author: Littleton

text:
    Appeal of EMILIE BAER and MARK HYMAN, as Executors and Trustees under the Will of MORRIS B. BAER, Deceased.
    Docket No. 3532.
    Submitted August 10, 1925.
    Decided February 18, 1926.
    Value of real estate for estate-tax purposes determined.

      Charles E. Scribner, Esq., for the taxpayer.

      FranJc T. Homer, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This appeal is from the determination of a deficiency in estate-tax in the amount of $13,213.91, arising from an increase by the Commissioner of the valuation placed by the executors upon the decedent’s interest in certain real estate.
    FINDINGS OF FACT.
    Emilie Baer and Mark Hyman are the duly qualified and acting executors and trustees under the last will and testament of Morris B. Baer, who died on March 21, 1921, the owner of certain real estate, situated in New York City, and of all the capital stock of the Ursa Realty Corporation, together with three-fourths of the capital stock of the Venture Realty & Construction Co., both being New York corporations.
    The value of the decedent’s interest in the real estate involved herein, as returned by the executors and as determined by the Commissioner, is as follows:

    The real estate listed as item 7 was the sole asset of the Ursa Realty Corporation. The real estate listed as item 8 was owned by the Venture Realty & Construction Co.
    Shortly after the death of Morris B. Baer the executors employed an appraiser to value the decedent’s interest in the real estate. The values placed upon the several parcels of real estate by this appraiser are listed above as returned by the executors. The values as determined by the Commissioner were based upon an appraisal of the real estate in question by an appraiser employed by him for that purpose and upon the opinion of a second real-estate appraiser as to the value of an undivided interest, the condition of the real-estate market in New York in March, 1921, and an appraisal made by him of the property at 72-74-76 East One Hundred and Twenty-fifth Street; 66-70 East One Hundred and Twenty-fifth Street, and 63-67 East One Hundred and Twenty-fourth Street, listed above as items 4, 5, and 6.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION-.

Littleton

: This appeal presents two questions of fact. First, the value at the death of Morris B. Baer of his interest in the several parcels of real estate listed in the findings of fact, and, second, whether the value of a fractional interest in a parcel of real estate is less than the same fractional part of the value of the entire parcel. As to both of these questions, the testimony of the witness for the executors and the witnesses for the Commissioner is in conflict.

In support of their contention as to the value of the real estate, the executors introduced as a witness the appraiser whose values were accepted by them in making the estate-tax return and upon whose testimony they relied for the purpose of showing that the Commissioner’s valuation was erroneous. This appraiser testified at length in support of the values assigned by him to the several parcels of real estate upon the basis of the price per standard lot, taking into consideration the location of the real estate, the improvements thereon, and the real-estate market in March, 1921.

In support of his values, the Commissioner introduced testimony of two real-estate appraisers. The conflict in the testimony of the appraisers, all of whom used substantially the same basis in making their appraisals, is in respect to the desirability of the property, the effect of sales of other property nearby, the condition of the New York real-estate market at the time- of the decedent’s death, and the value of an undivided interest. The witness for the executors testified that the fair market value of an undivided interest was 15 per cent less than its proportion of the value of the whole. The appraisers for the Commissioner testified that, except in foreclosure proceedings, undivided interests usually' sold for their pro rata portion of the entire tract, and submitted evidence of numerous sales of fractional interests for amounts equal to the same proportion of the value of entire tracts.

We do not deem it necessary to discuss in detail the testimony of the appraisers. The appraisals of the witness for the executors and the witnesses for the Commissioner were on substantially the same basis, but differed in the matter of opinion relative to the various factors entering into the value of property at ihat time. From all of the evidence, which has been carefully considered, the Board is of the opinion that the values as determined by the Commissioner should be accepted.


source: Caselaw Access Project

author: Smith

license: Public Domain

text:
    Appeal of THE FARMERS’ LOAN & TRUST CO. and ISABELLE W. TILFORD, Executors, Estate of HENRY MORGAN TILFORD, Deceased.
    Docket No. 3286.
    Submitted July 3, 1925.
    Decided February 18, 1926.
    The New York State transfer tax held, a legal deduction from the gross income of the estate during the period of administration.

      Russell L. Bradford, Esq., for the taxpayer.

      E. G. Lake, Esq., for the Commissioner.
    Before Smith:, James, Littleton, and TRttssell.
    This appeal involves a deficiency in income tax for the year 1920 in the amount of $198,716.09. The question in issue is the right of the taxpayer to deduct from gross income for the taxable year $605,976.18, New York transfer tax paid during the year.
    . findings op pact.
    Henry Morgan Tilford was a resident of Tuxedo Park, N. Y. He died on December 3, 1919⅜ leaving a will naming The Farmers’ Loan & Trust Co. and Isabelle W. Tilford as executor and executrix, respectively.
    An income-tax return was filed for, the estate, for the year 1920, on or before the date specified for the filing of such return. Subsequently, an amended return was filed for that year, showing gross income of approximately $580,623.68, and deductions of $163.58, representing interest paid, and $923,974.30 as estate, transfer, and inheritance taxes paid to the various States in which the testator owned property. Of the amount so deducted, $605,976.18 was paid to the State of New York as transfer tax.
    The books of the taxpayer were examined by a field agent of the Bureau of Internal Revenue, who reported the gross income of the estate at $580,720.62, and allowable deductions as follows: Interest, $163.58; amounts distributable to beneficiaries, $169,079.94; and transfer taxes paid to the States of Maryland, Pennsylvania, and Utah, in the amount of $14,166.01. The amount paid as transfer tax to the State of New York was disallowed as a deduction. The report of the revenue agent was accepted by the Commissioner in determining the deficiency here in question.
    DECISION.
    The determination of the Commissioner is disallowed.
   OPINION.

Smith

: The asserted deficiency in this appeal rests entirely upon the. claim of the Commissioner that the New York State transfer tax is not an allowable deduction from gross income. Both the courts amd the Board have held otherwise. Keith v. Johnson, 3 Fed. (2d) 361; Farmers' Loan & Trust Co. v. United States, 9 Fed. (2d) 688; Appeal of Edgar Munson, 3 B. T. A. 185; Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97.


author: Teussell

text:
    Appeal of KEHOTA MINING CO.
    Docket No. 1117.
    Submitted June 9, 1925.
    Decided February 18, 1926.
    1. A corporate taxpayer organized in 1916 and engaged in coal . mining operations is entitled to a deduction for depreciation of buildings and all miscellaneous equipment used in its business, computed on the basis of the cost, less salvage, if any, and spread over the estimated time of continuing mining operations in proportion to the quantity of coal produced during each accounting period.
    2. Said corporate taxpayer is entitled to a depreciation deduction upon the cost of steam and electric shovel units, less salvage, computed upon the basis of the number of tons of coal which each shovel unit will remove.
    3. Said corporate taxpayer is entitled -to a deduction for depletion of the coal content of its lands, ascertained by dividing the cost of the lands by the final estimate of tons of coal in place at the beginning of mining operations.

      Hale Hill, Esq., for the taxpayer;

      B. H. Saunders, Esq., for the Commissioner.
    Before Jabíes, Littleton, Smith, and Thussell.
    This is an appeal from the determination of deficiencies in income and profits taxes for the year 1917 of $12,786.99, and for the year 1920 of $26,829.78, and an overassessment for the year 1918 of $16,027.16. The deficiencies result from the disallowance by the Commissioner of amounts claimed for depreciation on machinery and equipment and depletion of coal mines.
    FINDINGS OF FACT.
    The taxpayer is a corporation, organized in 1916 under the laws of the State of Ohio, with its principal office in the City of Pittsburgh, Pa.; and, during the years in question, was engaged in the business of producing coal by what is commonly known as the stripping process. The coal was stripped by large steam shovels, which were used in removing the overburden of dirt and rock. After the coal was stripped, smaller electric shovels were used to remove the coal and load it in cars.
    Taxpayer’s coal properties consisted of three tracts of land, one located in Perry County, near Saltillo, on the New Tork Central Railroad-; one on the Baltimore & Ohio Railroad, designated as the McCune mines; and the other, commonly known as the Baird property, on the Hocking Valley Railroad, or connected by a branch with the Hocking Valley Railroad, all in the State of Ohio.
    In 1916, when these coal properties were acquired, it was estimated that the coal content was approximately 3,822,530 tons. The actual cost of the coal lands was $266,700. During the years 1918, 1919, and 1920, it became evident that the original estimate of coal was excessive, and in 1922 a new and correct estimate was made showing 3,205,958 tons of recoverable coal.
    In order to market this coal, the taxpayer installed the equipment and machinery necessary to strip and mine the coal, at a total cost of $1,059,098.05 for the years 1916 to 1920, inclusive. The equipment and machinery installed consisted of electric appliances, shovels, locomotives, cars, tipples, railroad tracks, mine tracks, store rooms and offices, engine houses and shops, horses, automobiles, tools, and other miscellaneous equipment. The largest item was the steam and electric shovels, which, on December 31, 1920, amounted to $565,413.68, or a little more than one-half the total expenditures for equipment and machinery. The life of the steam and electric shovels, based on units of production, was at first estimated at 500,-000 tons of merchantable strippings per shovel, but later it developed that the solidity of the overburden in places reduced the life of the shovels to about 400,000 tons of merchantable coal per shovel. The total amount expended for machinery and equipment for the years 1916 to 1920, inclusive, was as follows:
    For the year 1916_ $107,450. 76
    For the year 1917_ 342,547.57
    For the year 1918_1_ 486, 597. 65
    For the year 1919_ 97,135. 84
    For the year 1920_ 25, 366. 23
    Total_ 1,059,098.05
    This machinery and equipment had a life sufficient, with minor replacements, to mine out the coal contained in the mine.
    Taxpayer built near the mines and owned 20 dwelling houses for use of the miners. The houses were built during the years 1917, 1918, and 1919, at a total cost of $27,178.52, apportioned as follows:

