author: Murdock:

text:
    Edwin M. Knowles China Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7711, 12544.
    Promulgated January 14, 1928.

      E. A. Mihills, O. P. A., for the petitioner.

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

Murdock:

The petitioner alleged that the Commissioner allowed insufficient depreciation on its plant buildings, machinery, kilns, tenement house, and motor truck. Having produced some evidence that the tenement house had a probable life of not more than 30 year's, the petitioner is entitled to have a rate of 3y3 per cent applied to $2,500, the admitted cost of this house, and depreciation allowed accordingly.

The evidence in regard to the other assets named is entirely too indefinite and incomplete to enable us to determine whether or not the Commissioner was in error or to determine what a proper rate for any of the assets would be. We can only affirm the Commissioner’s determination and correct an error of $1,000 in his calculation of 8y2 per cent depreciation on kilns for 1919.

The remaining question pertains to the petitioner’s right to special assessment of its war-profits and excess-profits taxes under sections 327 and 328 of the Revenue Act of 1918.

Section 327 is as follows:

Seo. 327. That in the following cases the tax shall be determined as provided in section 328:
(a) Where the Commissioner is unable to determine the invested capital as provided in section 326;
(b) In the case of a foreign corporation;
(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively;
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits-, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

The cost of the “ Mayflower ” patent could have been included in invested capital, but there has been no showing that its cost can not be determined, or that it had any particular value. We can see no reason for special assessment in the facts relating to this patent. The special relief given by sections 327 and 328 of the Act was not intended for those taxpayers whose invested capital is small in amount merely because they have not taken the trouble to establish the larger amount to which they are really entitled.

The petitioner alleges as another fact entitling it to special assessment that the compensation paid to its officers was unusually low, because of the stock ownership of the officers, and represented inadequate compensation for the services actually rendered. However, the evidence fails to disclose what services these officers actually rendered and it also fails to show that their compensation was inadequate for the services actually rendered. We have heretofore held that a comparison of officers’ salaries in a petitioner corporation with the officers’ salaries in other corporations similarly circumstanced is insufficient to show an abnormality. Appeal of Crowley Brothers, Inc., 2 B. T. A. 477.

The further contention of the petitioner is that it is entitled to special assessment because of the fact that, although a considerable amount was added to its prewar invested capital, particularly in the year 1913, its prewar income included no income from thebe additions to its invested capital since the money was used to build additional buildings which were not operated until some time in 1914. We have not been told the average net income of the corporation for the prewar period, or the average invested capital for the prewar period. We do not know the war-profits credit allowed the petitioner in the taxable years 1918 and 1919. The facts proven account for a lower credit than might have resulted otherwise, but they may account for only a slight difference in tax and they do not show a gross disproportion in tax within the meaning of this section of the Act. Consequently, they do not establish .the existence of an abnormality producing an exceptional hardship, or in any other way entitle the petitioner to special assessment.

It is clear from the evidence that the petitioner at the time of incorporation on May 3, 1907, issued its capital stock having a par value of $150,000 for the assets of its predecessor corporation. It also appears that at some time in 1906, the predecessor corporation had net tangible assets in the amount of $168,564.64. But we do not know what assets either corporation had at the time of the transfer or even what their books showed in regard to the value of these assets at the time of the transfer. Nor do we know what the Commissioner has done in regard to the petitioner’s opening invested capital and we are without sufficient evidence to determine the value of the assets acquired by the petitioner from the predecessor corporation.

The petitioner asks us to determine, from the table of net tangible assets and net earnings of the predecessor company for the five-year period preceding reorganization, that intangibles in a substantial amount were transferred to the new corporation, which intangibles with the tangibles made a total consideration greatly in excess of the par value of the capital stock exchanged. Perhaps evidence is available for the satisfactory determination of the respective values of the tangibles and the intangibles received by the petitioner at the time of its organization and from this evidence the petitioner’s invested capital could be increased. See Appeal of St. Louis Screw Co., 2 B. T. A. 649, and Tyler & Hippach, Inc. v. Commissioner, 6 B. T. A. 636. So far as we know the Commissioner has recognized the value, if any, of these intangibles in invested capital. See Atlanta Casket Co. v. Rose, 22 Fed. (2d) 800. Evidence such as this does not entitle the petitioner to special assessment, inasmuch as it fails to show that the respective values of the several classes of property at the time they were paid in for stock could not be determined satisfactorily in this case.

The comparatives produced in evidence show that the petitioner’s tax liability is relatively higher for the years in question than the tax liability of the other companies, but these tables did not indicate any particular reason for the inequality. Unless it is due to some abnormality affecting capital or income, the inequality does not entitle the taxpayer to special assessment. Appeal of Cleveland & Western Coal Co., 4 B. T. A. 93.

From the facts before us we can not say either that the Commissioner was unable to determine invested capital as provided in section 326 or that he was unable satisfactorily to determine the respective values of the several classes of property at the time they were paid in. Neither can we say that the tax if determined without the benefit of section 328 would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by a gross disproportion between the tax computed without the benefit of this section and the tax computed by reference to the representative corporations specified in section 328. Consequently, our judgment must be for the respondent on this point.

Reviewed by the Board.

Judgment will 5e entered in accordance with the foregoing opinion on notice of SO days, under Rule 50.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    John D. Ankeny, Executor, Estate of Levi Ankeny, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8904.
    Promulgated January 14, 1928.

      John F. Watson, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner claims the right to deduct the amount of $44,873.07 from the value of the gross estate of the decedent under the provisions of section 403(a)(2) of the Bevenue Act of 1918, which is as follows:

An amount equal to the value at the time of the decedent’s death of any property, real, personal, or mixed, which can be identified as having been received by the decedent as a share in the estate of any person who died within five years prior to the death of the decedent, or which can be identified as having been acquired by the decedent in exchange for property so received, if an estate tax under the Bevenue Act of 1917 or under this Act was collected from such estate, and if such property is included in the decedent’s gross estate.

The circumstances upon which this claim is based are fully set forth in our findings of fact, above. The respondent has refused to allow the deduction on the theory that deposits to and withdrawals from the bank accounts in question, prior to the death of the decedent, resulted in a commingling of funds that makes it impossible to identify the amounts taxed within five years as a part of the estate of the prior decedent. The petitioner concedes some changes in the bank accounts, but proves beyond question that none of them at any time showed a smaller credit balance than on September 29, 1918, and that, therefore, the exact credits except as to the amount of $10,000, remained undisturbed until the date of the death of the decedent.

The property transferred is designated as cash, and certainly, if that is true, the identical currency involved was not earmarked, and can not be identified. In fact, however, the values transferred to the decedent by the death and will of his wife were not cash, but credits in the several banks, and such credits remained unchanged until the death of the decedent. Neither the wife nor the husband had any actual cash in the bank which they could demand as specified and identified pieces of currency. The properties transferred were credits which were evidenced by the depositor’s pass books and by the books of the several banks. Such credits were taxed as a part of the estate of the prior decedent. We are convinced that the property in question is amply identified as having been taxed to the estate of a prior decedent within five years of the death of the decedent. The petitioner prevails on this point. Appeal of Elmer E. Rodenbough, Executor, 1 B. T. A. 477; Appeal of Estate of Isabella C. Hoffman, 3 B. T. A. 1361; Lowell v. Brown, 284 Fed. 936; Cary v. United States, 22 Fed. (2d) 298; John F. Archbold, Executor, v. Commissioner, 8 B. T. A. 919.

The petitioner introduced no evidence upon which we can base a finding of fact as to this second contention, and on this point the determination of the respondent is approved.

Judgment will be entered on %0 days' notice, under Rule 50.


author: Lansdon:

text:
    Ignaz Schwinn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8441.
    Promulgated January 14, 1928.

      John E. Hughes, Esq., for the petitioner.

      J. TV. Fisher, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner purchased 2,300 shares of stock of the Anaconda Copper Co. in December, 1919, and sold the same in June, 1924, at a loss of $73,472. The respondent treated said stock as “ capital assets ” within the meaning of section 208 of the Bevenue Act of 1924, and determined the petitioner’s income-tax liability for the year in question by subjecting said loss to the 12y2 per cent limitation prescribed by subdivision (c) of that section and Act. The petitioner claims that said stock was property held by him primarily for sale in the course of his trade or business, and that from December, 1919, to the present time one of his businesses and, in fact, his principal business, has been that of speculating in stocks, grain and other commodities. Section 208 (a) (8) of the Bevenue Act of 1924 provides in full as follows:

The term “capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

The particular portion of the statute brought into consideration by the facts of this case is the phrase, “or property held by the taxpayer primarily for sale in the course of his trade or business.” In other words, are the petitioner’s speculations in stocks, grains and other commodities of such a nature as properly to be regarded as his trade or business ?

It has been said that the word “ business ” has a wider scope than the word “trade.” Edgin v. Bell-Wayland Co. (1915), 149 Pac. 1145, 1146. However, the word “ trade ” used in the Bevenue Act of 1913 in connection with the deduction of losses, was construed as being synonymous with “business.” See Mente v. Eisner (1920), 266 Fed. 161, certiorari denied, 254 U. S. 635; 41 Sup. Ct. 8. The statute under consideration uses the expression “his trade or business.” As the two terms are used disjunctively in the Act, it will serve for the present to ascertain the legal significance of the word “ business.”

