. Civ. App.) 140 S. W. 1180; Duniven v. Turner (Tex. Civ. App.) 259 S. W. 267; Mathews v. Caldwell (Tex. Civ. App.) 258 S. W. 810.

Upon the second point the record has again been examined in the light of the reargument of counsel and the Board is of the opinion that its conclusion as to the basis for the depletion allowance to the petitioners is correct and that the finding of this allowance should be computed upon 280,523.71 barrels as amply supported by the evidence.

Petitioners’ motion for a modification of the opinion promulgated January 26, 1926, as to the Waggoner-Greene-Noble & Co. transaction is granted and it is held that no profit from this transaction should be included in income for the year 1919. The motion is denied as to the depletion question.

The parties are directed to file a recomputation of the deficiency for 1919 in accordance herewith.

Reviewed by the Board.

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


author: Littletow :

text:
    Harry A. Moody, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29.
    Promulgated December 17, 1927.

      Martin A. Soheneh, Esq., and Edward Cornell, Esq., for the petitioner.

      A. H. Mwrray, Esq., for the respondent.
   OPINTOJNT.

Littletow :

The petitioner insists that dividends declared by the F. W. Woolworth Co. on January 10, February 14, and April 11, 1917, and received by him on March 1, April 1, and June 1, respectively, were distributions made by the company of the surplus and undivided profits for 1916, and should be taxed at the rates imposed by the Revenue Act of 1916. He further claims that the distributions were made by the company on the dates on which the dividends were declared and not on the dates of payment. He therefore insists that by adopting the Commissioner’s method of prorating the earnings for the entire year to the respective dates of declaration the current earnings were not sufficient to cover the entire dividends.

The Commissioner held that the dividends were distributed within the meaning of the statute on the date of payment and, by prorating the net earnings for the entire year 1917 to the dates of payment, he determined that there were more than sufficient earnings out of which the dividends were paid. He held further that the dividends were distributed out of earnings for the year 1917 and taxable at the rates imposed by that Act.

The petitioner has not submitted sufficient evidence to convince the Board that the company did not have sufficient current profits for the year 1917 on the dates when the dividends were paid out of which to pay them. The company made no attempt to determine its current earnings on the several dates and nothing has been proved in this proceeding which would indicate what the profits for 1917 on these dates were or that the earnings available were less than the amount determined by the Commissioner. In the absence of proof of a better method of determining the available current profits the Commissioner’s method must be accepted by the Board. Peter W. Rouss, 4 B. T. A. 516. Gardner-Governor Co., 5 B. T. A. 70. The case of Mason v. Routzahn, 275 U. S. 175, decided November 21, 1927, involved the determination by the Commissioner that dividends, some of which were declared in 1916 and some in 1917 but all paid in 1917, were taxable at the rates imposed by the Revenue Act of 1917 for the reason that by prorating the net earnings for the entire year 1917, to the dates of payments of the dividends sufficient current earnings were found to have been available for payment. It was admitted by all concerned in that case that the B. F. Goodrich Co., the corporation paying the dividends, had earned no profits in 1917 prior to the payment of the dividends there in question. The Supreme Court said:

The District Court held that, despite the fact that the profits for 1917 were in excess of all dividends paid in that year, the distribution must be deemed to have been made out of profits accumulated in 1916; and entered judgment for the full amount. Thereafter, and before this case was heard in the Court of Appeals, Edwards v. Douglas was decided by this Court. The Court of Appeals recognized that Edwards v. Douglas differed in its facts from the case at bar. But it concluded that, under the reasoning of the opinion in that case, the taxing year should be treated as a unit; and it believed that it was required to hold that, if the net profits of a whole year prove sufficient to meet all the dividends paid within it, those must be deemed to have been paid from such profits, even if it affirmatively appears that none had been earned before the date when the latest dividend was paid.
The Solicitor General concedes that Edwards v. Douglas does not so decide; that the case is authority only for the proposition that a pro rata share of the entire year’s earnings may be treated as approximating the actual earnings for the fraction of the year prior to the payment of the dividend in the absence of circumstances showing that there were no earnings actually accumulated during the fractional period; that the amount actually available for payment of dividends out of the current year’s earnings prior to the date of payment may always be shown; that such had been the practice of the Treasury Department from the time the Revenue Act of 1917 took effect until the date of the Court of Appeals’ decision; and that this rule was embodied in its regulations.
We see no good reason for disturbing the long settled practice of the Treasury Department. Its contemporary interpretation is consistent with the language of the Act; and its practice was, in substance, embodied in the Revenue Act of 1918, February 24, 1919, e. 18, § 201 (e), 40 Stat. 1057, 1060. We conclude that the Circuit Court of Appeals placed an erroneous construction on § 31 (b).
Since two of the dividends paid in 1917 were declared in 3916, it becomes necessary for us to consider whether these also are to be deemed distributions made in 1917, as it is only to such that the section applies. It declares that the dividend is income of the shareholders in the year in which it is “ received.” We think it clear that, for this purpose, the date of payment, not the date of the declaration of the dividend, is the date of distribution; and as all the dividends here in question were paid in 1917, the provision as to the rate is applicable to all. As there were no earnings in 1917, prior to the dates of the payments, and as there were confessedly ample accumulated earnings of 1916 prior to the declaration of the several dividends, we have no occasion to consider other questions which were argued. The judgment of the Circuit Court of Appeals is reversed; that of the District Court is affirmed.