      . 1917.
    October_$3,190. 98
    November_ 5, 203. 79
    December_^_3, 025. 63
    1918.
    May_ 2,420.12
    July_ 5, 000. 00
    August___ 635. 00
    September_ 4, 065.00
    1919.
    January_ 3,638.00
    Total_$27,178. 52
    The houses will have no value when the coal is exhausted. Under normal conditions, all of the coal would be mined out on or before January 1, 1932. Taxpayer took no depreciation, either on its books or in its income-tax returns, on said dwelling houses during any of the years in question, and now asks that depreciation be allowed on the basis of cost and the useful life of the buildings.
    The taxpayer produced coal from these mines during the years in question as follows:
    Tons
    1916_ . 1,344
    1917_ 99, 749
    1918_ 246,430
    1919_ 255,186
    1920_!_ 464,213
    The taxpayer in its returns for the years 1917, 1918, 1919, and 1920, took depreciation deductions on physical properties on the basis of units of production of coal at 25 cents per ton for each ton of coal produced for each of said years. The Commissioner allowed depreciation on tonnage based on the rate of 2.8 cents per ton produced during the year 1917; 12 cents per ton produced during the year 1918; 24.3 cents per ton produced for the year 1919, and 27.3 cents per ton produced for the year 1920. The taxpayer, in its income and profits tax returns for the years involved, took a depletion deduction of 10 cents for each ton of coal produced during each year. The Commissioner reduced this rate to 7 cents for each ton of coal produced during each of said years.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Rule 50.
   OPINION.

Teussell

: The questions presented in this appeal are. whether the taxpayer is entitled to a greater rate of depreciation on mining machinery and equipment and dwelling houses erected near the mines, less salvage, than that allowed by the Commissioner; and, also, whether taxpayer is entitled to a greater deduction for depletion of mines than that allowed by the Commissioner.

Section 234 (a) (9) of the Revenue Act of 1918 provides that taxpayers engaged in the recovery and merchandising of natural resources may have deductions from gross income due to the depletion of such resources and the wear and tear of equipment used in the business, and such provision is in the following language:

In case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted.

• The’ Commissioner, with the approval of the Secretary of the Treasury, for the purpose of administering this provision of law, adopted a regulation as follows (Regulations 45, art. 165) :

The capital sum to be replaced should be charged off over the useful life of the property either in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of the capital sum over units of production.

The record of this appeal establishes that the taxpayer began business in 1916 with coal-bearing lands, either at that time or immediately thereafter acquired at a cost of $266,700 and having a coal tonnage in place originally estimated as 3,822,530 tons of merchantable coal. Some time later this estimate was revised. The engineer’s final figures of original coal content of the lands owned by the taxpayer is 3,205,958 tons; and, for the purpose of the computation of depreciation and depletion, we have accepted the latter estimate as the amount of recoverable merchantable coal originally underlying the taxpayer’s properties. Mining operations began in 1916, and the engineer’s estimate established the period of continuing mining operations as ending December 31, 1931. Depreciation, therefore, of the taxpayer’s equipment should be computed upon the cost of equipment used, in the light of its character and the period of operations beginning in 1916 and ending in 1931.

The equipment installed and used by the taxpayer appears, for the purposes of depreciation, to be all properly considered in two groups, in one of which should be the units of steam and electric shovels, the estimated life of which is limited to the production of not more than 500,000 tons of coal per unit of shovels, while in another group all the other miscellaneous equipment and buildings necessary to the taxpayer’s business, with such additions and replacements as the operations require, may be included and may be depreciated upon the basis of use throughout the period of mining operations.

In view of all the facts set forth in the findings, we are of the opinion: (1) That the total cost of all the miscellaneous equipment, buildings, and miners’ dwellings, less estimated salvage, if any, at the completion of mining operations, should be credited with an annual depreciation deduction found as follows: To the cost of such equipment at the beginning of each year, less salvage, if any, and depreciation actually sustained bn the basis of this formula, add the coát, less salvage, of additions not including replacements made during the year averaged, divide this amount by the quantity of coal in place at the beginning of the year, ascertained by deducting from 8,205,958 tons the total number of tons mined to the beginning of the taxable year, and multiply by the number of tons removed during the year; (2) that the total cost of steam and electric shovel units, less estimated salvage, if any, should be credited with depreciation deduction each year, found as follows: To the original cost, less estimated salvage, if any, add additions not including replacements made during the year, if any, divide by 500,000 tons and multiply by the number of tons of coal removed during each year by each shovel unit in use.

Depletion of coal content for each of the years under consideration should be found by dividing the cost of coal-bearing lands by 3,205,958, the estimated number of tons in place at the beginning of operations. This process will produce a depletion unit of 8.31888 cents per ton of recoverable coal.


author: Tkussell

text:
    Appeal of E. W. EDWARDS & SONS.
    Docket No. 5318.
    Submitted November 30, 1925.
    Decided February 19, 1926.
    Tile cost ol constructing tunnels, under public streets, connecting store buildings, held to be capital expenditures and not ordinary and necessary expenses'for the years in which paid.

      Charles E. Cooney, Esq., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before Smith and Tetjssell.
    This appeal involves income tax liability for the fiscal years ended January 31, 1919, 1920; and 1921, as follows:
    Tear 1919, overassessment_1_1_$4,181. 04
    Xear 1920, deficiency_„— 5,227. 64
    Xear 1921, deficiency_,_,___12,181.54
    Total deficiency 17, 409.18

      The deficiency arose from the action of the Commissioner in treating expenditures for certain tunnels under public streets and connecting certain stores of the taxpayer as capital expenditures and not allowing the cost thereof as a deduction from gross income.
    FINDINGS OF FACT.
    1. The taxpayer is a ISTew York corporation, with its principal place of business at Syracuse. It operated large department stores, both in Syracuse and Rochester, in said State.
    2. In the year 1913 the taxpayer constructed, at a cost of $5,199.14, a tunnel under a street, known as Division Street, in the City of Rochester, which connected a large store upon leased premises with a new building it owned across the street.
    In the year 1921 the taxpayer constructed tunnels under certain other streets, known as Liberty and St. Paul Streets, in the said City of Rochester, which connected two other stores owned by it on leased property with its store in its own building, at a cost of $25,826.94. The construction of the tunnels was authorized by ordinances of the said City of Rochester.
    3. The taxpayer treated the cost of the said tunnels as a business expense and deduced $5,199.14 from the gross income for the year 1913 and the sum of $25,826.94 from the gross income for the fiscal year 1921. The Commissioner refused to allow said sums as deductible expense, but treated them as capital expenditures and also restored them to invested capital for the years affected thereby.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Tkussell

: The taxpayer contends that the tunnels were on municipal property; that the municipal officials had no authority to permit the construction of said tunnels; and that the taxpayer had no legal or equitable title to the same and only occupied the city property by license revocable at will.

The right of municipalities to grant franchises and permits for the exclusive use of parts of public streets, whether upon or over or under the surface thereof, has been long and generally recognized; and that such franchises and permits, and the construction necessary for the profitable use of the same, have a capital value which may be continuously used in carrying on business or may be the subject of purchase and sale so long as the franchises continue or the permits are not revoked, is too well established to be seriously questioned. The taxpayer’s tunnels were constructed under municipal ordinances, and so long as such ordinances remain unrepealed the right to use such tunnels and the cost of their construction must be presumed to have a continuing capital value to the taxpayer’s business. The cost of constructing such tunnels should be treated as a capital expenditure, subject to an allowance for exhaustion of the construction cost.


author: GREEN:

text:
    Appeal of THE BARNES COAL & MINING CO. and THE COLUMBUS COAL & MINING CO.
    Docket No. 3209.
    Submitted July 15, 1925.
    Decided February 19, 1926.
    1. Upon evidence introduced, taxpayers held to be affiliated.
    2. Evidence held insufficient to overcome Commissioner’s determination with respect to the invested capital of the Columbus Coal & Mining Co.
    3. Value of assets acquired by the Barnes Coal & Mining Co. in exchange for its stock, determined.

      Warner M. Pomerene and William B. Pomerene, Esqs., for the taxpayers.

      Lee I. Park, Esq., for the Commissioner.
    Before Gkeen and MoRRis.
    The Commissioner has determined deficiencies in income and profits taxes for the calendar year 19Í8 in the sum of $50,392.58, of which amount there is in controversy in this appeal the sum of $9,885.33.
    The petition asserts as the grounds of the appeal:
    (1) That the Commissioner erred in holding that the Barnes Coal & Mining Co. and the Columbus Coal & Mining Co. were not, in the year 1918, affiliated corporations;
    (2) That he erred in deducting from the invested capital of the Columbus Coal & Mining Co. the sum of $65,000;
    (3) That he erred in refusing to allow the Barnes Coal & Mining Co. a paid-in surplus in the sum of $52,899.95;
    (4) That he erred in deducting the sum of $5,000 from the invested capital of the Barnes Coal & Mining Co.; and,
    (5) That he erred in reducing the depletion rate applicable to coal mined by the Barnes Coal & Mining Co.
    No proof was offered as to the $5,000 item set out as the fourth ground of the appeal, and we conclude that it was either abandoned or is included in one of the other claims made by the petitioners.
    The fifth assignment of error was abandoned at the hearing.