The word “ business ” is one which is used with widely varying meanings. It becomes necessary to determine, as best we may, the meaning in which it is used in the statute involved. The Bevenue Act of 1924, under the heading of “Deductions Allowed Individuals ” (section 214), allows as deductions, among others, in computing net income, losses incurred in trade or business, and also losses incurred in any transaction entered into for profit, though not connected with the trade or business. It is apparent from its description of deductible losses, that the statute differentiates between certain types of losses sustained. Losses from isolated transactions entered into for profit are separately considered from those incurred in trade or business. When the expression “ trade or business ” is used in the statute in connection with losses it would seem to refer to a regular occupation or calling of the taxpayer, for the purpose of livelihood or profit. This is one of the accepted definitions of the term “ business ” and is probably its most usual legal sense. Flint v. Stone Tracy Co. (1911), 220 U. S. 107, 171; 31 Sup. Ct. 342; Hewin v. Atlanta (1905), 121 Ga. 723; 49 S. E. 765, 768; Easterbrook v. Hebrew Ladies' Orphan Society (1912), 85 Conn. 289; 82 Atl. 561, 563; Allen v. Commonwealth (1905), 188 Mass. 59; 74 N. E. 287, 288. As to a similar conception of the word “ trade,” see May v. Sloan (1879), 101 U. S. 231, 237; In re Charles Town Light & Power Co. (1910), 183 Fed. 160, 163; United States v. Douglas (1911), 190 Fed. 482, 484.

It has been recognized by the courts and by the Bureau of Internal Revenue that a person can be engaged in more than one trade or business. Mente v. Eisner, supra; see, also, 17 Ruling Case Law, 487. It is not necessary under the language of the 1924 Act that the activities in question form the taxpayer’s principal trade or business. It is sufficient that they may of themselves be regarded as an occupation or business. It is recognized that a single, isolated • activity or transaction is not sufficient to constitute a business or vocation. Cooper Manufacturing Co. v. Ferguson (1885), 113 U. S. 727; Woods v. Lewellyn (1921), 289 Fed. 498; Lederer v. Cadwalader (1921), 274 Fed. 753. In the instant case, however, the petitioner devoted the largest part of his business time to, and made the most money from, speculating in stocks, grain and other commodities. Large sums of money were involved in his marginal dealings. In 1923 he had with Lamson Bros. & Co, some 112 transactions in grain and other commodities and 15 in securities; similarly in 1924, he made with the same broker approximately 91 transactions in grain and other commodities and about 30 in securities. These facts and circumstances would seem to meet the test of the reported decisions as to the principal business or occupation of an individual. In the case of In re Mackey (1901), 110 Fed. 355, the court said (pp. 358-359) :

The chief occupation or business of one, so far as worldly pursuits are concerned, is that which is of principal concern to him, of some permanency in its nature, and on which he chiefly relies for his livelihood or as the means of acquiring wealth, great or small. That one may principally devote his physical exertions or his time to a given pursuit while one of the factors entitled to consideration, is not in all cases determinative of the question whether that pursuit is his chief occupation or business. One may own, reside on and operate a farm and at the same time be engaged in the business of buying and selling stocks and other securities. The latter occupation may consume only an hour or two and the balance of the day be devoted by him to bis farm, yet it does not follow that bis chief occupation or business is not dealing in stocks or other securities. If such dealing is of principal concern to him and chiefly relied on by him for his subsistence and financial advancement, and if he treats it as of paramount importance to his welfare, he would not be within the category of persons chiefly engaged in farming, even were his farm to yield him some profit. Nor does the amount of capital invested necessarily determine in all eases what one’s chief occupation or business is. It, like the amount of time devoted, is undoubtedly a factor to be considered, but often is not conclusive. One may erect a palatial residence in the country, and own the farm on which it stands. It becomes part of the farm, and the farm may be skillfully operated and yet not yield in profits a hundredth part of the interest on the investment. The owner may be engaged in profitable manufacturing or mercantile pursuits which enable him to pay in full the cost of his house, and thereafter maintain it from the profits on his business capital, though less than such cost. No one would in such case contend that the owner of the farm was chiefly engaged in farming because most of his capital was invested in it. It is evident that it is impracticable, if not impossible, to define with precision the facts which will in all cases determine whether one in engaged chiefly in farming, and that each case must be decided on its own circumstances. It may, however, legitimately be stated, generally, that, if it appears in a given ease that one’s occupation or business which is of principal concern to him, not ephemeral, but of some degree of permanency, and on which he mainly relies, for his livelihood and financial welfare, be other than farming, he is not “ a person engaged chiefly in farming.”

In view of the unimpeached and uncontradicted testimony of the petitioner to the effect that his principal business from 1919 to 1924 was speculating in stocks, and in further consideration of the legal authorities hereinabove mentioned, we have no hesitancy in holding that the loss resulting from the purchase and sale of the 2,300 shares of Anaconda copper stock was a loss sustained in 1924 with respect to property held primarily for sale in the course of the petitioner’s trade or business. See Bryce v. Keith (1919), 257 Fed. 133; Penrose v. Skinner (1923), 298 Fed. 335, 338. Cf. Wilson v. Eisner (1922), 282 Fed. 38. The respondent was therefore in error in determining the petitioner’s income-tax liability under section 208(c) of the Kevenue Act of 1924. Under this view of the case it becomes unnecessary to pass upon the remaining issues raised by the petitioner and no opinion is expressed thereon.

Judgment will be entered for the 'petitioner on 15 days’ notice, under Bule 50.


author: GREen:

text:
    Appeal of Northern Trust Co., Executor, Estate of Lucy C. Underwood.
    Docket No. 2473.
    Promulgated January 14, 1928.

      John D. Watkins, Esq., and Edward MeGarrtlvy, Esq., for the petitioner.

      J. 0. Sway&e, Esq., for the Commissioner.
   OPINION.

GREen:

The issues involved in this case are: (1) Whether the Phoenix, Ariz., waterworks bonds acquired by decedent through the sale of the securities received from the prior decedent, who died within five years prior to death of decedent and on whose estate the estate taxes were paid, can be identified as having been acquired in exchange for the securities so received, and (2) whether the value of the property previously taxed within five years should be reduced by the amount of funeral and administration expenses and debts of the decedent which were paid out of the commingled funds of the estate.

In accordance with the reasoning of the Board in the Appeal of Elmer E. Rodenbough, Executor, 1 B. T. A. 477, we are of the opinion that the record sufficiently establishes the identity of the $20,000 face value of the Phoenix, Ariz., waterworks bonds as having been acquired with part of the proceeds from the sale of the 89 shares of Bacon Underwood Yeneer Co. stock and 135 bonds of Elmwood Cemetery Co. received from a prior-taxed estate within the meaning of section 403 (a) (2) of the Revenue Act of 1921. Since the Bacon stock and the Elmwood bonds were included in the prior decedent’s estate at a lvalue of $31,062.50, since such stock and bonds were sold for only $27,618.97, since only $25,204.47 of such proceeds were invested in the Phoenix bonds, since only four-fifths of such Phoenix bonds were still held by the decedent at her death, and since the value of such Phoenix bonds still held by the decedent at her death was only $20,600, it is clear that such value of $20,600 is less than the value at which the same proportionate part of the Bacon stock and Elmwood bonds were included in the prior decedent’s estate. The value of such Phoenix bonds in the amount of $20,600, should, therefore, be deducted from the gross estate of Lucy C. Underwood in ascertaining the value of her net estate for the purposes of the estate tax. See also Appeal of Estate of Isabella C. Hoffman, 3 B. T. A. 1361; Walter G. Pietsch, Executor, v. Commissioner, 6 B. T. A. 582; Honoro Gibson Pelton, Executrix, v. Commissioner, 7 B. T. A. 1144; John F. Archbold, Executor, v. Commissioner, 8 B. T. A. 919; Cary v. Urated States, 22 Fed. (2d) 298; and, as contra, United States v. Rodenbough, 21 Fed. (2d) 781.

The second issue involved in this appeal is whether the value of the property with respect to which a deduction is claimed under paragraph two of subdivision (a) of section 403 of the Revenue Act of 1921 should be reduced by the amount of the funeral and administration expenses and debts of decedent paid by the executor out of the commingled funds of the estate.