In view of the decision of the court in Mason v. Routzahn, supra, and the evidence in this proceeding, the Commissioner’s determination in respect of the dividends paid by F. W. Woolworth Co. is sustained.

Petitioner in its petition claimed that the Commissioner erred in his determination in respect of the dividends received by him during the taxable year from certain other corporations, fío evidence was submitted concerning these dividends.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    Jacob A. Jacobs, George G. Gambrill, and Henry D. Hain, Executors of the Last Will of Morris Eisenstadt, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4642.
    Promulgated December 17, 1927.

      David Goldsmith, Esq., for the petitioners.

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

Littleton :

It is insisted upon behalf of the executors that the amount of $75,000 constituted a debt of the decedent and such a claim against the estate of the decedent as is allowable by the law of Missouri.

Section 403 (a) (1) of the Kevenue Act of 1921 provides that for the purpose of the tax the value of the net estate shall be determined by deducting from the value of the gross estate “ Such amounts for * * * claims against the estate, * * * as are allowed by the laws of the jurisdiction, * * * under which the estate is being administered.”

The case of Vogel v. Vogel's Administrator, 22 Mo. 161, is relied upon by the executors. That case involved an antenuptial contract providing that in case the wife survived her husband she should receive a specific sum from the husband’s estate. After his death there was action by the widow against the administrators to recover the sum so provided, and the court said:

The plaintiff sues for the two hundred dollars promised to her in this marriage contract. There was a demurrer by defendant to the petition, which was overruled, and judgment afterwards rendered by default in favor of the plaintiff. The defendant excepted, sued out of his writ of error and brings the case to this court.
The defendant, plaintiff in error, relies upon the following point for a reversal: That this contract is a testamentary disposition and does not create a legal liability so as to constitute the plaintiff a creditor; that she should go into the Probate Court and claim as a distributee, and that this action cannot be maintained.
This Court will, therefore, only notice this point. In our opinion this is a valid and subsisting contract, and that a legal obligation is thereby created in favor of the petitioner to demand the sum of money from the estate of her deceased husband.

The executors also rely upon the case of Baker, 83 App. Div. 530, affirmed 178 N. Y. 575. In that case the court considered an ante-nuptial contract providing for the payment of a fixed sum to the wife, if she survived her husband, in lieu of dower and other rights. Upon the death of her husband she received payment from the estate of the amount provided in the contract and the question was whether such amount was subject to the transfer tax imposed upon transfers of property by will or succession and transfers made in contemplation of death or intended to take effect in possession or enjoyment at or after death. The husband died intestate and it was held that the amount received by the widow was in payment of an obligation created by contract and not in succession to the decedent and, therefore, not subject to the transfer tax. The court said:

It will doubtless be conceded that the respondent’s claim is not one which is dependent for its validity upon n deed or grant of any kind, and, furthermore, that it is not testamentary in its character, although it did not become due and payable until after the death of her husband. It was simply the outgrowth of a contract entered into between the decedent and the claimant, which was founded upon a perfectly good and valuable consideration, and one which is regarded with favor by the law, and will generally be enforced in accordance with the intention of the parties (Johnston v. Spicer, 107 N. Y. 185; Peck v. Vandemark, 99 N. Y. 29; White v. White, 20 App. Div. 560). It would seem to follow, therefore, that a claim arising from such a source is in the nature of a debt against the estate, and as such enforceable like any other debt (Hegeman v. Moon, 131 N. Y. 462; Warner v. Warner, 18 Abb. N. C. 151), and, if this is its character, we do not see why it should be subject to taxation under the Transfer Tax Law any more than, if it were a debt represented by a bond or note. The tax imposed by the statute in question is a tax on the right of succession and not on thé property itself (Matter of Dows, 167 N. Y. 227) ; and “ a payment of an obligation dependent upon a valuable consideration is not a succession in any sense.”

The executors also cited In re Vanderbilt’s Estate, 184 App. Div. 661, affd. 226 N. Y. 638. In this case the court again had before it an antenuptial contract providing—

In the case at bar, Mrs. Vanderbilt’s right to receive these securities did not grow out of the will; its source was in the antenuptial agreement, and the obligation could have been enforced against the estate had there been no will. It rested upon a valuable consideration, which was executed by the marriage. The mere fact that the method of payment and satisfaction of the obligation was directed by the will did not change the inherent character of the obligation.

In Hill v. Treasurer and Receiver General (Mass.), 116 N. E. 509, an antenuptial contract provided that the wife should have out of the estate of the husband in the event she survived him the sum of $250,000 in full .discharge of all dower and other rights as a debt of the estate. The will of the deceased husband directed that this amount be paid to her, but provided that she might take securities of equal value. The Supreme Court of Massachusetts held that the securities of this amount transferred to the widow in accordance with the will, were subject to the transfer tax imposed by Statutes of 1909, ch. 490, part IY, sec. 1. The tax imposed by such statute was similar in kind to that involved in the New York cases mentioned. The court held that the securities received by the widow were received by her under the will and were, therefore, subject to the transfer tax. The court said, however:

We are of opinion that by force of the antenuptial agreement Mrs. Hill became a creditor of the estate. That agreement was in terms that she should receive from his estate the sum of two hundred and fifty thousand dollars “ as a debt against his estate.” If Mrs. Hill had asked for and received from the executors of her husband’s will two hundred and fifty thousand dollars in cash, no inheritance tax could have been imposed upon the sum so paid. For a decision to that effect see Matter of Baker, 178 N. Y. 575, affirming 83 App. Div. 530, on opinion below.
* * * The inheritance tax law of the Commonwealth (St. 1909; C. 490, Pt. IV, Sec. 1) applies to all cases where property or an interest therein passes by will.

The conclusion of the court in the above case appears to have been based somewhat upon the fact that the manner of payment was provided by will.

The foregoing decisions involve the question whether amounts received under an antenuptial contract were subject to tax as transfers of property by will or succession. There was no alternative provision in the will and the case did not involve an election of the widow to take under the will in lieu of the contract. We think they are not authority for tlie allowance of the deduction here claimed.

Had Mrs. Eisenstadt elected to take only the $75,000 provided in the antenuptial contract and nothing more, we think there could be no question but that the amount would have been a proper deduction from the gross estate as a claim against the estate; however, she did not do this. She chose to take the bequest of $250,000 in trust, thereby completely relinquishing whatever claim she had to the estate by the marriage agreement. She became a beneficiary of the estate instead of a creditor. In view of these circumstances it should not be held that the bequest in trust, to the extent of $75,000 thereof, was a claim against the estate. We have found no provisions in the statutes of Missouri, nor any decisions of the Missouri courts to the effect that when an election, such as we have here, is made the amount provided in contract is a claim or charge against the estate. We are of the opinion that had the case of Vogel v. Vogel's Administrator, supra, relied upon by the executors involved a state of facts such as we have here, the court would have held the amount received under the will subject to the transfer or succession tax.

In Wood v. Conqueror Trust Co., 265 Mo. 511; 178 S. W. 201, the Supreme Court of Missouri said:

It is a fundamental principle of law that one who accepts a beneficial interest under a will, thereby adopts the whole will and renounces every right or claim that is inconsistent with the will.

Since Mrs. Eisenstadt elected to take under the will as any other legatee, she expressly waived any claim she might have had as a creditor of the estate by virtue of the antenuptial contract. By reason of the provisions of the will it was necessary for her to decide whether she would take under its provisions or under the contract. When she decided to take under the will the contract no longer constituted a claim against the estate, nor would it have been allowed as a claim against the estate in the administration thereof.