      FINDINGS OP PACT.
    . The Columbus Coal & Mining Co., an Ohio corporation, was organized in 1884. The Barnes Coal & Mining-Co., an Ohio corporation, was organized in 1906. Both companies have their principal place of business at Coshocton. The. mines of the two companies are some 7 miles apart.
    The stockholdings in the two companies during the years in ques- . tion were as follows:

    One share of stock in the Barnes Coal & Mining Co., listed above as the property of Bollin N. Barnes, was in fact issued to Marguerite E. Barnes, the wife of Bollin IST. Barnes, and was issued to her to qualify her as a director of the company. One share of stock in the Columbus Coal & Mining Co., listed above as the property of Clyde F. Barnes, was in fact issued to Olive M. Barnes, and was issued to her to qualify her as a director of that company. In each case the share is actually the property of the husband.
    The directors and officers of the two companies during the year 1918 were as follows:

    Clyde F. Barnes is the father of Bollin IST. and Francis N. Barnes. Olive M. Barnes is the wife of Clyde F. Barnes and Marguerite E. Barnes is the wife of Bollin N. Barnes.
    Bollin IST. Barnes was the general manager and superintendent of both companies. He was actively in charge of the mines of both companies and devoted his entire time to the operation thereof, devoting, to each mine so much of his time as the affairs of that mine required, having in mind the general success of both and without giving preference to either.
    Both companies were operated from the samé office. Clyde F. Barnes, secretary and treasurer of both companies, was in charge of the office work of both and did a large part of such work himself.
    A. F. Baier was the sales manager of a company which handled the sales of coal from both mines. He took little part in the operation of the mines, but was always consulted in all matters relating to the sales of coal.
    The coal from both mines was sold through the same sales agency. Orders were received sometimes in the name of one company and sometimes in the name of the other and were filled from the coal of whichever mine could most advantageously fill the order, with no attempt to favor either company. The mines of the two companies were operated practically as a unit. Machinery and labor were moved from one to the other as the occasion required. Each company loaned to the other, without interest or profit, money and credit and cooperated in the purchase of supplies and materials. Bollin FT. Barnes, Francis N. Barnes, and O. F. Barnes, each, as the conditions required, loaned his personal credit to the companies. If the available funds of one company were not sufficient to pay officers’ salaries, they were paid by the other company or by the individual stockholders.
    Each of the stockholders voted his stock independently of the other stockholders. There was no control of any stockholder’s stock by any other stockholder or by either of the companies.
    The Columbus Co., at the time of its incorporation, had an authorized capital of $15,000. Stock of the par value of that amount was issued at the time of its organization for mining properties in Hocking, Perry, and Coshocton Counties, Ohio. All of the persons who had actual knowledge of the value of the assets acquired in exchange for the stock are dead.
    In 1906 the office of the- Columbus Co. was moved from Columbus to Coshocton, Ohio. At that time all of the books and records pertaining to the organization and operation, of the company, with the exception of the corporate record book and the stock .book, were destroyed, and there are available at this time no records, other than the two referred to, which are evidence of the value of the assets received by the corporation in exchange for its stock.
    No dividends were paid by the Columbus Co. prior to 1901, nor were other distributions made to stockholders of the Columbus Co. prior to 1904. During this period, however, the company did sustain substantial losses, the exact amount of which was not disclosed by the evidence.

      In the year 1902 the authorized capital stock of the company was reduced from $15,000 to $10,000 by appropriate amendments to the charter. This action was taken for the purpose of reducing the amount of the State franchise tax. So far as the record discloses the authorized capital stock was not increased thereafter.
    In April, 1906, the Barnes Coal' & Mining Co. was formed to take over from a partnership composed of F. 1ST. Barnes, B. 1ST. Barnes, C. F. Barnes, and several associates, certain mining properties, together with the equipment ■ thereon, owned and operated by the partnership prior to that time. The principal acquisition was that of a certain mine acquired by B. N. Barnes for himself and the other members of the partnership by purchase from the Lorain Coal & Dock Co. during February, 1906. The assets acquired from the Lorain Coal & Dock Co. are listed and had a value as of the date of acquisition, as follows :
    326 acres of surface-:_$2, 394. 00
    186 acres of coal- 16, 293. 60
    Machinery, equipment, and supplies_ 29, 050.01
    Contract with the Wheeling & Lake Erie it. R. Co. for rebates of freight_ 5, 000. 00
    Total_ 52,737.61
    This property was purchased for $25,000, turned over to the Barnes Coal & Mining Co. for its entire issue of capital stock of the par value of $10,000, and was set up on the books of the company as having the value of $30,000.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

GREEN:

There are in this case three issues: (1) Are the petitioners affiliated? (2) Should the Columbus Coal & Mining Co. be allowed as invested capital an amount equal to the par value of the stock exchanged for assets? (3) Is the Barnes Coal & Mining Co. entitled to a paid-in surplus, and if so, the amount thereof ?

The first issue depends upon whether the petitioners meet the requirements of paragraph (b) of section 240 of the Bevenue Act of 1918. That paragraph reads as follows:

Eor the^urpose of this section two or more domestic corporations shall be deemed to be 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.

It is clear that neither corporation owned or controlled any part of the stock of the other and that, if the corporations are to be deemed affiliated, it must be because “ substantially all the stock is owned or controlled by the same interests.”

An examination of the stockholdings discloses that four men, each of whom is a stockholder in both companies, own all of the stock In the Barnes Co. their holdings are equal. In the Columbus Co. one owns 40 per cent and the other three 20 per cent each.

We have no question of control and have remaining only the question of whether this ownership by four men is ownership “by the same interests.” The inevitable conclusion from an examination of the evidence in this case is that substantially all the stock of the corporations was owned by the same interests. This being true, we hold that statutory requirements have been met and that the corporations should be deemed affiliated. See Appeal of Rowe Transfer & Coal Co., 1 B. T. A. 593; Appeal of Rishell Phonograph Co., 2 B. T. A. 229; Appeal of Watsontown Brich Co., 3 B. T. A. 85.

In support of the second contention, counsel argue convincingly that, under the common law and the statutes of Ohio in effect at the time the stock of the Columbus Coal & Mining Co. was exchanged for the mining properties, it was the duty of the directors on' an exchange of stock for property to secure property of a par value equal to the par value of the stock exchanged, and that there is a presumption that the officers acted regularly and in accordance with the law. Thus they argue that proof of the issuance of stock of the par value of $15,000 raises the presumption that the assets received in exchange were worth $75,000. It is not necessary for us to determine whether, under the common law or the statutes of Ohio, such a presumption arises.

If we assume that the petitioners’ contention is correct, the question then is whether the presumption is sufficient to sustain the burden of proof. Such a presumption is rebuttable and is far from conclusive. The weight to be given to presumptions must be determined from common experience, and common experience in transactions wherein corporate stock is exchanged for property leads us all to scrutinize closely such a transaction. Such a presumption, unsupported by actual evidence of the value of the property received, is insufficient to sustain the burden of proof, and as to this point in the case we must affirm the Commissioner. Appeal of W. E. Marshall & Co., 1 B. T. A. 175; Appeal of Central Consumers Wine & Liquor Co., 1 B. T. A. 1190.

A determination of the third issue necessitates a valuation of the assets received by the Barnes Coal & Mining Co. in exchange for its stock. There was no weakness in the evidence offered as to the value of the assets acquired, and we have found as facts the values which were proven, except that, while the evidence shows the existence and transfer to the petitioner of the claim against the railroad of $5,162.34 and its subsequent payment, there was no evidence of its actual value on the day of acquisition, and we are not convinced that such a claim was worth its full face value. The evidence does clearly indicate that it had a substantial value and we have fixed it at $5,000.


text:
    Appeal of ANNIE L. DEAN.
    Docket No. 1552.
    Submitted December 12, 1925.
    Decided February 19, 1926.

      Phil D. Moreloolc and Dudley Doolittle, Esqs., for the taxpayer.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    This is an appeal from the determination of a deficiency in income tax for the year 1928 in the amount of $216.80, of which $119.42 is in controversy. The sole issue is whether depreciation and obsolescence on certain buildings owned by the taxpayer shall be computed for income-tax purposes on a straight-line basis at 5 per cent per annum, as contended by the taxpayer, or at 2½ per cent per annum as asserted by the Commissioner. There is no dispute as to the basis upon- which depreciation and obsolescence shall be computed.
    FINDINGS OP PACT.
    The taxpayer is an individual, residing in Kansas City, Mo., and is the owner of four parcels of improved land located in that city, which will be referred to hereinafter as properties Nos. 1, 2, 3, and 4, respectively.

      Property No. 1, located at 1105-7 McGee Street, in 1923 was improved with a two-story and basement store building, constructed of brick and wood with some steel beams and an ornamental terracotta front. This location is within the downtown business district and less than three squares from the Federal Reserve Bank Building. At March 1, 1913, it had a remaining useful life of 25 years and a value of $27,842.53.

      Property No. % is located at 1328 McGee Street, and is within the downtown business district. In 1923 it was improved with an old two-story dwelling, which was remodeled and reconstructed for business uses in 1910 or 1911 at a cost of $10,990.53. It is only on the cost of reconstruction that the taxpayer has taken a deduction in her income-tax returns for depreciation. The valué of the depre-ciable assets on this property at March 1, 1913, was $9,900.53, and the improvements had a remaining useful life of 15 years.

      Property No. §, located within the downtown business district, at 1332-1334 McGee Street, in 1923 was improved with seven one-story business buildings, cheaply constructed of soft, second-hand brick and wood, with tarred paper and gravel roofs and concrete floors of the type commonly referred to among real estate men as 4‘taxpayers.” If not demolished to make room for structures suitable to the business needs of the locality, these buildings had a remaining useful life of 20 years and a value of $8,300 at March 1, 1913.