This question presents the identical problem that was involved in the first point in John F. Archbold, Executor, v. Commissioner, supra, in which case we held that where funds consisting of (1) prior-taxed property and (2) funds from other sources were commingled, and the funds from other sources were always sufficient to defray the expenditures allowable as deductions under section 403(a) (1) and (3) of the 1921 Act, the amount allowable as a deduction under section 403 (a) (2) should not be reduced by the amount allowable under section 403(a) (1) and (3) or any part thereof. In the instant case, funeral expenses, executor’s commissions, attorney’s fees, miscellaneous administration expenses and debts of decedent, amounting to $40,036.13, were paid out of such commingled funds and the funds from sources other than prior-taxed property were at all times sufficient to pay such expenses, commissions, etc. It follows that the respondent was in error in reducing the deduction of property identified as taxed within five years by the amount of $40,036.13. The deficiency should be redetermined on the basis of a net estate for tax of $444,369.43, computed as follows:

Gross estate:
Real estate_$36, 978.19
Stocks and bonds_ 401,297.18
Mortgages, notes, cash and insurance_ 16, 620.31
Other miscellaneous property_ 8, 077. 63
Property identified as taxed within five years- 411,998. 81
Total gross estate-- — 874,972.12
Deductions:
Funeral expenses_ $643. 00
Administration expenses- 33,114.42
Debts of decedent-- 6, 278. 71
Property identified as taxed within five years- 340, 566. 56
Specific exemption_ 50,000. 00
Total deductions_$430, 602. 69
Net estate for tax- 444, 369.43

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


text:
    Abraham Fischer, Administrator, Estate of Jonas Fischer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7427.
    Promulgated January 16, 1928.

      Mortimer G. Rhone, Esq., for the petitioner.

      R. E. Copes, Esq., for the respondent.
   Lansdon:

The respondent has asserted a deficiency in estate tax in the amount of $315.60. The petitioner alleges that certain stock owned by the decedent had a value less than that determined by the respondent.

FINDINGS OF FACT.

Abraham Fischer, the petitioner of record in this proceeding, is a resident of the Commonwealth of Pennsylvania, and is the duly appointed administrator of the estate of Jonas Fischer, who died on November 30,1923.

At the date of his death the decedent owned 2,611 shares of the stock of the Citizen’s Electric Co. of Williamsport, Pa. In the Federal estate-tax return made by the petitioner, such stock was included in the gross estate of the decedent at $89.06 per share, or a total of $233,010.33. Upon audit of the return the respondent determined that the stock had a value of $93.08 per share at the date of decedent’s death, or a total of $243,590.36, and asserted the deficiency here in controversy.

The Citizen’s Electric Co. was a close corporation with 3,000 shares of stock outstanding. All such shares, in addition to those owned by the decedent, were the property of members of his family. Six weeks after the death of Fischer, the entire 3,000 shares of stock were sold by the owners for $301,500. Conditions of the sale were that the vendors retained certain physical assets of the company and all its accounts receivable and assumed liability for the payment of all its accounts payable.

From the sale of the retained assets and the collection of the accounts receivable, the vendors realized the amount of $45,560.88. The cost of salvaging the assets sold was $1,862.14 and vendors paid the company’s accounts in the amount of $64,072.17. The net amount' received by the vendors for 3,000 shares of stock and the retained assets 'of the company was $287,126.56.

Judgment will be entered for the respondent.


text:
    G. F. Vossler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5515.
    Promulgated January 16, 1928.

      B. J. Carver, Esq., for the petitioner.

      L. A. Luce, Esq., for the respondent.
   OPINION.

Lansdon:

There being only an overassessment involved for 1918, this Board has no jurisdiction over the tax controversies of that year. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

At the hearing the petitioner testified in his own behalf. The findings of fact which we have made are based upon such oral evidence and upon the testimony of the revenue agent who examined the petitioner’s returns. There is nothing in the evidence so adduced to establish the contention of the petitioner.

Judgment will he entered for the respondent.


text:
    Kasigan Gas Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11085.
    Promulgated January 16, 1928.

      Donald W. Stewart, Asy., for the petitioner.

      L. A. Luce, Asy., for the respondent.
   Lansdon :

The respondent has asserted a deficiency in income and profits tax for the fiscal year ended October 31, 1921, in the amount of $542.93. The petitioner alleges that the respondent erroneously excluded value of a certain franchise from its invested capital in the taxable year. It is alleged in the petition that some time in 1916, the petitioner acquired a mixed aggregate of tangible and intangible property of the value of $129,394.85, for which it issued its stock of the par value of $100,000, and assumed liabilities in the amount of $11,076.86. Among the property which it avers it so acquired was an unexpired franchise for the operation of a gas company in the City of Independence, Kans. In its income-tax return for the taxable year, the petitioner included such franchise at a value of $25,000 in its computation of its invested capital. Upon audit of such return the respondent disallowed the $25,000, aforesaid, as a factor of invested capital, and determined the deficiency here in question.

At the hearing the petitioner produced no corporate records or books of account in proof of the alleged transaction or of the value of any property acquired as a result thereof. Its only evidence was the oral testimony of a witness who was not a stockholder or officer of the corporation from which the assets were acquired nor connected in any way with the petitioner until some three years subsequent to the transaction. This witness testified that in his opinion the franchise was worth at least $25,000 at the date it was acquired by the petitioner.

Judgment will be entered for the respondent.


text:
    Wilton D. Frazier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10836.
    Promulgated January 16, 1928.

      Fred J. Wolf son, Esq., and Al LeBrecht, Esq., for the petitioner.

      P. M. Glarh, Esq., for the respondent.
   Lansdon:

The respondent has asserted a deficiency in income tax for the year 1924, in the amount of $226.50. The petitioner alleges that his income for the taxable year was inadvertently overstated in his return.

FINDINGS OF FACT.

The petitioner is an individual residing in Kansas City, Mo., where he conducts a news store and shoe-shining stand. Assisted by a deputy collector of internal revenue, he made an income-tax return for the taxable year. Such return was prepared without reference to any books of account. The petitioner’s original records of income and expenses for the year in question have been destroyed. Upon audit of the return the respondent determined a deficiency in the amount of $226.50.

Judgment will be entered for the respondent.


text:
    W. W. Sheane Auto Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5187.
    Promulgated January 16, 1928.

      Matthew W. Hill, Esq., and «4. G. Elder, Esq., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
   Lansdon :

The respondent has asserted a deficiency in income and profits tax for the year 1919 in the amount of $3,919.33. The only issue involved is the reasonableness of the salary paid the president of the petitioner during the taxable year.

BINDINGS OP PACT.

The petitioner is a Washington corporation with its principal place of business at Yakima and with a branch office at Toppenish. During the taxable year it was engaged in the sale of automobiles, repair parts, and motor vehicle accessories, and in the operation of garages at its two places of business. Its sales for such year amounted to $1,094,336.13. It employed between 35 and 40 persons as salesmen, mechanics, and in other capacities required by the nature of its business. During the year it borrowed large amounts of money and discounted many notes made by purchasers of automobiles and trucks. Its financial condition and standing were such that it was necessary for its president and secretary personally to endorse and guarantee all paper which it discounted at the banks.

The president of the petitioner was regularly and actively engaged in the business during the taxable year. He had long been in the automobile business and was familiar with all the details essential to commercial success of such an enterprise. The compensation claimed was authorized by proper corporate action. The amount of $6,000 was paid to the president during the year as salary, and was no more than a reasonable compensation for the services rendered.

Judgment will be entered on £0 days' notice, wider Bule 50.


author: Phillips :

text:
    J. Heninger and Rebecca Heninger, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 205.
    Promulgated January 16, 1928.

      W. L. Coley, Esq., for the petitioners.

      8. 8. Faulkner, Esq., for the respondent.
   OPINION.

Phillips :

Petitioners contend that of the 250 shares of stock sold in 1920, 225 shares were received in that year as a gift and had a value at the time received equal to the price for which sold. With this contention we can not agree. Without reviewing the evidence in detail, we may say that we are satisfied that there was an understanding between August and Heninger that the latter would be compensated for services performed in securing loans and endorsing notes for August and his corporation. This compensation was to take the form of an increased interest in the corporation and stock was from time to time transferred to Heninger. It is true that such stock was pledged for the debts of the corporation, but while such debts are matters to be considered in determining its value, the fact that it was so pledged would not postpone the time when it became the property of petitioner to the date when the lien was discharged. We are of the opinion that 170 shares of the stock sold were received by Heninger in years prior to 1920 and that 55 shares were received in 1920. For the purpose of determining a profit or loss on the sale, it makes no difference whether they were received as compensation or as a gift; in either event their value when received was less than the price at which they were sold and the difference is subject to tax.

The Commissioner added to the tax asserted against J. Heninger an amount equal to 50 per cent of the deficiency as a penalty for filing a false and fraudulent return. Section 250(b) of the Eevenue Act of 1918, under which the return was filed, provides for the imposition of such a penalty in the event of an understatement of tax liability which is false or fraudulent with intent to evade the tax. The same section provides a separate penalty for negligently omitting items of income. While we are satisfied that Heninger was, as a matter of law, the owner of stock in the corporation and that such stock was sold to August in 1920, we are also satisfied that Heninger never thought of himself as the owner of this stock, which was pledged as collateral for loans to the corporation and to August individually. He thought of this stock as something he was to have in the future when the loans were paid off, and when, in 1920, the money here in question was paid to him, we are satisfied that he looked upon it as a bonus and neither as salary nor as the sales price of any stock which he owned.