In Randolph v. Craig, 267 Fed. 993, the court held that under section 204 of the Revenue Act of 1916 the value of the widow’s dower was a proper deduction from the gross estate of the husband under the local laws. Subsequently, in Title Guaranty & Trust Co. v. Edwards, 290 Fed. 617, the court had before it a will in which the decedent had made certain provisions for the widow expressly in lieu and in bar of dower and thirds in the estate. The court held that the devise or bequest in lieu of dower was subject to the estate tax under the provisions of the Revenue Act of 1916 and could not be diminished by the value of the widow’s dower and other rights. The question here involved is in principle the same as that of the Title Guaranty & Trust Co. v. Edwards, supra.

In Briscoe v. Craig, decided June 20, 1927, the District Court for the Eastern District of Tennessee held that a widow, when she takes under the provisions of her husband’s will and enters into an agreement with the executors and trustees of his estate whereby she receives a lump sum of $75,000 based upon what she might have received as dower had she dissented from the will, such payment is not deductible from the gross estate of .the husband for the purpose of the estate tax for the reason that the widow did not dissent from the will and take dower instead of the sum agreed upon.

The Board is of the opinion that the estate was not entitled to a deduction of $75,000 and the Commissioner is therefore affirmed.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    Jacob Grossman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8290.
    Promulgated December 17, 1927.

      Jacob Bennett, C.P. A., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   opinion.

Lansdon:

The determination of petitioner’s claim depends, first, upon the question whether this debt had an existence in fact. No deduction can be allowed from his gross income, as a bad debt, unless the existence in fact of the debt is established. Appeal of Luke & Fleming, Inc., 1 B. T. A. 12.

The petitioner testified that the repayment of the alleged loan “was dependent on his [the son’s] success in life, sooner or later, and at the present time he has not succeeded so that he could not pay it.” He also testified that, since the failure of the Missouri enterprise, he had advanced money to be used for the support of the wife and children of the son, and that he had continued to make such advances “to keep his body and soul together,” and that he regarded such action as no more than “every father would do for any son whom he considered reliable for a loan.”

The law presumes that money transferred by a parent to his child is a gift or advancement, and not a loan. In Storey v. Storey, 214 Fed. 973, at page 977, the court said:

Transfers of money from a father to a minor son cannot create a debt. Transfers from a father to an adult son may; but only by an express agreement to that effect. Presumptively such transfers are irrevocable gifts, either never to be accounted for or only as advancements.

The same principle was enunciated in Smith v. Smith (Mich. 1921) 184 N. W. 501-

Money paid to a wife or child will be presumed to have been a gift or advancement, but such presumption is rebuttable.

Also Tiffany on Domestic Relations, 3d ed., p. 391, citing Taylor v. Taylor, L. R. 20 Eq. 155.

To establish the debt petitioner must show affirmatively that there was an agreement or intention of the parties, at the time of the transaction, that the money transferred was loaned. Proof of such intention or agreement must consist of acts or declarations substantially contemporaneous with the event. Subsequent acts or declarations can not change the nature of the transaction. Mullen v. Mullins, (N. J.) 130 Atl. 628.

We think the evidence is insufficient to rebut the presumption of law.

Eeviewed by the Board.

Judgment will be entered for the respondent.


author: Phillips :

text:
    Homer M. Preston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9816.
    Promulgated December 19, 1927.

      Fred R. Angevine, Esq., for the petitioner.

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

Phillips :

The petitioner pleads that determination and collection of the tax here involved is barred by the period of limitations prescribed by statute and also sets up a defense upon the merits to such tax liability. The facts in the instant case bring it squarely within the decision of this Board in Wirt Franklin v. Commissioner, 7 B. T. A. 636, holding that in such circumstances as here exist the determination or collection of deficiencies would be barred after April 1, 1924, in the absence of some such factor as an estoppel against the taxpayer. In view of our decision upon this question it becomes unnecessary to examine into the defense which is raised upon the merits.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Aettndell :

text:
    Standard Silk Dyeing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11694.
    Promulgated December 19, 1927.

      Paul F. Myers, Esq., for the petitioner.

      Donald D. Shepard, Esq., for the respondent.
   OPINION.