      Property No. 1¡., located at Eighteenth and Holmes Streets, in 1923 was improved with a two-story and basement building of brick and wood construction. The basement and a part of the first floor were occupied by a laundry for many years. The vibration of machinery and the effect of the steam incidental to the operation of the laundry damaged the walls and woodwork of this building to such an extent that it was necessary to shore up the walls and make very substantial repairs to fit it for the use of other tenants after the laundry moved out. Taxpayer paid $60,000 for this property in 1918. The •depreciable assets thereon then had a remaining useful life of 20 years and a value of $32,327.05.
   DECISION.

The deficiency should be computed in conformity with the foregoing findings of fact. Final determination will be made on 15 ■days5 notice, under Hule 50.


author: Arttndell:

text:
    Appeal of ETTENSON WINNIG DRY GOODS CO.
    Docket No. 362.
    Submitted November 4, 1925.
    Decided February 19, 1926.
    Upon tbe evidence, held, that tbe Excelsior Springs Mineral Water & Bottling Co., a subsidiary of tbe Ettenson Winnig Dry Goods Co., sustained a net loss for tbe calendar year 1918, and tbe net income of tbe consolidated group for tbe fiscal year under consideration should be determined witb due regard to such loss.
    P. W. Shrader, Esq., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.

      Before SteRnhagen, LaNSdoN, and Arttndell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended January 31, 1919, in the amount of $1,407.40. The deficiency arises from the fact that the Commissioner determined the net income of a subsidiary company by-reference to certain journal entries and disregarded other accounts which the taxpayer contends must be considered in order to reflect its true income.
    BINDINGS OP PACT.
    The taxpayer is a Kansas corporation, with its principal office at Leavenworth.
    The Excelsior Springs Mineral Water & Bottling Co. is a Missouri corporation, with its principal office at Excelsior Springs.
    For the fiscal year ended January 31, 1919, the Ettenson Winnig Dry Goods Co., the Excelsior Springs Mineral Water & Bottling Co., and the Excelsior Springs Land & Waters Co. filed a consolidated return.
    The books of the taxpayer, the parent company, were maintained on the basis of an accounting period ending on January 31, while those of the Excelsior Springs Mineral Water & Bottling Co. were maintained on the basis of an accounting period coinciding with the calendar year.
    The Commissioner, using solely the journal entries closing the nominal expense and income accounts for the year into the profit and loss account as a basis, found that the sales for the year amounted to $20,339.96, the expenses to $11,069.93, and the net income to $9,270.03, the latter amount being the difference between the sales and expenses, as disclosed by the closing journal entries.
    The journal entries purporting to close the nominal expense and income accounts ,of the Excelsior Springs Mineral Water <& Bottling Co. for the calendar year 1918 into the profit and loss account, upon which journal entries the Commissioner relied as a basis for computing that company’s net income, were incomplete, in that they failed to close into the profit and loss account 19 expense accounts and 6 income accounts, said accounts being transferred to the profit and loss account without any journal entries.
    The 19 expense accounts "not included in the Commissioner’s computation of net income total $16,484.93, while the 5 income accounts not included in that computation total $6,444.73.
    In his computation of net income, the Commissioner allowed as deductions donations of $145 to the B.ed Cross, $20 to the Salvation Army, $5 to the Boys Fife and Drum Corps, $25 to the Y. M. C. A., $25 to the Excelsior Springs Military Band, and $2 to J. A. De Hoff, a total of $222.

      Advertising was allowed as a deduction by the Commissioner in the sum of $252.04, which is the amount shown by the closing journal entries transferring to profit and loss the sum of $211.04 from “ Complimentary advertising No. 1 ” and the sum of $41. from “ Complimentary advertising No. 2.” The correct amount transferred from “ Complimentary advertising No. 2,” as shown by the ledger account, was $46, the journal entry being in error.
    The result of operations for the calendar year 1918 was that the Excelsior Springs Mineral Water & Bottling1 Co. sustained an actual loss of $775.17.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Arttndell:

We have set out in our findings of fact the method resorted to by the Commissioner in computing what he alleges was the net income of the Excelsior Springs Mineral Water & Bottling Co. for the calendar year 1918. The Commissioner’s computation of net income, baséd solely upon the closing journal entries, is erroneous, since it fails to take into account 19 expense accounts totaling $15,484.93 and 5 income accounts totaling $5,444.73, which accounts were transferred to profit and loss without formal journal entry. Also, we have pointed out in our findings of fact that the journal entry transferring “ Complimentary advertising No. 2 ” to profit and loss is in error to the extent of $5.

It will be noted from the findings of fact that the Commissioner has allowed as donations amounts totaling $222. This was error, as donations are not deductible by corporations.

For the purpose of proving the accuracy of the ledger accounts and their dependability as a basis for computing net income for income and profits-tax purposes, the taxpayer presented in evidence the general ledger and journal of the Excelsior Springs Mineral Water & Bottling Co. for the entire calendar year 1918, and that company’s vouchers for the first eight months of the year. The vouchers for the last four months of the year have been misplaced or destroyed. The Board has made a careful examination of these records for the first eight months of 1918 and has satisfied itself that the general ledger accounts for that period of time are correct. Under such circumstances, we accept the gen-, e^al ledger accounts for the entire year 1918 as correct and as a proper basis for the determination of the results of the operations of the Excelsior Springs Mineral Water & Bottling Co.

We have found that, for the calendar year 1918, the Excelsior Springs Mineral Water & Bottling Co. sustained a net loss of $553.17, and this we have computed in the following manner:

Net profit as found by the Commissioner- $9,270.03
Add:
Income accounts not considered by Commissioner:
Rentals_ $128. 00
Receipts from operation of pavilion No. 1_ 3,857. 54
Receipts from operation of pavilion No. 2- 1, 085.17
Sales of bottles_ 374. 02
- 5,444.73
Total_ 14, 714. 76
Deduct: Expenses not considered by Commissioner:
Packing material_ 205. 30
Carbonating gas_ 429.47
Bottle supplies_1, 318.11
Superintendent’s salary_ 1, 200. 00
Fuel, light, water, power_i- 331. 32
Wages in plant__ 2, 704. 88
Repairs to machinery_ 245.98
Repairs to buildings- 51. 95
Repairs to grounds_ 36. 53
Sulpho-saline well wages- 588. 75
Sulpho-saline pavilions_ 482. 56
Opening expenses new pavilion_ 380. 03
Operating expenses new pavilion_■- 314. 91
Operating expenses pavilions 1 and 2_ 2, 809.47
Soda-water cases and bottles_ 26. 67
Empty cases supply account- 688.17
Ginger ale and soda water supplies_ 959. 35
Bottle supply account_'- 2, 482. 79
Insurance_:_ 228. 69
15, 484. 93
Difference_•_ 770.17
Add: Error in journal entry transferring “ Complimentary advertising No. 2 ” to profit and loss_ 5. 00
Actual loss sustained for year___ 775.17
Deduct: Donations allowed as deductions by Commissioner_ 222. 00
Loss for income-tax purposes_,_ 553.17

We conclude that the consolidated net income for the fiscal year ended January 31, 1919, should be computed, with due consideration to the loss of $553.17 sustained by the Excelsior Springs Mineral Water & Bottling Co. for the calendar year 1918.


text:
    Appeals of C. R. GOUDIE, L. R. GOUDIE, and G. A. GOUDIE.
    Docket Nos. 2147-2149.
    Submitted November 14, 1925.
    Decided February 19, 1926.

      Phil D. Moreloch and Dudley Doolittle, Esqs., for the taxpayers.

      A. H. Fast, Esq., for the Commissioner.
    Before Steenhagen, Lansdon, and Arundell.
    These appeals are from determinations of deficiencies in income taxes for the year 1919, in the respective amounts of $866.76, $890, and $811.95. They arise from the same state of facts. Counsel for the parties stipulated that they might be heard and decided together. In each appeal the single error pleaded is the inclusion in taxable income of an alleged liquidating dividend of a corporation of which the petitioners were stockholders. No evidence was offered at the hearing. The taxpayers rely on the Commissioner’s admissions in his answers to the allegations of fact in the petitions.
    FINDINGS OE FACT.
    The taxpayers were stockholders of the Carnie-Goudie Manufacturing Co. during the taxable year. On September 20, 1917, the Oil Belt Tent Co. was organized. The money invested in the latter was obtained from a bank on the credit of the first-named, company. All the shares of the Oil Belt Tent Co. were issued to the stockholders of the Carnie-Goudie Manufacturing. Co. in proportion to their ownership of stock in that corporation. The Oil Belt Tent Co. had certain Government contracts. It operated during the remainder of 1917, after its incorporation, and during a part of 1918, and accumulated a surplus of $16,372.67. When it was liquidated in 1919-, such surplus, in the amount of $16,372.67, disclosed by its trial balance, was amalgamated with the surplus of the Carnie-Goudie Manufacturing Co.
   DECISION t

The determinations of the Commissioner are approved.


text:
    Appeal of REUBEN ROSENBERG.
    Docket No. 4671.
    Submitted December 15, 1925.
    Decided February 19, 1926.

      Samuel P. Garm,an, Esq., for the taxpayer.

      L. 0. Mitchell, Esq., for the Commissioner..

      Before Geaupnek, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax for the year 1919 amounting to $2,904.18. The deficiency results from a reduction by the Commissioner of the March 1, 1918, value of real estate, sold during the taxable year, below that reported by the taxpayer.
    BINDINGS OP PACT.
    The taxpayer during 1911 purchased real estate located on the southwest corner of Homan Avenue and Roosevelt Road, in the City of Chicago. It consisted of a lot having 75 feet frontage on Roosevelt Road and 167 feet on Homan Avenue, running to an alley, on which was located a three-story building, consisting of a basement, seven 4-room apartments, six 6-room apartments, eleven 5-room apartments, and two stores. The taxpayer purchased this property at a price which can not be fixed definitely but which was between $78,000 and $76,000 from the original builder, who was at that time in straightened circumstances and who sacrificed it for cash to save his other holdings.
    The taxpayer, during the year 1919, sold the property for $110,-000. Some changes in the building had been made during the time the taxpayer owned it. The taxpayer estimated the March 1, 1913, value of the property to be $110,000 in his income-tax return for 1919.
    The Commissioner determined the March 1, 1913, value of the property to be $100,000, and, from the evidence before us, we find that amount to be correct.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of MRS. T. C. THOMPSON, Executrix of the Estate of T. C. THOMPSON.
    Docket No. 5280.
    Submitted December 5, 1925.
    Decided February 19, 1926.