Without reviewing the evidence in detail we may say that the record contains much indicating the inherent business integrity of this petitioner. The penalty asserted by the Commissioner implies a willful intent to evade tax. We are satisfied that the petitioner had no such intent, although we can not agree with the contention of his counsel that there was no tax liability. Undoubtedly one who comprehended the legal situation would have either reported the transaction as a sale or would have incorporated into the return a complete statement of the transaction, thereby avoiding any implication of an attempt to avoid tax. In the circumstances of this case the failure to do so is not such as to be construed into an intent to evade tax. Whether a penalty should have been asserted for negligence is not before us and upon this question we express no opinion.

Petitioner alleged and proved that instead of understating his salary for 1919 by $500, as determined by respondent, he overstated it by $1,250. Instead of a deficiency for such year, there has been an overassessment. Petitioner also claims that the Commissioner erred when he determined that petitioner understated his salary for 1920 by $7,500. Undoubtedly a part of this amount is on account of the 55 shares of stock which were set over to the petitioner in 1920. In computing the gain from the sale of stock the Commissioner treated these 55 shares as having a value of $5,500 when acquired in 1920 and taxed as gain only the difference between the sales price and such value of $5,500. Since the stock was received by the petitioner in 1920 for services performed, its value is properly to be returned as income in that year. The circumstances are such as to lead us to believe that this accounts for a substantial part of the $7,500 increase in salary made by the Commissioner. In any event we are without any evidence from which we might learn what was the total salary of the petitioner in 1920 or from which we might determine whether the Commissioner was right or wrong in the adjustment made. We must, therefore, assume that the salary determined by the Commissioner is correct.

Decision will be entered■ on W days’ notice, under Bule 50.


author: Phillips:

text:
    William C. Raue & Sons Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8272.
    Promulgated January 16, 1928.

      Joseph J. Raue, Esq., for the petitioner.

      A. LeRoy Deveney, Esq., for the respondent.
   OPINION.

Phillips:

The petitioner claims that the salaries paid were merely nominal in amount, that a larger amount would have been paid before the close of the year, except for the sickness of the officer having charge of the accounts, and that it should be entitled to a further deduction for salaries in the amount of $1,550.

Section 234(a) (1) of the Revenue Act of 1918 provides that in computing the net income of a corporation there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation impersonal services actually rendered.

There is no evidence that any amount for salaries was paid or incurred by petitioner during the year 1920, except the amount of $4,050, which was paid to its three officers by petitioner during the year 1920 and which was allowed as a deduction by the Commissioner. The Board has consistently held that salaries, like all other expenses, must be paid or incurred in the taxable year in which they are claimed as deductions. We conclude that the Act does not permit of any further deduction for the year 1920 on account of salaries than has been allowed by the Commissioner.

Decision will be entered for the respondent.


text:
    Atlas Tack Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4725.
    Promulgated January 16, 1928.

      W. E. Hayes, Esq., and Myron Heller, Esq., for the petitioner.

      F. O. Graves, Esq., for the respondent.
   OPINION.

Phillips :

The petitioner assigns as its first error the refusal of the Commissioner, in computing the actual cash value of property acquired for stock at organization for invested capital purposes, to allow any separate value for the intangible assets. The books of account of the predecessor corporation were no longer in existence at the time of the hearing and because of this and the lapse of time, the evidence as to what happened is necessarily incomplete. It appears that the predecessor corporation, the Atlas Tack Co. of Maine, was a consolidation of several companies manufacturing tacks and nails used in the shoe-manufacturing and shoe-repairing industry, as well as other articles. It had acquired from these companies labels and trade-names- which had been in use for many years and which had an established reputation and market. Some time prior to 1897 this predecesor company had been in the hands of a receiver but was discharged from receivership in 1897. From that date to the organization of the petitioner on July 1,1900, the earnings of the company had barely exceeded its losses.

The record further discloses that the assets were acquired by the petitioner from one H. H. Rogers through a nominee. They had been acquired by Rogers, presumably, through a sale in foreclosure. The price paid by Rogers is not shown. There is in the record a closing balance sheet of the old company which discloses a second mortgage of $100,000, and since the assets were acquired by the petitioner subject only to a first mortgage, the reasonable presumption is that the company was unable to care for either the principal or interest upon its second mortgage and that it was under this mortgage that a foreclosure sale took place. The record discloses that during the first six months after its organization the petitioner had substantial sales which • continued to increase from year to year. It further appears that approximately 40 per cent of the sales were made under the trade-names and labels acquired at organization and that by reason of the reputation and market for such labeled goods the petitioner was able to obtain a somewhat better price than that at which its competitors could sell similar goods. During the first six months of operation it sustained a considerable loss. During the following three years it had modest profits. Thereafter, its profits were substantial.

On this showing we are asked to find that the Commissioner committed error in refusing to allow any separate value for trademarks, trade-names, and labels.

We believe that it will not be disputed that unless a business such as that which the petitioner acquired has some value as a going concern, its tangible assets such as machinery, equipment, mechandise inventory, and goods in process of manufacture can not be disposed of except at a sacrifice. Sound business judgment dictates that if one is to purchase the assets of a business which has not shown a profit in the past and is to pay therefor an amount which represents substantially the full value of its tangible assets as an operating business, he must be reasonably certain that the business, properly managed, will show profits justifying the price paid. It appears that in the present instance the Commissioner has allowed the tangible assets acquired at organization for stock to be included in invested capital at their value to a successfully operating business. In so doing he has given effect to that intangible value of an operating concern which marks the difference between a sale of its assets at full value and a sale at a liquidating value. He has assumed that there went with these tangible assets sufficient intangible value to make them worth the value which he has placed upon them. In the present instance this intangible value included an established market, and certain trade-marks, trade-names, and labels which were well known. Viewing the record as a whole and attempting to visualize the situation as it existed in July, 1900, we would not be justified in finding that the intangible assets acquired by the petitioner had at that time any value in excess of that allowed indirectly by the Commissioner. By this we do not mean that these trade-names, trade-marks, and labels had no value at that time. Undoubtedly they did have some substantial value and conceivably might have been sold to a competitor for some price, but here we must look to a transaction where the petitioner acquired a very large amount of tangible assets which, without these intangibles, would have had little or no value and where the stock of the company was issued for all of the assets of an operating business, both tangible and intangible. The record justified no separate valuation of the intangible assets and we approve the action of the Commissioner.

The petitioner alleges error in computing the depreciation upon its power plant and upon its machinery and equipment. It appears that in 1919 the power plant was in full operation 20 hours per day. Its plant appears also to have been to some degree obsolescent for in 1922 petitioner abandoned the operation of its power plant and purchased its power from outside sources, finding this cheaper than either continuing the operation of its plant or remodeling to meet new conditions. Under the circumstances, we believe the petitioner is entitled to a 10 per cent rate of depreciation in the taxable year.

Upon its machinery and equipment petitioner claims a rate of 25 per cent, basing its claim upon a normal rate of 10 per cent for normal years with an additional 15 per cent because of overtime operation. It appears that beginning with the year 1916, the petitioner had operated a substantial part of its plant on a 24-hour basis. If the petitioner’s claim for 25 per cent is justified in 1919, a like rate is justified for the three preceding years. The effect of this would be to depreciate the entire machinery account in those four years, but it also appears that substantially all of the machinery which was in the plant in 1911 was still there and in operation in 1919. This fact appears to conclusively dispose of opinion testimony to the effect that 25 per cent was a reasonable rate of depreciation.

Considerable weight is given in the testimony of the witnesses to changes in style making a part of the machinery obsolete. For instance, the petitioner was engaged in the manufacture of eyelet-making machines. High shoes and corsets went out of style and such machinery became useless to a considerable extent. This, however, constituted only a very small portion of the petitioner’s business and apparently the allowance made by the Commissioner will be sufficient to care for such obsolete machinery. Considerable weight was laid upon the rapidity with which such equipment as dies had to be replaced. From the testimony, however, it is fair to assume that all such articles of equipment were charged to expense and therefore play no part in determining the rate of depTeciation upon the machinery and equipment as a whole. We are satisfied that the evidence would not justify us in disturbing the determination of the Commissioner.

Decision will be entered on 10 days’ notice, under Bule 50.


text:
    Heller Brothers Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Heller Tool Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9073, 9072.
    Promulgated January 16, 1928.

      Luther F. Speer, Esq., and Fred A. Woodis, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
   OPINION.

Phillips:

It is contended that the petitioners are affiliated corporations within section 240 of the Revenue Act of 1918 and entitled to file a consolidated return. That section provides that “ corporations shall be deemed affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.” Here one-third of the stock of the Heller Tool Co. was owned by Lyons, who owned none of the common stock of the Heller Brothers Co. The principal contention is that Heller Brothers Co. controlled the output and sales of the Tool Company to the extent that its stock was also under the control of the former company. .