Aettndell :

From the testimony introduced at the hearing we are convinced that the growth and success of the petitioner corporation is primarily due to the competency and resourcefulness of its officers and their system of superintending every phase of the business personally instead of intrusting such duties to subordinates. This practice saved the petitioner the expense of paying high salaries to chemists, purchasing men, foremen, technicians and others to do or supervise the work of the various branches of the business and enabled it to economize and reduce claims for inferior workmanship to a minimum. All of the officers were experienced dyers and finishers before the corporation was organized and were qualified to supervise the work of any department of its business.

The Commissioner questions only the reasonableness of the salaries and finds that these officers were not worth $50,000 each, but only $40,620. He disallows as a deduction the difference between what was actually paid and what he has determined to be reasonable. We find no evidence in the record that warrants the substitution of the Commissioner’s judgment for that of the petitioner’s board of directors, even though it be in the matter of authorizing their own salaries. The amounts paid appear reasonable and we think their deduction should be allowed.

While the payment of large salaries to officers of a corporation who own and control all of its stock may well prompt an inquiry into the question of Avhether the amount paid as salary is such in fact rather than a distribution of profits in the guise of salary, still that question was not raised by the Commissioner and no facts are present in the record which would lead us to that conclusion.

The errors alleged with respect to the reduction of invested capital on account of prior years’ taxes are disposed of by section 120T of the Revenue Act of 1926, except insofar as a change in invested capital for 1921 may result from the additional allowance of salaries for 1920, which may be settled under Rule 50.

Judgment will be entered on 10 dags’ notice, under Rule 50.

Considered by Lansdok, Sternhagen, and GReen.


author: MtjRdocK :

text:
    John A. L. Blake, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7461.
    Promulgated December 19, 1927.

      George H. B. Greene, Jr., Esq., for the petitioner.

      A. II. Murray, Esq., for the respondent.
   OPINION.

MtjRdocK :

The petitioner contends that he contributed to the capital of the partnership of Blake Brothers & Co., and that all of the income wdiich he received from Blake Brothers & Co. either by way of interest as provided in Article Third of the copartnership agreement or as a portion of the net gains and profits in accordance with Article Sixth of the copartnership agreement, constituted his distributive share of the net income of the partnership for the taxable year in question, and that he should be entitled to the same fractional part of the total credits and deductions to which the partnership was entitled as this total distributive share of the net income of the partnership was of the total net income of the partnership, in short, that the so-called interest mentioned in Article Third was not in fact interest but was a part of his distributive share of the partnership net income. He contends further that the Commissioner determined that interest mentioned in Article Third was in fact interest and that the petitioner’s distributive share of the net income of the partnership was .26 and, therefore, gave the petitioner only .26 of the deductions and credits to which the partnership was entitled.

From the facts before us, we are unable to determine what the Commissioner did. He admits that he adopted the changes made by the revenue agent but we do not know what changes the revenue agent made. However, at the trial counsel for the respondent stated that the Commissioner allowed the interest paid each of the partners on his capital contribution as an expense of the partnership before determining the distributive share of this partner, and that this distributive share as thus determined was in direct proportion to the share of the dividends, interest and other credits and deductions allowed this partner. Counsel for the respondent states the issue as being the same issue stated by counsel for the petitioner.

Various things are essential to the successful operation of a banking and brokerage business. Capital, clients and ability, are important factors. The partners may be able to supply these in varying proportions. Each contributes whatever he may have, a partnership is formed, and the partnership agreement may provide for the distribution of profits and losses among the partners in any proportion. It may be that the contribution of one partner is so essential and valuable that the others agree that his share of the profits shall be preferred. Capital may be of primary importance. If in the articles of copartnership first right to a share in the profits is given to those contributing capital and this preferred share is called interest, being equivalent to the amount of legal interest which the money might be expected to earn elsewhere, the fact remains that this so-called interest is a distribution of profits. The partnership agreement provides a method of distributing the profits which is in accordance with the wishes of the partners but it does not change profits to interest and expense. The share paid to each partner is paid for the contribution of money risked in the business as a part or all of the contribution of that partner. The latter does what he can for the partnership and it may be that as a result of his contribution he will be rewarded in an amount, exceeding 6 per cent on his money. How can it be said that he was not receiving partnership profits ?