      Oscar W. Underwood, Jr., and H. O. Kilpatrick, Esqs., for the taxpayer.

      Frank T. Horner, Esq., for the Commissioner.
    Before Gkattpner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in estate tax under the Revenue Act of 1921, amounting to $5,343.21. The deficiency results from the increase by the Commissioner in the value of stock owned by decedent in the Buck Creek Cotton Mills, a corporation.
    FINDINGS OP PACT.
    The taxpayer is the executrix, qualified and acting under the last will and testament of T. C. Thompson, deceased, of Siluria, Ala., who died October 5, 1922. T. C. Thompson, at his death, owned 909.8 shares of a total of 1,182.8 shares issued and outstanding of the common stock of the Buck Creek Cotton Mills. He owned 88.5 shares of a total of 643 shares issued and outstanding of the second preferred stock, and he owned 964 shares of a total of 3,000 shares issued and outstanding of the first preferred stock of the same corporation. Each of these shares had a par value of $100.
    The Buck Creek Cotton Mills is a corporation organized under the laws of the State of Alabama, and is engaged in the manufacture of cotton cloth at Siluria, Ala. The second preferred stock of the above-named corporation provided for payments of 3 per cent semiannual dividends, payable on the 1st day of January and July of each year. Such dividends are noncumulative and have been paid each year from 1920. The first preferred stock of the above-named corporation provided for cumulative dividends at the rate of 3 per cent semiannually, payable on the 1st day of January and July of each year, which have been paid each year from 1916. The charter of the corporation prohibited the payment of any dividends upon the common stock until after the redemption or retirement of all of the first preferred stock, and limited the dividends on the common stock thereafter to 8 per cent per annum until the retirement of all of the second preferred stock. No dividends have ever been paid on the common stock. Following out the provisions of the charter, the company has retired $110,000 of the preferred stock since the reorganization of the company in 1911.
    For the nine years ending September 30, 1922, the corporation’s average annual earnings amounted to $47,783.39. The earnings of the company, as far back as the present records of the company go, after deducting income and profits taxes paid for each of such years, were as follows:
    Amount.
    1914 (loss) . $27, 034. 36
    1915 (gain) 19, 696. 53
    1916 (gain). 52, 825. 73
    1917 (gain) 90, 555. 37
    1918 (gain) 116,189.09
    1919 (gain) 85, 461.04
    1920 (gain). 171, 428.52
    1921 (loss) 64,403. 61
    1922 (loss) . 14, 667.74

      At the time of the death of T. C. Thompson, the cotton-mill industry was in an extremely depressed condition, wide fluctuations in the cotton market rendering it difficult to determine a manufacturing or a buying policy. While some improvement over the depth of the depression was at that time noted, the future was somewhat uncertain. At that time the company, the books of which were kept upon a fiscal year basis ending September 30, had closed its second consecutive year of Josses.
    The assets and liabilities of . the Buck Creek Cotton Mills from September 30, 1918, to and including September 30, 1922, were as follows:

      Balance Sheets Buck Greek Cotton Mills, Siluria, Ala.

    In 1921, about a year prior to decedent’s death, 16 shares of common stock of the Buck Creek Cotton Mills were sold at $100 per share, and 10 shares of second preferred stock were sold at $80 per share to .one of the officers of the corporation. ' There were no sales of first preferred shares of stock within recent-years.
    The Commissioner’s valuation of the stock of decedent at the time of his death on October 5,1922, was as follows:
    Share.
    Common stock_$234
    First preferred stock_•_ 85
    Second preferred stock_:_ 75
    The taxpayer claims that the value of the stock of decedent at the time of his death on October 5,1922, was as follows:
    Share.
    Common stock_ $55
    First preferred stock_ 75
    Second preferred stock_ 65

      The value of the common stock owned by decedent at the time of his. death on October 5, 1922, was $200 per -share. The value of the first preferred stock was $85 per share, and that of the second preferred stock was $75 per share.
   DECISION.

The deficiency should-be computed in accordance with the foregoing findings of fact. Final determination will be made on 15 days’ notice, under Rule 50.

On reference to the Board, Green dissents.


author: Makquette

text:
    Appeal of CHARLES OWEN.

    Docket No. 2997.
    Submitted October 20, 1925.
    Decided February 19, 1926.
    Under the facts of this appeal, held, that the distribution to its stockholders, by' the Osage Natural Gas Co., of 2,000 shares of the capital stock of the Owen-Osage of West Virginia,* owned by it, as a step in or preliminary to the merger of the two corporations, resulted in taxable income to the stockholders of the Osage Natural Gas Co. to the extent that the distribution was made from the earnings of that company.

      Charles J. Kappler, Esq., Walter E. Barton, Esq., W. L. Clark, C. P. A., and H. A. Wells, C. P. A., for the taxpayers.

      M. N. Fisher, Esq., for the Commissioner.
    Before Maequette, Green, and Love.
    These appeals are from determinations of deficiencies in income tax for the year 1919, as follows:
    Charles Owen_$58, 045. 92 Charles M. Casey_;. $38. 79
    Stephen H. Waits_ 499. 95 K. O. Horton_ S70. 06 C. A. Hancock_i :i!'406. 96 A. S. White_■’ ' 80.26
    K. C. Watts_ 240.00 James F. Casey_■_, : 33.00
    Charles J. Kappler_ 96.26 E. H. Hancock_ 220.00
    Pauline W. Owen_ 2,132.04 it. T. Watts,, Jr___ 187.20
    Charles E. Heald_ 1,763.92 H. O. Miller_ Í13.18
    C. M. Guggenheimer_ 176. 00 C. G. Shannon — -_ 327. 70
    They involve the same facts and present the same question, to wit, whether or not the taxpayers, in the year 1919, realized dividends as the result of the distribution to them of 2,000 shares of the capital stock of the Owen-Osage Oil & Gas Co. of West Virginia, owned and held by the Osage Natural Gas Co., of which they were stockholders. The appeals were consolidated for hearing and decision.
    BINDINGS OB BAOT.
    The Osage Natural Gas Co. was organized under the laws of the State of Delaware on June 19, 1916. The Owen-Osage Oil & Gas Co., hereinafter called the Owen-Osage of West Virginia, was organized under the laws of the State of West Virginia on August 10, 1917. Both corporations were organized for the general purpose of producing and trading in oil and gas.
    The total authorized capital stock of the Osage Natural Gas Co. was 10,000 shares, of the par value of $100 per share, and the total authorized capital stock of the Owen-Osage of West Virginia was 2,500 shares, of the par value of $100 per share.
    On October 31, 1919, and until the consolidation, as hereinafter set forth, was consummated, Charles Owen owned a majority of the stock of the Osage Natural Gas Co., to wit, 5,146 shares. On October 31, 1919, the Osage Natural Gas Co. owned 2,000 shares of stock of the Owen-Oságe of West Virginia. That stock was acquired by the Osage Natural Gas Co. in 1917, in consideration of the assignment of certain gas and oil lands to the Owen-Osage of West Virginia, and was held by the Osage' Natural Gas Co. until the same was apportioned among its own stockholders in December, 1919, as hereinafter set forth. On October. 31, 1919, and until such time as the apportionment was made, Charles Owen owned 71 shares of stock of the Owen-Osage of West Virginia.
    In 1919, and thereafter until the consolidation, as hereinafter set forth, was consummated, Charles Owen was the president and the chairman of the boards of directors of both corporations. Some time prior to November 19, 1919, he conceived the idea of consolidating the Osage Natural Gas Co. and the Owen-Osage of West Virginia into a new corporation. He discussed this plan with V. A. Hays, his friend and adviser, who later became the secretary, treasurer, auditor, and general office manager of the new corporation; and also with members of the boards of directors of the Osage Natural Gas Co., and the Owen-Osage of West Virginia. The board of directors of both these corporations, at special meetings held on November 19, 1919, passed resolutions recommending to their respective stockholders that the proposed plan of consolidation be adopted.
    The proposed plan provided for the organization of a corporation under the laws of the State of Delaware, to be known as the Owen-Osage Oil & Gas Co., hereinafter called the Owen-Osage of Delaware, with an authorized capital stock of 75,000 shares of no par value. The plan further provided that the Osage Natural Gas Co. should receive 40,000 shares and the -Owen-Osage of West Virginia should receive 10,000 shares of stock of the new corporation, in consideration for the transfer of the assets (subject to their liabilities) of the old corporations.
    On November 24, 1919, the certificate of incorporation of the Owen-Osage of Delaware was executed by the incorporators, and on December 1, 1919, the certificate was filed with the Secretary of the State of Delaware. The Owen-Osage of Delaware was organized for the general purpose of producing and trading in oil and gas, with corporate powers similar to those of the Osage Natural Gas Co. and the Owen-Osage of West Virginia. Its authorized capital stock was 75,000 shares of no par value.
    Pursuant to notices calling special meetings, the respective stockholders of. the Osage Natural Gas Co. and the Owen-Osage of West Virginia met on December 1, 1919, at the office of the company in Caney, Kans., and adjourned until December 2, 1919, at which time they voted unanimously to consolidate the properties of the Osage Natural Gas Co. and the Owen-Osage of West Virginia into the new Owen-Osage of Delaware.
    At a special meeting held on December 1, 1919, the board of directors of the Osage Natural Gas Co. passed a resolution apportioning pro rata among the stockholders of said corporation the 2,000 shares of stock of the Owen-Osage of West Virginia, which was owned by the Osage Natural Gas Co. At the same meeting a cash dividend of $9 per share was declared. The resolutions,-dated December 1, 1919, voting said cash dividend and apportioning said stock, provided as follows :

      Resolved, That a dividend of nine (9) dollars per share he paid to stockholders of record, as of December SI, 1919, payment to be made Jan. 2, 1920.