The record shows some intercompany transactions. It also shows that the entire output of the Tool Company was sold on commission by the Heller Brothers Co. Apparently the arrangement was satisfactory to the stockholders of both companies, for the testimony discloses that Lyons had no disagreement with the majority stockholders or they with him. It does not appear that either controlled the other nor does it appear that the sales arrangement with Heller Brothers Co. was more important to the Tool Company than the supply of tools was to the selling company. By eliminating the name on their dies, the Tool Company was equipped to manufacture their product for any purchaser. The record does show that Heller Brothers Co. controlled the board of directors and consequently they were in a position to control the activities of the Tool Company, so long as there was no interference with the rights of the minority stockholder. But this is far from a control of his stock and stock control is the test laid down by the statute. We conclude that the two companies are not affiliated.

In determining profit or loss from the sale of the Yerona Avenue property, the cost of the 30-foot strip conveyed to Heller Brothers Co. should be added to the cost determined by the Commissioner.

The Commissioner determined depreciation and invested capital of Heller Brothers Co. upon the basis of the values of the assets on its books on July 31, 1916. In computing depreciation on the Yerona Avenue stores, for purposes of determining gain or loss on the sale of those stores, he departed from that basis and used as a basis the cost of the property at the date when Heller Brothers Co. acquired it. We must approve the action of the Commissioner since there is no evidence of the March 1, 1913, value of the stores.

It is conceded that the Commissioner made a clerical error, overstating the net income of the Heller Tool Company by $8,340.84.

Decision mill l)e entered accordingly upon %0 days’ notice, under Rule 50.


text:
    Rio Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12756.
    Promulgated January 16, 1928.

      D. V. W. Beckwith, Esq., for the petitioner.

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

Phillips :

This proceeding was submitted upon the pleadings and upon a stipulation of facts', the material portions of which have been incorporated in our findings of fact above. The single question involved is whether the amounts received by the petitioner under contract by which it was to construct an extension of its lines, the cost of which was to be paid by the rual residents of the community served, is taxable as income. The decision of this ques-lion is governed by the decisions of the Board in Appeal of Liberty Light & Power Co., 4 B. T. A. 155, and Great Northern Railway Co. v. Commissioner, 8 B. T. A. 225, 272, which were in turn based upon the decision and opinion of the court in Edwards v. Cuba Railroad Co., 268 U. S. 628. See also Aransas Compress Co. v. Commissioner, 8 B. T. A. 155.

There is no deficiency. Decision will be entered accordingly.


text:
    Klau, Van Pietersom, Dunlap, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6881.
    Promulgated January 16, 1928.

      T. II. Spence, Esq., for the petitioner.

      A. LeRoy Deveney, Esq., for the respondent.
   OPINION.

Phillips :

The sole question before üs for determination is whether the petitioner should be allowed to deduct in 1920 the amount of an indebtedness which it charged off on its accounts as worthless in that year. The respondent admits the existence of the debt and the fact that it was charged off, denying only that the petitioner ascertained the indebtedness to be worthless. Upon this issue the petitioner submitted its testimony which disclosed that its officers were thoroughly familiar with the affairs of the Hacine Auto Tire Co. during 1920 and that due to a series of unfortunate events that company was so hopelessly involved financially that its unsecured creditors could hope to recover nothing more than a nominal amount, if anything, from the liquidation of its affairs. Having-knowledge of the facts which would lead to such a conclusion, it is our opinion that the petitioner properly charged off the account in 1920 and is entitled to deduct the amount as a debt ascertained to be worthless and charged off in that year.

There is no deficiency for 1920. The deficiencies determined by the Commissioner for the fiscal year and for the fiscal period ending in 1919 are approved.

Decision will be entered accordingly.


text:
    John S. Ames, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8895.
    Promulgated January 16, 1928.

      Burton E. Eames-, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Phillips:

In computing the distributive share of the petitioner in the net income of the trust estate of which he was the life beneficiary, the Commissioner refused to allow as a deduction any part of the expenditures made by the trustees during the years 1919 and 1920, on the ground that the amounts involved were chargeable to the principal of the trust fund and were not deductible from income. The question before us is not that of determining whether the payments in question are deductible in computing the net income of the trust, but rather that of determining whether the distributive share of the petitioner in the income of the trust is to be reduced by such payments. In determining whether such amounts were to be charged to the principal of the trust fund, or were to be deducted from the income of the life beneficiary, we must look to the decisions of the courts of the State in which the trust is created. Under decisions of the courts of Massachusetts all current expenses such as taxes, insurance, mortgage interest and repairs are properly chargeable against the income of real property and are to be deducted from such income before any payment is made to the life beneficiary. On the other hand, additions of a permanent character are to be paid for from the principal of the trust fund. The trustees are vested with considerable discretion in determining in which of these classes expenditures fall. Bridge v. Bridge, 146 Mass. 373; Little v. Little, 161 Mass. 188; Jordan v. Jordan, 192 Mass. 337. . In the latter case the court held that improvements which did not permanently increase the value of the inheritance but did enhance the income were properly treated by the trustees as chargeable against income of the trust.

In the case before us it appears that the trustees expended certain amounts as commission for securing a lease for a term of five years and in altering the premises to meet the needs of the new tenant. The portion of the property involved had formerly been used by a florist. It was now to be used as a restaurant and lunchroom. It was necessary to change the location of the entrance to the property, to install new types of electric fixtures and to change the locations of such fixtures, to rearrange the radiators and to make over the heating system in the building, to erect partition walls and replace the floors, to tear out much of the woodwork and replace it with new woodwork which would harmonize with the new fixtures installed by the tenant and, after this work was done, to repaint the entire store. All of this work was done for the purpose of adapting the store and basement for the new use to which it was to be put. It did not increase the life of the property and there was no assurance that it would be of any value after the lease expired. A new tenant coming in at the end of the lease might require much the same thing done to fit the premises for a different use. Such expenditures can not be classed as ordinary and necessary repairs nor can they be classed as additions to the property. They fall between the two and in our opinion are properly chargeable against income over the period of the lease under which they are made. It would not be proper from the standpoint either of income tax or from the standpoint of estate accounting to charge such alterations entirely against the principal account nor would it be proper to charge them against the income in the year in which the alterations are made, for if the life tenant dies before the expiration of the lease the remainderman secures the advantage of the expenditure for such alterations. The same is true of the commission paid for,securing the lease, which ran for a period of five years from July 1, 1919. In recomputing the distributive share of the petitioner in the income of the trust for 1920, one-fifth of such expenditures made in 1919 from the trust of which he is beneficiary and two-ninths of the expenditures so made in 1920 should be deducted.

In addition to the expenditures for alterations to fit the premises to the use of the tenant, certain repairs were made to the building, including the portion which was subject to the new lease. The walls were repaired; broken plaster was cut out and replaced; worn hardware was replaced by new; the roof gutters and conductors used to drain the water from the roof were repaired and in some instances replaced, leaking skylights were repaired; and broken glass replaced. Repairs were made upon the cornice of the building and expenditures made for other similar items in the nature of repairs necessary to preserve tbe building and keep it in efficient operating condition, all at a cost of $1,667 in 1920, of which one-half was properly chargeable against the income of the life tenant. Under the decisions of the courts of Massachusetts such repairs are charged against income and serve to reduce the amount which is paid to the life beneficiary. In recomputing the distributive share of the petitioner in the income from the trust this one-half should be allowed as a deduction from the 1920 income.

The Commissioner having determined no deficiency for 1919 but an overassessment, which it is admitted would result in a refund (if not barred by limitation), the Board is without jurisdiction and the proceeding, so far as it relates to 1919, will be dismissed for want of jurisdiction. R. P. Hazzard Co., 4 B. T. A. 150; Cornelius Cotton Mills, 4 B. T. A. 255.

The deficiency will he reeomfuted on 20 days' notice, under Rule 50.


text:
    Mrs. Lyde McDonald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9336.
    Promulgated January 16, 1928.

      D. W. Rohinson, Jr., Esq., for the petitioner.

      G. H. Curl, Esq., for the respondent.
   Phillips:

This proceeding arises out of the determination by the Commissioner of deficiencies of $6,294.39, in income tax for 1922 and was submitted upon a stipulation of facts which has become a part of the record. Without reciting the stipulation here at length, we set out below what we regard as the principal facts upon which our decision must rest.

In March, 1922, the petitioner recovered a judgment of $40,000 in an action by her against R. S. DesPortes for damages for breach of promise to marry. This judgment was paid to her attorney in 1922. He retained $10,000 as his agreed fee and paid over $30,000 to petitioner. The Commissioner has included said $40,000 as income to the petitioner. She claims that no part of such amount is income or, in the alternative, that error was committed in refusing to make allowance for the amount paid to her attorney and for the March 1, 1913, value of the contract to marry, the contract having been made prior to that date. In the view we take, it is unnecessary to consider the alternative assignments of error.