There would be no more reason to hold that this so-called interest was a true business expense than to hold that a share paid a partner, whose services were worth $10,000 and who contributed nothing else, was a business expense until it exceeded $10,000. In Appeal of Executors of the Estate of S. U. Tilton, 8 B. T. A. 914, we held that so-called salary of a partner was a part of his distributive share of the net income of the partnership.

In the case of Parker v. Commissioner of Corporations and Taxation, 255 Mass. 546; 152 N. E. 34, it was necessary to decide whether an amount designated interest ” paid to a special partner was income from money at interest or income from a trade or business. The complainant had contributed capital only. She received what the agreement called “ interest.” The court there said:

Although she is termed a special partner, her income from the capital invested is determined upon the basis of the profits and losses of the business. Her contributions of capital are at the risk of the business the same as the contributions of a general partner, except that her liability for losses is limited to the amount of capital contributed. The partnership agreements here considered provide that “interest” shall be credited on the contributions of capital of all the partners, general and special, and then that the balance shall be divided as profits. This “ interest ” and the profits are each charged to the profit and loss account. The interest and profits so divided are a division of profits derived from the business. The provision that “interest” shall be credited means that there is to bo. a division of profits equal to an amount of interest at six per cent, before the division of the remaining profits is to be made. All the money so divided, either as interest or profits, is a division of the profits which have accrued during the year from the conduct of the business. It is not interest on her contributions of capital; she is not a creditor who has lent money to the partnership. No relation of debtor and creditor exists between her and the firm. The fact that some of the income is called interest is immaterial so long as in fact it was profits derived from the business as such.

The reasoning of the Parker case is sound and applies with even more force to a case such as ours where the partner receiving the so-called interest is a general partner. The distributive share of this petitioner in the net income of this partnership included the amount to which he was entitled as interest on his capital.

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

Considered by Mokhis and Siefkin.


author: Van Fossan:

text:
    E. C. Humphreys, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4069.
    Promulgated December 19, 1927.

      E. G. Humphreys pro se.

      Alva G. Baird, Esq., and J. Arthwr Adams, Esq., for the respondent.
   OPINION.

Van Fossan:

The record of this case contains proof of very few facts. Petitioner at the outset denied that he had received any sums in excess of those shown on his returns and throughout maintained this position. The questions of Government counsel as to various other sums alleged to have been paid to petitioner were met by a categorical denial of receipt or by an explanation that in some instances checks drawn in petitioner’s name were in fact corporate obligations to third parties, in which cases petitioner acted merely as a conduit and paid over the sums to the proper persons.

One fact only gives us pause. After the hearing had consumed the better part of two days’ time and the record was filled with reiterated denials by petitioner of receipt of additional income, petitioner and respondent signed a written stipulation agreeing that an order be entered approving the deficiencies as found by the respondent and submitting to the Board only the question of whether the fraud penalties should be approved. No adequate explanation of the reason for the apparent change of attitude was made and no further evidence was introduced.

On the record before us the evidence does not sustain the charge of fraud. Though the two positions assumed by the petitioner appear inconsistent and were not reconciled, this fact is not enough to prove fraud. The usual presumption of correctness attached to the finding of the Commissioner is fully overcome by the uncontradicted testimony of petitioner.

There being no fraud, the statute of limitations barred respondent from assessing deficiencies for the years 1917 and 1918. The deficiency for 1920 is stipulated to be $25,484.29. No fraud being proven, no penalty attaches for this year.

Under the record in the case the year 1919 is not before us for determination and the action of the Commissioner in respect to that year may not be disturbed. The motion of the Commissioner for setting aside the orders of the Board as to Minnie A. Humphreys is denied.

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

Considered by Marquette and Phillips.


text:
    Big Four Coal & Coke Co., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11541.
    Promulgated December 19, 1927.

      A. LI. Law, Esq., and R. M. Grane, G. P. A., for the petitioner.

      A. G. Bouchard, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner claims that it sustained a net loss, •within the meaning of section 204 of the Revenue Act of 1918, in the year 1919, which exceeded its correct taxable income for the year 1918, and that such excess net loss is deductible from its 1920 taxable income. The respondent admits that the petitioner sustained a net loss in the year 1919, which was applied in reduction of its 1918 taxable income, but denies that there was any excess net loss deductible from 1920 taxable income. The controversy arises from the differences in the respective computations of 1918 taxable income and 1919 net loss. The petitioner alleges that the respondent incorrectly determined its 1918 taxable income in that he did not allow a sufficient deduction for the depiction of its Centennial Mine and incorrectly determined its 1919 net loss by refusing to include therein the loss sustained upon the sale of its Big Four Mine and equipment in the year 1919. It is alleged that by reason of such errors the respondent incorrectly determined that the. 1919 net loss did not exceed the 1918 taxable income and accordingly that there was no excess net loss deductible from 1920 taxable income.