      Resolved, that the two thousand shares (2000) of the Owen-Osage Oil and Gas Company (West Virginia) stock owned by this Company he distributed pro rata among the present stockholders of the Osage Natural Gas Company, giving each of them one-fifth (½) of one (1) share for each share now held, and proper officers are hereby directed to have reissued on above basis and mailed to them.
    The 2,000 shares of the capital stock of the Owen-Osage of West Virginia were distributed among the stockholders of the Osage Natural Gas Co., in accordance with the resolution of the board of directors of December 1, 1919. The taxpayers herein were stockholders of the Osage Natural Gas Co. and they received the proper number of shares of stock of the Owen-Osage of West Virginia to which they were respectively entitled under said apportionment.

      The first meeting of the board of directors of the Owen-Osage of Delaware was held on December 20, 1919, and at the meeting the directors voted to take over, on January 1, 1920, the assets and assume the liabilities of the Osage Natural Gas Co. and to issue therefor 40,000 shares of its. capital stock, and also to take over, on January 1, 1920, the assets and assume the liabilities of the Owen-Osage of West Virginia, and to issue.therefor 10,000 shares of its capital stock. Said stock was issued accordingly.
    On or about January 5, 1920, the Osage Natural Gas Co. and the Owen-Osage of West Virginia issued to their stockholders four shares of the capital stock of the Osage-Owen of Delaware in exchange for each share of capital stock of the Osage Natural Gas Co. and the Owen-Osage of West Virginia owned by them.
    The fair market value on December 1, 1919, of the 2,000 shares of the capital stock of the Owen-Osage of West Virginia distributed among its stockholders on that date by the Osage Natural Gas Co. was $200,000. It is stipulated by parties in this appeal that, if the distribution constituted a dividend, $152,631.35 was paid from earnings and $41,368.65 from capital.
    The Commissioner, upon audit of the taxpayers’ income-tax returns for the year 1919, determined that, as a result of the distribution involved herein, the stockholders of the Osage Natural Gas Co. received taxable dividends and that there were deficiencies in tax as above set forth.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Eule 50.

       The following appeals were heard with the above-entitled appeal and are .decided herewith: Appeals of Stephen H. Watts, No. 1958; R. O: Horton, No. 2659; R. C. watts, No. 2703; Charles J. Kappler, No. 2998 ; Pauline Owen, No. 3034; Charles E. Heald, No. 3054; C. M. Guggenheimer, No. 3055; Charles M. Casey, No. 3056: C. A. Hancock, No. 3057; A. S. White, No. 3058; James P. Casey, No. 3059; E. H. Hancock, No. 3060; R. T. Watts, Jr., No. 3061; H. O Miller, No. 7730; and C. G. Shannon, No. 7731.

   OPINION.

Makquette

: The only question presented by this appeal is whether or not the stockholders of the Osage Natural Gas Co. received taxable income as a result of the distribution to them, pursuant to the resolution of the board of directors on December 1, 1919, of 2,000 shares of the capital stock of the-Owen-Osage of West Virginia. The taxpayers contend that,- looking through form to substance, the distribution in question was only a part of a single transaction, the-consolidation or merger of the Osage Natural Gas Co. and the Owen - Osage of West Virginia, and that the stockholders of the Osage Natural Gas Co., on the completion of the merger, or consolidation, did not receive a greater number of shares of the capital stoek of the Owen-Osage of Delaware, than they would have received if the distribution, pursuant to the resolution, of December 1, 1919, had not. been made. The Commissioner contends that the distribution constituted a taxable dividend, in so far as it was made out of earnings of the Osage Natural Gas Co.

We have carefully considered the arguments advanced by the attorneys for the taxpayers, but we can not subscribe to their con-1, ention. We think that the distribution to the stockholders of the Osage Natural Gas Co., pursuant to the resolution of December 1, 1919, of 2,000 shares of the capital stock of the Owen-Osage of West Virginia, constituted a dividend, and that, so far as it was paid out of earnings, it was taxable income to the recipients. It may be noted that the plan of the consolidation or merger of the two corporations into the Owen-Osage of Delaware was for the last-named corporation to issue its capital stock to the two merging corporations, and in exchange it was to receive all of their assets, subject to their liabilities. Before making the exchange, however, the directors of the Osage Natural Gas Co. saw fit to reduce its assets by distributing among its stockholders about $90,000 in cash and the shares of stock it then owned in the Owen-Osage of West Virginia. What the purpose of that distribution was, the record does not disclose. However, it may be assumed that the motive, whatever it may have been, that impelled or prompted the declaration of the distribution or dividend to the stockholders, of cash and stock on December 1, 1919, concerned equally both the cash and stock — that is, the same motive prompted the distribution of cash that prompted the distribution of the stock. Certainly, no one will seriously contend that the distribution of cash to the extent of $9 a share did not, in so far as it was paid out of earnings, constitute taxable income to the stockholders.

We can perceive no sound reason for placing the distribution of the stock on a different basis from the distribution of the cash. Both the cash and stock were assets of the corporation and, when the distribution had been completed, the assets were reduced by the amount of the cash plus the amount at which the stock had been carried on the corporation’s books. We’ do not consider that all of the acts performed by the two corporations, outlined in the findings of fact, are necessarily to be considered as steps in the merger or consolidation and that taken together they constitute one transaction. We consider, rather, that the distribution made by the Osage Natural Gas Co. pursuant to the resolution of December 1, 1919, was a step preliminary to the consolidation or merger, taken to reduce the assets to be turned over to the Owen-Osage of Delaware in exchange for shares of its capital stock.

Viewed as a separate transaction, the distribution involved herein presents a situation essentially identical with that found in the case of Peabody v. Eisner, 247 U. S. 347. The facts in that case were that on March 1, 1914, the Union Pacific Bailroad Co. paid a dividend on each share of its common stock amounting to $3 in cash, $12 in par value of preferred stock of the Baltimore & Ohio Bailroad Co., and $22.50 in par value of the common stock of the same company. The Supreme Court held that the dividend of the stock was governed by the same rule applicable to the distribution of a like value of money.

However, assuming that the distribution in question was an essential and necessary part of the merger or consolidation of the Osage Natural Gas Co. and the Owen-Osage of West Virginia, we are of the opinion that it nevertheless constituted a taxable transaction. In the Appeal of Edward A. Langenbach, 2 B. T. A. 117, the evidence established that, in the reorganization of a corporation of which the taxpayer was a stockholder, all of its. assets were sold for a cash consideration to a new corporation of another State, organized for the purpose of taking over the business of the first corporation. Upon receipt of the cash, the old corporation declared a dividend of the amount of its surplus. The taxpayer then transferred his shares of stock to the new corporation and received the par value thereof in cash. The. amounts so received by him as dividends and in payment for his shares were immediately paid over by him for shares in the new corporation. The Board, holding that the dividend was taxable, said:

Here the corporation declared and the stockholder received a cash dividend, which, were it not for his voluntary contract, he had under his complete dominion. At the moment of its receipt he realized income, and what he did with it thereafter, irrespective of how soon, can not change its character at that time. Appeal of Regal Shoe Co., 1 B. T. A. 896; Appeal of E. C. Huffman, 1 B. T. A. 52.
It is our opinion, therefore, that the taxpayer can not escape tax because the amounts received were incidental to the reorganization.

The only real difference between the dividend involved in the Appeal of Edward A. Langenbach and the transaction under consideration herein, considering them as steps in a reorganization or merger, is that the one was paid in cash, while the other was paid in shares of another corporation. The fact that the distribution by the Osage Natural Gas Co. was made in shares of the Owen-Osage of West Virginia does not change its taxable character. Peabody v. Eisner, supra.

Whether the distribution by the Osage Natural Gas Co. of the 2,000 shares of the Owen-Osage of West Virginia be considered as a separate transaction or as a step in the merger or consolidation of the two corporations, it is our opinion that it resulted in taxable income to the stockholders of the Osage Natural Gas Co. in the amount of $152,631.35.


author: MaRquette:

text:
    Appeal of ROSCOE H. ALDRICH.
    Docket No. 3301.
    Submitted July 10, 1925.
    Decided February 19, 1926.
    1. By tbe terms of an agreement between tbe taxpayer and a corporation, tbe corporation agreed to compensate tbe taxpayer for entering into a contract with another corporation and becoming its general manager for a period of five years, by depositing in escrow certain shares of stock to be delivered to tbe taxpayer at tbe expiration of said five years upon the performance of certain conditions, tbe dividends payable on the stock during tbe escrow period to be paid to the taxpayer. Held,, that the taxpayer was not a stockholder during tbe escrow period and tbe dividends on tbe escrow stock constituted compensation for services and not dividends as to him.
    2. Tbe evidence fails to establish that certain stock did not have a fair market value at tbe time of its receipt in 1919, and the Commissioner’s determination of such value is approved.

      Lester H. Woolsey Esq., for the taxpayer.