The Judge presiding in the action in which the verdjct was recovered charged the jury with respect to damages, and the measure thereof, as follows:

I charge you that if you should find that the defendant is liable then the plaintiff would be entitled to:
First, actual damages, that is compensatory damages, such damages as would be the natural and ordinary consequence of the breach of the contract, such damages as would have been in contemplation of the parties at the time the contract was made, and that the plaintiff suffered as a direct and natural cause of that breach.
In estimating the damages, if the jury find the plaintiff had a contract of marriage with the defendant and that the same had been breached by defendant as alleged by the plaintiff, the jury should endeavor to give such damages as would compensate the plaintiff for the actual injury and wrong which she lias suffered at the hands of the defendant.
In estimating the damages, the jury is entitled to take into consideration mortification and pain or distress of mind, if there was such; loss of social standing, if there was such; injury to future prospects of marriage, if there was such; loss of benefits which the injured party might have derived from the union including loss of station to which the marriage would have advanced plaintiff, and loss of a permanent home and worldly advantages, if the jury finds there was such loss of any or all of the elements; length of time the marriage engagement lasted, if there was such, and give to the plaintiff, if she is entitled to damages, such sum as will compensate her for any and all damages and injuries which she may have suffered as the direct and proximate consequence of the breach of the contract.
I charge you that if you should decide that the plaintiff is entitled to damages you may consider such loss as she has sustained by reason of the fact that the defendant has breached the contract, and in this connection you may consider whether or not she has lost provision of a home and how far the defendant has already provided her with a home and what income if any she has and what pecuniary damages, if any, she has suffered by the breach.
In considering the question of damages you may consider what acts the defendant may have done in connection with the promise of marriage, or what acts the plaintiff ma-y have done, and I charge you that you may consider any other matter connected with the case, under the testimony and under the law as I give it to you.
The general character of the defendant must be taken into consideration in estimating the damages — I will change the word “ must ” to “ may ” be taken into consideration — the general character of the plaintiff may be taken into consideration in estimating her damages. The jury might justly and with good sense find that the mental suffering or loss of character of a licentious or bad woman was less than that of a virtuous and good woman. The general character of the plaintiff was therefore a subject of proof on the part of the parties and consideration on the part of the jury.
It is for you to say in this case what mental suffering, if any, or loss of char* acter, if any, the plaintiff sustained, and what damages should be awarded plaintiff, if any, on account of these alleged acts.
The jury should take into consideration, as I stated, what her suffering was, injury to her health, if any, and you might take into consideration, as I stated, her character, and the whole surroundings, in estimating, under the testimony, what she has suffered, if you should find that she is entitled to recover.

Upon the basis of this charge the jury rendered a verdict of $40,000, which the court later refused to set aside.

When we consider the elements which entered into the damages awarded and those decision^ of the Supreme Court in which it has been called upon to determine what is and what is not taxable income J under the various acts, it seems clear that the amount awarded this i petitioner was not taxable as income to her. The decisions to which we have reference and the principles to be considered are set forth in the opinion adopted by the Board in Hawkins v. Commissioner,

6 B. T. A. 1023, and we are content to rest our decision in this proceeding upon the discussion in that case. \

Judgment will be entered for the petitioner.


text:
    Seletha O. (Mrs. J. C.) Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1895.
    Promulgated January 16, 1928.

      E. W. R. Ewing., for the petitioner.

      M. E. McDowell, Esg., for the respondent.
   OPINION.

Phillips :

This proceeding is presented to us on depositions, taken by counsel other than the attorney of record, which include as exhibits several hundred canceled checks and check book stubs containing wholly inadequate memoranda of the purposes for which the checks were drawn, and some testimony as to the general purposes for which such checks were drawn. On the basis of this evidence we are asked to restate petitioner’s entire income and deductions for 1919. The deficiencies in the evidence have to do mainly with deductions claimed as expenses of carrying on a business. The testimony is more satisfactory with regard to certain sales of property upon which the Commissioner is alleged to have erroneously taxed the petitioner.

It appears that during 1919 petitioner was the wife of one H. F. Cauble and was living with her husband in Texas. They had agreed that the earnings of each spouse were to be separate property, an agreement which was recognized by the Texas courts. Separate returns of income were filed by each and the deficiency has been computed on the basis of such separate returns.

During the taxable year the petitioner was engaged in the business of buying and selling oil and gas leases in Texas, prospecting thereon for oil and gas, and in drilling oil and gas wells. The expenses of the business deducted on her return in computing net income, the amounts allowed by the Commissioner, and the amounts now claimed, are as follows:

The evidence establishes that during 1919 the petitioner expended $1,036.40 for maps, abstracts, legal opinions on titles and recording fees, and $3,333.33 in settlement of a suit involving title to leased lands. Such items have been held by the Board to be capital expenditures to be added to the cost of acquiring the property in connection with which they are paid and considered in computing gain or loss on sale or in fixing the basis for depreciation or depletion. McCandless, 5 B. T. A. 1114; Gopher v. Commissioner, 5 B. T. A. 1216. The same is true of the amounts paid for geological surveys and opinions, unless, perhaps, it is shown that such payments were made for surveys and opinions upon tracts never purchased. There is no such showing in this case, the testimony being confined to a bare statement of the amounts paid. Commissions paid in acquiring property are likewise to be considered a part of the cost of the property acquired, while those paid for selling property are properly deducted from the sales price in computing gain or loss. It appears that in computing gain or loss on the sale of leaseholds the Commissioner has so treated some of the amounts now claimed by the petitioner as an expense of the business, and in no case does it appear that the Commissioner has failed to so treat such a payment.

We are without any evidence on which we might base an allowance for depreciation and depletion, although the record would indicate that petitioner is entitled to some depletion. Counsel states in his brief that after the deficiency notice was mailed a further report was made on this matter and that the Commissioner determined $23,800.83 to be a reasonable allowance for depreciation and depletion. If this be so, that amount may properly be allowed in recomputing the deficiency herein.

The evidence respecting the item of pay-roll labor consists of a large number of checks and check-book stubs with testimony to the general effect that such amounts, totaling $21,105.14, were expended for pay rolls. Whether any of such expenditures should properly be capitalized, whether petitioner was to be reimbursed by others for any part of such expeditures, or whether they are properly deductible as ordinary and necessary expenses we are.unable to determine from the record. The Commissioner allowed the full amount dedupted on the return filed by the petitioner and on the record made we can not disturb his detemiination of this item.

Much the same situation exists with respect to the item of drilling expenses. Checks or check-book stubs totaling $33,740.80 have been submitted in evidence. The only statement of the purpose of each expenditure is a short itemization such as “ derrick, lumber, supplies, carpenter work, drilling contract, labor and derrick, casing, fuel oil, hauling, expense on Blk 98, Erickson Well.” While we might conclude that such items as fuel oil, hauling, and minor supplies are properly charged to expense, we are certainly not justified by anything in the record in concluding that such items as casings, derricks and wells, each costing several thousand dollars, are to be charged to expense rather than capitalized as a part of the cost of either permanent equipment used in drilling the well or as improvements upon the leasehold. Furthermore, the evidence indicates that in several instances the petitioner was interested with others in drilling wells and it is not at all clear that these expenditures were all borne by her without reimbursement.

The evidence indicates the expenditure of $514.71 for camp equipment and supplies. What we have said with respect to drilling expense applies with equal force to this item.

The petitioner substantiates by voucher a smaller amount of expenditures for auto and truck expense than was allowed by the Commissioner. It appears quite possible that some of the amounts allowed by the Commissioner are included by petitioner in her claim for drilling expenses, and in view of the unsatisfactory record we do not disturb the Commissioner’s determination of the proper amount to be allowed.

The evidence as to the amount claimed for miscellaneous expenses consists only of certain checks with no statement of the purpose of the expenditure. The Commissioner allowed the amount claimed on the. original return. We have no evidence on which we might allow a greater amount.

The evidence establishes that $3,983.07 was paid for interest on indebtedness and the deduction should be increased accordingly. It also shows the expenditure of $3,036.18 for office ¡salaries, supplies and expenses, $2,100.26 for liability, fire and compensation insurance, $1,150 for rentals on leases, and $220 for advertising, all of which appear to be properly deductible as expenses. The Commissioner’^ determination of the expense of the business is approved except that these additional deductions, totaling $8,857.65, are allowed.

During the taxable year petitioner was operating an apartment house or rooming house in Wichita Falls. The gross .income is admitted to be $7,446.86. On her return petitioner deducted $1,581.86 as expenses of operation, which amount the Commissioner allowed. The evidence establishes that such expenses were $2,185.44. The taxable income from this source should be adjusted accordingly.

On her original return petitioner deducted $1,142.20 as debts ascertained to be worthless and charged off within the taxable year. The Commissioner allowed the deduction. Petitioner now claims $1,504.08. The undisputed evidence is that these amounts represent pergonal loans, worthless checks or payments on notes endorsed, that all of the transactions took place in 1919, that the amounts were uncollectible and were charged off. The increased amount must be allowed.

In her return petitioner deducted $8,945 as the cost of leases which lapsed in 1919. In the deposition submitted there is some testimony with respect to payments made on leases on which petitioner had driller’s contract but it is so confused as to be largely unintelligible and in the brief and an amended petition no reference is made to the deduction claimed.