The principal question at issue is whether or not the respondent erred in excluding from the computation of the 1919 net loss, as defined by section 204 of the Revenue Act of 1918, a loss alleged to have^been sustained upon the sale of the Big Four Mine and equipment, capital assets of the petitioner, in the year 1919. It is incumbent upon the petitioner to establish as a basis for the consideration of this question that a loss was sustained upon the sale of said capital assets and the amount thereof.

We have found that the March 1, 1913, value of the Big Four Mine and equipment was $103,708.81. The only evidence of the cost or value of this mine and equipment on the date of sale, 1919, is the testimony of one witness that the petitioner’s books show the gross value at that time to be $168,990.07, to which was added the sum of $3,221.62 for inventories, making a total of $172,211.69 for all property conveyed and transferred, as reflected by petitioner’s records. No evidence was offered as to the individual items of property, the value or cost thereof, included in the alleged gross value of $168,990.07. There is no segregation whatever of the total alleged value. No evidence was offered of the amount of coal extracted from the Big Four Mine subsequent to March 1, 1913, the recoverable coal remaining in the mine on the date of sale, the additions, if any, to the equipment of the mine and the cost thereof, or the depletion and depreciation sustained in the operation of the mine between March 1, 1913, and the date of sale. It does not appear whether the value of $168,990.07, as shown by the books, represents the cost of the mine and equipment and additions or the March 1, 1913, value of the mine and equipment plus subsequent additions, less depletion and depreciation. Nor is the evidence sufficiently clear to enable us to determine what was received by the petitioner, in addition to the $25,000 cash payment, as consideration for the sale. The items of depreciation, amortization of development, and royalty coal alleged to have been credited pursuant to the contract of sale are not explained. No evidence was offered relative to the bases upon which the amounts credited for these items were computed nor has it been shown wherein such credits were made pursuant to the contract of sale. So far as that contract disclosed the petitioner was to receive, in addition to 77,400 tons of coal in lieu of pillars to be left in the mine, only an amount of coal equal, at the rate of 20 cents per ton, to the April 1, 1914, value of the equipment, plus the cost of additions thereto, less depreciation at the rate of 8 per cent per annum. Upon this record we are forced to conclude that the petitioner has not established that it sustained a loss in 1919 upon the sale of the Big Four Mine and equipment to the Colorado Fuel & Iron Co. In the absence of proof of such loss, we find that the respondent did not err in his determination of the net loss as defined in section 204, sustained by the petitioner in 1919.

The petitioner’s Centennial Mine in Boulder County included three adjoining properties, only one of which it owned in fee. It is claimed that the respondent erred in his allowance for depletion of the fee property in the year 1918. We have found that the total extraction from the entire mine, the fee and leased properties, from 1913 to December 31, 1925, was 845,092 tons and that the coal in the fee property on the latter date had been entirely exhausted, except for some pillars left as supports. We also have found that 81,865 tons were extracted during the year 1918'. There is no evidence, however, of the amount of coal extracted during the year from the leased and fee properties separately, so that we might determine how much of the 81,865 tons was extracted from the fee property alone. Nor was any evidence submitted as to the value of the property at the date of acquisition. There is no evidence of the basis employed by the respondent in his computation of the depletion allowance, except that the extraction for the year was found to be 12,098.03 tons. It was not shown that the tonnage extracted from the fee property was greater than that used by the respondent. We are, therefore, unable to determine the proper rate and amount of depletion allowable. On the record of the case before us, petitioner has failed to show that the respondent erred in his determination.

Attention is also called to the fact that the Court of Claims in Auburn & Alton Coal Co. v. United States, 61 Ct. Cls. 438, held that a loss sustained upon the sale of capital assets could not be allowed as a net loss under section 204 of the Revenue Act of 1918.

Judgment will be entered for the respondent.