      Lee I. Parle, Esq., for the Commissioner.
    Before MaRquette and Moeeis.
    This appeal is from the determination of deficiencies in income taxes for the years 1918 and 1919 in the respective amounts of $178.94 and $17,751.06.
    The questions presented are whether certain amounts received by the taxpayer from the Aldrich Pump Co. during 1918 constituted income subject to the normal tax, and whether certain stock received in 1919 had a fair market value and was taxable as income in that year.
    FINDINGS OF FACT.
    The taxpayer is an individual residing at Allentown, Pa. For 12 years prior to 1914 he was employed by the Allentown Rolling Mills, a corporation organized under the laws of Pennsylvania, and was in charge of the department concerned with the development and manufacture of electric pumps.
    The taxpayer was the inventor of an electric pump manufactured by the rolling mills, the patents for which had been taken out in his name, but which, before 1914, had been transferred to that company, with the exception of one patent, which was transferred to the Aldrich Pump Co. in 1914.
    On April 7, 1914, the taxpayer entered into an agreement with the Allentown Rolling Mills, which provided as.follows:
    Tbis agreement made tbe 7tb day of April, A. D. 1914, by and between Tbe Allentown Rolling Mills, a corporation of tbe State of Pennsylvania, party of tbe first part, and Roscoe H. Aldricb, of Allentown, Lebigb County, Pennsylvania, party of tbe second part.

      Whereas the party of the first part owns a' plant at Allentown,. Lehigh County, Pennsylvania, where it has conducted the business of manufacturing pumps and other hydraulic machinery under an agreement dated April 26, 1909, between itself, The Birdsboro Steel Foundry and Machine Company and said Aldrich;
    And whereas the parties to said agreement dated April 26, 1909 have agreed to terminate it on April 30, 1914;
    And whereas the party of the first part desires to provide for the continuation at its plant at Allentown of its business of manufacturing pumps and other hydraulic machinery heretofore manufactured by it under the aforesaid agreement, as well as the business of manufacturing pumps heretofore conducted by the Birdsboro Steel Foundry and Machine Company under said agreement; and for such purpose to incorporate a company which shall take over and purchase from the party of the first part that portion of its plant, buildings and tracks used in the manufacture of said pumps, and to provide that said Aldrich be the General Manager of said new Company;
    Now, therefore, this agreement witnesseth, that for and in consideration of the mutual covenants hereinafter set forth, as well as of other good and valuable considerations, the parties hereto do bind themselves, their successors, executors, and administrators as follows:
    I. Party of the first part hereby agrees that it will cause to be incorporated prior to May 1st, 1914, under the laws of Pennsylvania, a Company under the name of The Aldrich Pump Company, with a capital of Three hundred and fifty thousand dollars ($360,000), consisting of three thousand five hundred (3,500) shares of stock of the par value of One hundred dollars ($100.) each; and that in exchange for three thousand four hundred and ninety-five shares (3,495) of said stock it will grant, sell, assign and set over to The Aldrich Pump Company the plant and about ten (10) acres of land now occupied by the buildings, tracks, etc., of the pump department of The Allentown Rolling Mills; all the buildings, apparatus, machinery and equipment of said department; the raw materials, unfinished and finished work; the then existing accounts receivable and cash, in excess of bills and accounts payable, and the good will of the entire business of its pump department.
    II. The party of the first part agrees that it will cause The Aldrich Pump Company to enter into an agreement with Aldrich, and Aldrich agrees to enter into such agreement, as follows:
    (1) The Aldrich Pump Company will engage Aldrich as General Manager of its plant and business at Allentown for a period of five (5) years from May 1st, 1914, with the option to it of renewal for another period of five (5) years, such option to be exercised in writing served upon Aldrich at least ninety (90) days prior to May 1st, 1919. The General Manager shall have charge of the engineering, manufacturing and sales departments of the Company, subject only to the direction and supervision of the President and Board of Directors or Executive Committee of The Aldrich. Pump Company, with the right on the part of said Aldrich to hire and discharge any and all employees in said engineering, manufacturing and sales departments. The keeping of accounts shall be the duty of the Secretary and Treasurer, to whom the ofBce force shall be directly responsible and who shall have exclusive power to hire and discharge those in the office force. The Secretary and Treasurer must have the accounts so kept as to furnish at all times to the General Manager such information as the General Manager deems necessary, and must at all times on reasonable notice give to the General Manager such details, information and figures regarding any part of the business of The Aldrich Pump Company as he may ask for. The purchasing of materials and supplies shall be the duty of the Purchasing Agent, who shall be appointed by the Board of Directors and who may be the same person as the Secretary and Treasurer. The character and quality of materials and supplies purchased for the Company must be satisfactory to the General Manager.
    (2) The Aldrich Pump Company will pay Aldrich a salary of Two hundred and fifty dollars ($250) per month payable on the first of each month for the immediately preceding month.
    (3) The Aldrich Pump Company will promptly, after its organization, apply from its working capital ten thousand dollars ($10,000) in the purchase of patterns, templates, jigs, etc., under an agreement between The Allentown Bolling Mills, its successors and assigns and The Birdsboro Steel Foundry and Machine Company, dated the 7th day of April, 1914, and will apply from its working capital Twenty-five thousand dollars ($25,000) additional in the extension of the foundry and machine shop and the purchase of new tools.
    (4) Aldrich agrees that he will accept the position of General Manager of The Aldrich Pump Company for five (5) years under the covenants and conditions herein named, including the option to the Company to renew his engagement for a further period of five (5) years for the consideration recited in this contract, and he agrees that he will give his exclusive and best engineering services and his best services as manager of sales and as General Manager of The Aldrich Pump Company, to the end that the business of said Company may be as large and profitable as possible.
    III. The party of the first part further agrees to compensate Aldrich as follows:
    Upon the signing of this agreement it will deliver into the hands of the Guarantee Trust Company of Philadelphia in escrow five hundred shares (500) of the capital stock of The Aldrich Pump Company, upon the following conditions :
    (a) All dividends declared upon these shares from time to time shall be paid to Aldrich.
    (b) If at the end of the five years, the period of his engagement, Aldrich is still General Manager of the Aldrich Pump Company and the earnings of the Company- during the last year of said five year period, over and above interest charges on borrowed capital, if any, maintenance and running expenses (not to include replacements, purchases of new machinery, extensions and improvements to plant), and a reasonable depreciation charge, but without deduction for interest on capital invested, shall have amounted to not less than 8% on its capital stock of $350,000, then the 500 shares of stock shall be transferred and delivered to Aldrich as his absolute property. But if during said five year period Aldrich shall for any cause have left the Aldrich Pump Company, or if during the last year of said period said earnings have not amounted to 6% on the capital stock of $350,000, the 500 shares of stock are to be transferred and delivered to the Allentown Rolling Mills as its absolute property.