The Commissioner refused to allow a deduction of $31,133.32 claimed by petitioner as the cost of a well. It appears that in 1919 a well had been drilled t,o a depth of 2,100 feet on property described as the Fore land. The drillers were out of fundg. Petitioner entered into an agreement with them by which she acquired a two-thirds interest in the well and in leases upon a large surrounding acreage. As a part of this purchase she paid $31,133.32 to reimburse the drillers for two-thirds of the cost of the well to the date of ,such purchase. Thereafter the drilling continued throughout 1919 and into 1920, the petitioner paying two-thirds of the cost. The Commissioner refused to permit the deduction of $31,133.32 so paid, classifying it as a capital expenditure. This action of the Commissioner is approved.

In this proceeding the petitioner claims for the first time a loss of $10,000 in a transaction designated as the Chanowsky lease. On April 23, 1919, S. B. Burnett and others executed an oil and gas lease upon four tracts of land to one Chanowsky. It was provided that the lessee should begin operations upon the premises within 6 months after the date of the instrument and that drilling of a well should be prosecuted in good faith to a depth of 3,500 to 4,000 feet unless oil or gas should be discovered at a lesser depth and that such well should be completed within 18 months of the date of said lease. It was further provided that such well should be drilled with cable tools. An assignment of said lease, so. far as it related to a 100-acre parcel of one of said tracts, was made to the petitioner on June 2, 1919, for which she paid $10,000. This assignment was filed for record in May, Í920. At the time petitioner acquired this interest in the lease four or five wells were being drilled in the vicinity. Petitioner was drilling one of these some 500 or 600 feet from the leased property. This well was drilled to 1,400 feet and abandoned in 1919. In 1920 petitioner drilled another well on other property about the same distance from the leased premises. The petitioner did not drill on her portion of the leased premises but her testimony is that a well was started on one of the tracts with a spudder, drilled to about 800 feet and abandoned in 1919 or 1920. She further testifies that Burnett, in 1919, claimed that Chanowsky had not met the conditions of the lease and expressed himself as willing for the petitioner to take over the lease.

The claim that this investment was a loss in 1919 is based on the contention that the lessee did not perform the conditions of the lease by starting to drill a well with cable tools within six months. It appears, however, that a well was started in 1919 with a spudder and drilled to a depth of 800 feet. While the lessor complained that this did not comply with the lease, it does not appear that he took any steps to enforce its provisions or to stop this drilling which, according to the testimony, may have continued over into 1920 before the drilling was abandoned. In such circumstances we do not consider that petitioner has carried the burden of showing that her investment in this lease became worthless in 1919. It is also deserving of some weight that the assignment to the petitioner was recorded by her in 1920, that in the latter year she was drilling within 500 or 600 feet of the leased premises, that' the lessor had expressed a willingness that she should take over the entire leaso, and that no loss was claimed when the income-tax return of petitioner was filed.

During 1919 petitioner sold a number of leases or interests therein. There is no dispute between the parties with respect to the profit or loss on many of such sales except that in his computation the Commissioner gave effect to the cost of title searches, abstracts, surveys, geological opinions, etc., and to commissions paid. The petitioner claims all these items as ordinary and necessary expenses of her business, which claim we have disallowed above on the ground that they are capital expenditures to be considered in computing gain or loss. The action of the Commissioner in his determination of profit or loss on such sales is therefore approved except as particular transactions are dealt with below.

Petitioner, with others, was the owner of an oil and gas lease upon premises described as in Block 97, Bed River Valley Lands subdivision in Wichita County, Texas. In June, 1919, an oil and gas lease upon this tract was conveyed to one Travis in consideration of cash, certain notes, and other payments to be made from oil produced from the premises. As a part of this lease Travis also agreed to deliver to pipe lines for the account of the petitioner and her associates, three-eighths of all oil produced and saved from wells to be drilled on the property. On September 19, 1919, an agreement was entered into by which a portion of this three-eighths interest in the oil and gas produced was to be assigned to one Kamaiky and others, they to pay $100,000 in cash and $360,714 in five notes payable ,in 30, 60, 90, 120, and 150 days, respectively, from such date, with interest at 6 per cent from date. An assignment of the interest to be conveyed was to be executed by petitioner and placed in escrow until the notes should be paid. The agreement was carried out, the cash and notes were delivered to the petitioner and her associates and the assignment placed ,in escrow. During 1919 two of such notes were paid with interest and in 1920 the balances were paid as they became due. The assignment was delivered to the assignees by the escrow agent in 1920. In the meantime the assignees received their portion of the oil under the agreement. The parties agree that the amount received by the petitioner in 1919 from the Travis sale was $42,171.18 and that such transaction is taxable in 1919. They further agree that the petitioner’s share in the proceeds of the assignment to Kamaiky was $77,102.34 but differ as to whether the latter transaction is taxable in 1919 or 1920.

Under the circumstances here, it is our opinion that a completed transaction took place which was taxable in Í919. There was more than a contract to sell these oil rights to Kamaiky; there was a sale in 1919. The whole of the purchase price was paid over to the vendors or assignors, the vendees or assignees went into possession under the assignment and received the oil produced and the proceeds from its sale. They enjoyed and, until default, were entitled to enjoy, all the rights and privileges which they would have when the assignment was delivered. The petitioner, by placing the assignment in escrow, retained the bare legal title for one purpose only, i. e., to secure payment of the notes. Neither the practical nor the legal situation differs from a conveyance of title to the vendee with a mortgage from him to the vendor to secure payment of a part of the purchase price. The petitioner had conveyed her title, and had received payment. She was entitled to collect the notes as they became due without any further steps or further conveyance on her part. That the instrument conveying legal title was held in escrow as security for .payment of the notes can not alter her ownership of the notes. The situation is entirely different from one where the conveyance and the consideration are both placed in escrow pending some future date or occurrence.

We come now to consider what is referred to as the Tuttle lease. The Commissioner determined that petitioner owned a one-half interest and disposed of a one-quarter interest to Enfield and Martin at a profit. We are satisfied that petitioner owned only a one-quarter interest and that Enfield and Martin acquired their interest at the same time as petitioner and at the same price. Petitioner sold portions of her one-quarter interest at prices netting her a profit, as set out in our findings of fact, concerning which there seems to be no dispute. There was one sale to one Ayers upon which the Commissioner computed a profit. The uncontradicted testimony is that such sale was never carried out. The action of the Commissioner in computing gain on these sales in excess of that .shown in the findings is reversed.

The Commissioner included as income to petitioner an alleged gain on the sale of certain property to one Addicks. The testimony discloses that while title was taken in the name of the petitioner and conveyance made by her, the property belonged to her husband and the payments were made to him. The petitioner received no income from this transaction.

Decision will be entered on ¡SO daps’ notice, under Bule SO.


author: MaRQuette :

text:
    American Automatic Press Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5542.
    Promulgated January 17, 1928.

      Edwin Howell, G. P. A., for the petitioner.

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

MaRQuette :

The petitioner claims a deduction from, its 1920 income on account of depreciation of its patents. Section 234 (a) (7) of the Revenue Act of 1918 provides for the deduction from income of “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

However, before such deduction may be had the cost, or March 1, 1913, value of the property subject to exhaustion must be determined. That this is so is apparent when we consider the reason underlying this deduction. This reason has been stated in Appeal of William J. Ostheimer, 1 B. T. A. 18, as follows:

The allowance of a deduction on account of the wear and tear and exhaustion of property, commonly known as depreciation, is based upon the principle of allowing a taxpayer a return of" the capital invested in his business before subjecting his earnings therefrom to tax. Recognition is given to the fact that physical assets are constantly being reduced in value on account of wear, tear, and exhaustion thereof in the business. A taxpayer, however, is permitted to have returned to Mm only the capital which he has invested.

To the same effect is Appeal of Brevoort Hotel Co., 1 B. T. A. 132. Since the patents herein were acquired prior to 1913, the basis for depreciation thereof is the value on March 1 of that year. The record, however, is barren of evidence from which either the cost or the March 1, 1913, value can be ascertained. We know that in 1911 the petitioner issued its capital stock of the par value of $543,836, and received in exchange therefor the patents in question, $54,383.60 in cash, and liabilities amounting to over $40,000; and that petitioner gave to these patents a book value of $489,452.40. At the time petitioner was a newly incorporated company. It had, apparently, no other assets than those just mentioned. So far as we are informed its capital stock had no value. There is not sufficient evidence before us to show that the patents under consideration had any value on March 1, 1913, and there is no justification for any allowance for the exhaustion thereof. The determination of the respondent, therefore, is sustained.

Judgment will Toe entered for the respondent.


author: Littleton:

text:
    Fred G. Hodges, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7729.
    Promulgated January 17, 1928.

      Virgil Y. Moore, Esq., and Andrew T. Smith, Esq., for the petitioner.

      L. A. Luce, Esq., for the respondent.
   OPINION.

Littleton:

The undisputed testimony of the witnesses is that all the company’s assets were sold in August, 1920, at which time it was known that all it could possibly receive for such assets was $5,000 and that prior to December 12, 1920, the $5,000 was applied by the purchaser of its assets to the payment of liabilities, so that prior to December 12, 1920, it was definitely and clearly known that the company had no assets and would not receive anything from the purchaser. The Luster Machinery Co. was, therefore, prior to December 12, 1920, a completely liquidated company wholly without assets. The stock owned by the petitioner was worthless at the end of 1920 and the cost of $30,000 thereof to the petitioner was a proper deduction by him from his gross income for the year 1920.