Considered by Makquette and Phillips.


text:
    Brillo Manufacturing Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6868.
    Promulgated December 19, 1927.

      William D. Harris, Esq., for the petitioner.

      J. D. Foley, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner alleged that it acquired patents, trade-marks and good will of the value of $45,000 for capital stock, and that one-fourth thereof, $11,250, is allowable as invested capital. The respondent denied that the patents, trade-marks and good will acquired for capital stock had any value at the time of acquisition. No proof of the value of these intangibles having been offered by the petitioner, we must hold that the respondent did not err in excluding the same from invested capital. Intangibles may not be included as a part of invested capital in excess of their actual cash value at the time bona fide paid in for stock, and are subject to the limitations contained in section 326(a) (4) and (5), Revenue Act of 1921.

The jietitioner further alleges that it sold preferred stock at a discount of $21,610, which it was obligated to retire by 1930, and that a proportionate part thereof, $2,161, is deductible from its income for the taxable year as expense. The respondent denied that the petitioner was obligated to retire its preferred stock by 1930, and petitioner offered no proof in support of its allegation. On this issue, also, petitioner fails to establish error.

Judgment will be entered for the respondent.

Considered by MaRqtjette and Phillips.


text:
    Adrian C. Conway, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1614.
    Promulgated December 19, 1927.
    March 1, 1913, value determined.

      Adrian O. Gonway pro se.

      Brice Toole, Esq., for the respondent.
   OPINION.

Van Fossan:

Under the decisions of the Supreme Court in United States v. Flannery, 268 U. S. 98, and McCaughn v. Ludington, 268 U. S. 106, the loss in this case is to be computed by deducting the sale price from the aggregate cost. So computed, the loss is $375.

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

Considered by Maeqtjette and Phillips.


text:
    Los Angeles Towel Service Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8866, 23391.
    Promulgated December 19, 1927.

      Harry Kahan, Esq., for the petitioner.

      Brice Toole, Esq., for the respondent.
   Van Fossan:

Petitioner, a California corporation, appealed from determinations by the Commissioner of deficiencies of $1,163.76 for 1920, $440.32 for 1921, and $146.65 for 1922. The sole issue is the proper rate of depreciation on towel cabinets owned by petitioner.

FINDINGS OF FACT.

Petitioner manufactures and rents to customers various types of towel cabinets and supplies them with towels. Due to dampness, hard usage, and other causes it is necessary frequently to make repairs of the cabinets, revarnish them, resilver the mirrors, and replace the glass knobs. Styles change frequently, rendering cabinets obsolete. The average useful life of a cabinet is not to exceed five years, and 20 per cent is a reasonable rate for depreciation, including obsolescence.

Judgment mil be entered on 15 days’ notice, vmder Bute 50.

Considered by Marquette and Phillips.


author: Van Fossan :

text:
    Memphis Linotype Printing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7072.
    Promulgated December 19, 1927.

      O. R. Ewing, Esq., for the petitioner.

      W. T. Wattles, Esq., for the respondent.
   OPINION.

Van Fossan :

The petitioner in this case sets out as its sole ground of error that the respondent “ refused to permit the taxpayer to take reasonable salaries as a deduction ” in the year 1918. An examination of the evidence, however, reveals little or no substantiation of the reasonableness of the amounts alleged to have been paid. The fact that salaries formerly paid were inadequate to meet living demands, as recited in the resolutions, does not demonstrate that the increased amounts are reasonable. Where issue is joined on the question of reasonableness, it must be proven. On this ground, therefore, it is necessary to sustain the Commissioner.

The evidence presents a further ground on which it would probably be necessary to rule against petitioner. The testimony is almost entirely directed to an attempt to establish the fact of corporate authorization in 1918 of the salary increases and of a corporate obligation to pay them. From a consideration of the resolutions appearing in the record and the testimony of the witnesses, we are convinced that there was no corporate authorization of the salary increases within the taxable year or any other action creating such an obligation as would authorize the deduction of the additional amounts. See Appeals of Melrose Granite Co., 2 B. T. A. 113; Van DeKamps Holland Dutch Bakers, 2 B. T. A. 1247; Lars J. Fiksdal Co., 3 B. T. A. 398; Gray Printing Co., 4 B. T. A. 1264.

Judgment will loe entered for the respondent.

Considered by MaRquette and Phillips.