Judgment will be entered on 10 days’ notice, wider Rule 50.


author: Littleton :

text:
    Louis M. Goldberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11615.
    Promulgated January 17, 1928.

      A. E. James, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Littleton :

Section 204 of the Revenue Act of 1921 governing the questions here presented provides:

(a) That as used in this section the term “ net loss ” means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business) ; and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business exceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect to any mine, oil or gas well as is based upon discovery value in lieu of cost.
(b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of suck excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

Although, petitioner’s liquor business as it had formerly been carried on was somewhat restricted by prohibition legislation and his conclusion at the end of 1922 to discontinue avs soon as he could dispose of the liquor on hand, we are of the opinion from the evidence that he was regularly engaged in the sale of liquor as a business in the year 1928 and that the loss sustained in the operation of that business, amounting to $2,408.65, is deductible from net income for the year 1924.

From the evidence in this proceeding we are of the opinion that the real estate loss of $16,709.74 sustained by the petitioner in the sale of property hereinbefore mentioned was not a loss sustained in the operation of a trade or business regularly carried on by the petitioner within the meaning of section 204 of the Revenue Act of 1921.

The position of the Commissioner is that petitioner had no regular business, that he was merely an officer and employee of the corporation, all of the stock of which he owned. The question here is not whether the corporation may deduct the petitioner’s net Iofss, nor whether the petitioner may deduct a loss of the corporation. For this reason this proceeding is to be distinguished from Wm. J. Robb, 5 B. T. A. 827, and W. C. Hams, 8 B. T. A. 1234.

Petitioner’s activities during the year 1923, outside of his liquor business, were confined almost entirely to the management aud furtherance of the business of the real estate corporation. It appears from the evidence that over the period from 1915 to 1923, inclusive, he occasionally and for convenience made real estate contracts in his own name but these transactions were for and on behalf of the corporation and can not be regarded as establishing that petitioner, as an individual, was regularly engaged in the real estate business within the meaning of the statute. The purchase in 1920 and sale at a loss in 1923 of the house and lot in New Jersey is the only real estate transaction in which petitioner engaged as an individual over a period of nine years. The testimony of petitioner as to whether this transaction was strictly a personal one or whether it was for or on behalf of the corporation is conflicting. Upon cross-examination petitioner testified:

Q. Did you individually purchase it, or the corporation?
A. If I purchased any property in some Instances and they wanted me to go on the bond personally, I would take it in my name and transfer it to the corporation.
Q. Did you purchase the property for the corporation or yourself?
A. If it is for the corporation or myself, it is the same thing, because I own the corporation.
*******
Q. Did you transfer the New Jersey property to the corporation?
A. No, I did not.
Q. Did you purchase it for the corporation?
A. Yes.

Upon redirect examination the petitioner testified as follows:

Q. You testified, Mr. Goldberg, that the property in Deal, New Jersey, was bought for' the corporation. Did you mean to so testify?
A. Well, I always felt when I bought for the corporation or myself, it was all the same.
Q. Which way did you buy it?
A. I did not buy it initially for the corporation. I bought it to sell.
Q. Who took title to it?
A. I took title to it.
Q. Did you transfer it to the corporation?
A. This property?
Q. Yes.
A. No, I never transferred it.
Q. Who sold it?
A. My attorneys.
Q. Who signed the deeds under which it was sold?
A. I signed the deeds.

Assuming, however, that this real estate transaction was strictly carried out by petitioner on his own account as an individual, it was a single transaction in which he made an investment with the view of making a profit and was not sufficient to constitute a trade or business regularly carried on by him within the meaning of the statute. J. J. Harrington, 1 B. T. A. 11; Fridolin Pabst, 6 B. T. A. 843; Harry J. Gutman, 7 B. T. A. 500. Cf. Pan-American Bank & Trust Co., 5 B. T. A. 839.

The Board is of the opinion that the real estate loss in question was not such a loss as may, under the statute, be used in determining the net loss for 1923 which may be carried forward and deducted from net income for the taxable year 1924. Petitioner’s income, deductions, and losses for the year 1923 were as follows:

Income:
Salary_1-$10, 000.00
Interest_,_ 1,159.47
Dividends_ 30. 00
- $11,189. 47
Deductions: Taxes paid- 69. 75
11,119. 72
Net loss from liquor business_ 2,408.65
Heal estate loss_ 16, 709. 74

Under section 204 (a) of the Revenue Act of 1921 petitioner is entitled to carry forward and deduct from net income for 1924 only the net loss of $2,408.65 sustained in 1923 in the operation of his liquor business. Cf. H. J. ScJdesinger, 5 B. T. A. 943.

Judgment will Be entered on IB days’ notice, v/nder Rule 50.


text:
    E. M. Holt Plaid Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8745.
    Promulgated January 17, 1928.

      E. S. Par Jeer, Jr., Esq., and Jessie I. Miller, Esq., for the petitioner.

      Benton BaJeer, Esq., for the respondent.
   OPINION.

Littleton:

We have carefully considered the evidence submitted by the petitioner and from it we are of the opinion that the Commissioner’s allowance for depreciation on the brick mill building at 2% per cent per annum is correct and that the allowance for exhaustion, wear and tear of machinery and equipment should be computed at the rate of 11% per cent, as claimed by the petitioner. The evidence submitted in support of petitioner’s claim that the contributions mentioned should be allowed as a deduction from gross income as an ordinary and necessary business expense is very general and does not in the opinion of the Board establish that the contributions were ordinary and necessary expenses of carrying on the business of the petitioner. It has not been shown that the making of these contributions resulted in any direct benefit to petitioner in carrying on its business. Little more than the fact that the contributions were made is shown. The statute does not authorize the deduction by corporations of contributions of this character, and they should be allowed only upon a clear showing of a direct benefit to the corporation so as to clearly come within the term ordinary and necessary business expenses. Contributions of this character are not ordinary expenses as that term is used in the statute, and we can not say from the evidence that these contributions were necessary expenses. None of the churches were located in the petitioner’s mill village. They were located in the town of Burlington and were attended and maintained by the residents of the town and surrounding communities. Although petitioner’s employees attended these churches, it has not been shown that these contributions were necessary in order to afford petitioner’s employees church facilities. What has been said with reference to the contributions to the churches is also true of the other contributions mentioned. The evidence submitted does not bring this case within the rule laid down by the Board in Appeal of Poinsett Mills, 1 B. T. A. 6. We think the Commissioner correctly denied the deductions as ordinary and necessary expenses in carrying on petitioner’s business.

Judgment will be entered on 10 days' notice, under Rule 50.


text:
    Ethel D. Hearn, Administratrix, Estate of Benjamin F. Hearn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10285.
    Promulgated January 17, 1928.

      John E. McGlure, Esq., for the petitioner.

      L. 0. Mitchell, Esq., for the respondent.
   OPINION.

Lansdon :

The parties having stipulated that the books show that the net income of the partnership for the years 1919 and 1920 was $39,201.29 and $21,372.49, respectively, and neither having produced any evidence that such amounts were not the true net income for such several years, and, it having been proved that Hearn and Caughy owned equal interests in the partnership, it remains only for us to direct that the tax liability of the decedent for such years shall be recomputed under Rule 50, in conformity with the facts so established.

It is not disputed that the amount of $14,701.32, which the respondent added to the income of the decedent for the period January 1, 1921, to January 4, 1921, represents one-half of profits earned by the partnership, but not realized by collection or otherwise prior to December 31, 1920. Inasmuch as it is proved that Hearn kept his books and made his income-tax returns on the cash receipts and disbursements basis, and that a similar procedure was followed by the partnership, we are of the opinion that the respondent was in error in making such addition to Hearn’s income for the period in question.

The respondent added $2,938.43 to the income of the petitioner for the period January 5 to December 31,1921. It is not disputed that this amount represents one-half the net profits of the business conducted by Caughy, the surviving partner, during such period. The evidence is clear that the petitioner received no such amount during the period in question; but the respondent contends that whether distributed or not, one-half the. profits of the business for such period should be taxed to the estate of Hearn, since all its assets remained in and were used in the business for the entire time involved. The petitioner appears to rely on the fact that the partnership of Hearn and. Caughy was terminated by action of law at January 4, 1921,_ and offers no evidence that the estate of Hearn was not entitled to share in the distributive profits of such business earned in the remainder of the year. This contention is not in accord with the well-established law of Maryland, applicable to the facts herein. In the case of Goodburn v. Stevens, 1 Md. 420, et seq., the court said that “ If the surviving partners continue the trade or business, it is at their own risk and they will be liable, at the option of the representatives of the deceased partner, to account for the profits made thereby, or to be charged with interest upon the deceased partner’s share of the surplus, besides bearing all losses.”

Since it appears that the representatives of the deceased partner had the right to demand and recover the proportionate part of the profits of the business during the period here involved, attributable to the interest of the estate in the assets employed, we are of the opinion, that such profits, whether or not distributed, were income to the estate.

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