      Provided, however, that if during the last year of said five year period the company shall have met with substantial loss through fire, strike or similar causes beyond its control, or through a general business depression in the trade, the earnings for the year next preceding such fire, strike or depression shall be taken as the test under this article.
    (e) It is expressly agreed, however, that should Aldrich die at any time within said five year period and is at the time of his death General Manager of The Aldrich Pump Company, the Allentown Rolling Mills will either pay forthwith Fifty thousand dollars ($50,000) cash to the Estate of said Aldrich, or, at the option of the Allentown Rolling Mills, will deliver said five hundred shares (500) of stock of The Aldrich Pump Company to his Estate as its absolute property; and this provision shall be effective irrespective of the earnings of The Aldrich Pump Company.
    (d) The Allentown Rolling Mills shall quarterly, on request of Aldrich, pay to him an amount not exceeding fifty per cent (50%) of the net earnings applicable to dividends on 5/35 of the stock of The Aldrich Pump Company as shown on its books at the close of each quarter, such payment or payments to be deducted without interest from the amount payable to Aldrich on the next dividend thereafter declared. For the purposes of this subdivision (d), it is understood and agreed that in ascertaining the net earnings applicable for dividends, there shall be deducted from the gross revenue all expenses of the business including interest on borrowed capital, if any, and all replacements and purchases of néw machinery, and extensions of and other improvements to the plant during the current quarter or year as the case may be, but nothing shall be deducted for interest on capital invested.
    IV. The party of the first part hereby grants and gives to Aldrich the option to buy from it at par at any time within five years from the date of the incorporation of The Aldrich Pump Company any number not exceeding one hundred (100) shares of the capital stock of that Company.
    V. The party of the first part agrees with Aldrich that if at any time during the period in which he is General Manager of The Aldrich Pump Company it should sell its stock of that Company, it will make as a condition of such sale that the purchaser shall pay to Aldrich or to his Estate for the five hundred (500) shares of stock of said Company set.aside for his account as above set forth, the same price per share as shall be received by the party of the first part for its stock, and if, at the time, the shares set aside for Aldrich are still in escrow, they are to be at once transferred to Aldrich so that he may be able to make delivery of them to such purchaser.
    VI. The party of the first part agrees that it will cause The Aldrich Pump Company to enter into an agreement with Aldrich, and Aldrich agrees to enter into such agreement, as follows:
    If at any time during the period in which Aldrich is General Manager of the Aldrich Pump Company he shall desire to make application for a patent or patents relating to .pumps or other machinery of the kind manufactured by the Aldrich Pump Company, he shall first submit the drawings and specifications for such patent or patents to the President of the Company, and if the Company desires to become the owner of such patent or patents it shall pay all the reasonable costs and expenses for obtaining the same, and Aldrich shall thereupon assign to the Company the application or letters patent.
    VII. The party of the second part agrees that the party of the first part may, if it so desire, take out forthwith a life insurance policy or policies on him for fifty thousand dollars ($50,000) and keep the same in force during the five or ten years covered by his engagement with The Aldrich Pump Company, and party of the first part is to pay all premiums and expenses and to receive all dividends and payments under the policy or policies in case of death.
    Pursuant to the contract of April 7, 1914, the Aldrich Pump Co. was incorporated under the laws of Pennsylvania, and the Allentown Rolling Mills received 3,495 shares of the stock in exchange for assets transferred to the Pump Co. Certificates for 500 shares of that stock were placed in escrow with the Guaranty Trust Co. of Philadelphia, to be held in accordance with the provisions of the said contract.
    From 1914 to May, 1919, the stock of the Aldrich Pump Co. continued to be owned by the Allentown Rolling Mills and held by the escrow agent. The stock of the Pump Co. was closely held, none of it being sold or quoted on any stock exchange or bought or sold by brokers or individuals.
    On May 1, 1914, the taxpayer entered into a contract with the Aldrich Pump Co., which provided as follows:
    Memorandum of agreement made this first day of May, 1914, by and between The Aldrich Pump Company, a Corporation of the State of Pennsylvania, hereinafter called the Company, party of the first part, and Roscoe H. Aldrich, of Allentown, Pennsylvania, hereinafter called Aldrich, party of the second part.
    Whereas, the Company desires to employ Aldrich as General Manager of its plant and business, and Aldrich desires to give his best services to the Company in such capacity;
    And Whereas, it is the purpose and intention of the parties hereto in so doing to carry into effect the agreement made between The Allentown Rolling Mills, a corporation of the State of Pennsylvania, and said Roscoe H. Aldrich, dated the 7th day of April, 1914;
    Now this agreement witnesseth, that for and in consideration of the mutual covenants hereinafter set forth, as well as for other good and valuable considerations, the parties hereto do bind themselves as follows:
    (1) The Company agrees to engage and hereby does engage Aldrich as General Manager of its plant and business at Allentown for a period of five (5) years from May 1st, 1914, with the option to it of renewal for another period of five (5) years, such option to be exercised in writing served upon Aldrich at least ninety (90) days prior to May 1st, 1919. The General Manager shall have charge of the Engineeiang, manufacturing and sales departments of the Company, subject only to the direction and supervision of the President and Board of Directors or Executive Committee of the Company, with the right on the part of Aldrich to hire and discharge any and all employees in said Engineering, manufacturing and sales departments. The keeping of accounts shall be the duty of the Secretary and Treasurer to whom the office force shall be directly responsible and who shall have the exclusive power to hire and discharge those in the office force. The Secretary and Treasurer must have the accounts so kept as to furnish at all times to the General Manager such information as the General Manager deems necessary, and must at all times on reasonable notice give to the General Manager such details, information and figures regarding any part of the business of the Company as he may ask for. The purchasing of materials and supplies shall be the duty of the Purchasing Agent, who shall be appointed by the Board of Directors and who may be the same person as the Secretary and Treasurer. The character and quality of materials and supplies purchased for the Company must be satisfactory to the General Manager.
    (2) The Company will pay Aldrich a salary of Two hundred and fifty dollars ($250) per month payable on the first of each month for the immediately preceding month.
    (3) The Company will promptly, after its organization, apply from its working capital ten thousand dollars ($10,000) in the purchase of Patterns, templates, jigs, etc. under an agreement between Tbe Allentown Rolling Mills, its successors and assigns and The Birdsboro Steel Foundry & Machine Company, dated the 7th day of April, 1914, and will apply from its working capital twenty-five thousand dollars ($25,000) additional in the extension of the foundry and machine shop and the purchase of new tools.
    (4) Aldrich agrees that he will accept the position of General Manager of the Company for five (5) years under the covenants and conditions herein-named, including the option of the Company to renew his engagement for a further period of five (5) years for the consideration recited in this contract, and he agrees that he will give his exclusive and best engineering services and his best services as manager of sales and as General Manager of the Company, to the end that the business of the Company may be as large and profitable as possible.
    (5) The Company shall quarterly, on request of Aldrich, pay to him an amount not exceeding fifty per cent (50%) of the net earnings applicable to dividends on 5/35 of the stock of the Company as shown on its books at the close of each quarter, such payment or payments to be deducted without interest from the amount payable to Aldrich on the next dividend thereafter declared. For the purpose of this subdivision (5), it is understood and agreed that in ascertaining the net earnings applicable for dividends, there shall be deducted from the gross revenue all expenses of the business including interest on borrowed capital, if any, and all replacements and purchases of new machinery, extensions of and other improvements to the plant during the current quarter or year as the case may be, but nothing shall be deducted for interest on capital invested.
    (6) If at any time during the period in which Aldrich is General Manager of the Company he shall desire to make application for a patent or patents relating to pumps or other machinery of the kind manufactured by the Company, he shall first submit the drawings and specifications for such patent or patents to the President of the Company, and if the Company desires to become the owner of such patent or patents it shall pay all the reasonable costs and expenses for obtaining the same, and Aldrich shall thereupon assign to the Company the application or letters patent.
    In accordance with this agreement, Aldrich became general manager of the company for five years from May 1, 1914, and drew a salary of $250 a month throughout the period of that contract. After May 1, 1914, the taxpayer held no position and had no connection with the Allentown Eolling Mills, except under the contract of April 7, 1914.
    The taxpayer held the position of general manager in the Aldrich Pump Co. until December 31,1924.
    In the period between 1914 and 1919, while the 500 shares of stock of the Pump Co. were in escrow, the taxpayer exercised all the rights of beneficial ownership in the stock, by voting as a stockholder at various stockholders’ meetings, either in person or by proxy, without objection on the part of anyone, by acting as one of the directors of the corporation, and by receiving all dividends on said stock directly from the Aldrich Pump Co.

      The taxpayer did not own any other shares of the stock of the Pump Co. besides the 500 shares, and he did not hold as director any qualifying shares of stock.
    The taxpayer received dividends from the Aldrich Pump Co. on the stock in escrow in the years 1915 to 1920, inclusive. He returned for taxation as dividends the dividends received from the Aldrich Pump Co. on the stock ini escrow in the years in which said dividends were received. The Commissioner took no exception to the return of these dividends as dividends, except for the year 1918, when he held that the dividends should have been returned as compensation to the taxpayer for services.
    Said dividends, during the escrow period, were paid to taxpayer directly by the Aldrich Pump Co. and not through the medium of the Allentown Eolling Mills. The dividends were charged on the books of the Pump Co. as dividends and not as expenses.
    The taxpayer requested, and received from time to time, certain advances on dividend payments from the Aldrich Pump Co., beginning in 1915 up to and including 1919, the year in which he actually received the stock certificate, which advances were charged by the Aldrich Pump Co. against the taxpayer, and said charges were canceled by deductions from dividends subsequently declared.
    Upon the termination of the escrow period, May 1, 1919, the certificates for shares of stock were delivered to the taxpayer as provided in the agreement of April 7, 1914. In his return for 1919, the taxpayer included a statement to the effect that he had received said shares of stock but that the stock had no market value and that it was impossible to obtain even approximately its market value at that time.
    Dividends at the rate of 10 per cent per annum were paid by the Aldrich Pump Co. for the years 1915 to 1918, both inclusive, and a dividend of 12 per cent was paid in 1919. No dividends were paid after the year 1920.
    The Commissioner included in taxable income for the year 1919 the sum of $50,000, as representing the value of 500 shares of stock of the Aldrich Pump Co.
    The taxpayer made no effort to sell the said shares of stock during the year 1919, for the reason that at the timet he was general manager of the Aldrich Pump Co., and closely associated with the Allentown Eolling Mills interests, and on account of his relations with the officers of that corporation, and because any effort on his part to sell the stock would in his opinion have resulted in a break with his associates, charges of abandoning the business and the probable loss of his position.

      The taxpayer endeavored to dispose of his stock in 1923 and 1924. He offered to sell it to a director of the Allentown Pump Co. who owned the controlling interest in that company, but who refused to make any offer on the stock. In 1924 he attempted to borrow money on the stock as collateral from two banks, which refused to make a loan on the stock because he could not show to the directors that it had a market value. Both banks were familiar with the stock and the condition of the company, as it had theretofore applied to them for financial assistance. The banks informed the taxpayer that they could nof make any loan on the taxpayer’s stock and could not have loaned any money on it at any time.
    The taxpayer is not now an employee of the Aldrich Pump Co. or the Allentown Eolling Mills, having been forced out of his position as general manager in the former company on December 31,. 1924, because of certain disagreements.
    During the year 1918 the taxpayer received $6,000, representing dividends declared on the escrow stock, which amount was reported by him in his return for that year as dividends subject only to the'surtax. The Commissioner subjected this amount to taxation at the normal tax rates as having been compensation for services rendered.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

MaRquette:

We have two questions for decision herein: (1) Whether the amoufit of $6,000 in dividends on the stock held in escrow, received by the taxpayer in 1918, constituted a dividend to him under the circumstances above set forth, and (2) whether the 600 shares of stock of the Aldrich Pump Co., received by him m 1919, had a fair market value at that time and were taxable as income in that year. We will consider these questions in their order.

By the terms of the agreement the Allentown Eolling Mills agreed to compensate Aldrich for entering into a contract with the Aldrich Pump Co. to act as general manager for a period of five years by delivering in escrow 600 shares of the capital stock of the Pump Co., upon the conditions that all dividends declared upon those shares from time to time should be paid to him, and at the end of five years, if the conditions therein named had been performed, the 600 shares should be transferred and delivered to him as his absolute property. It appears that Aldrich entered into an agreement with the Aldrich Pump Co. in conformity with the above-named agreement, acting as its general manager during the five-year period and otherwise performing the conditions of the agreement. He acted as a director of the company and voted the escrow stock at stockholders’ meetings without objection and held no other shares of stock to qualify him as a director.

It is a general rule of law that where stock is deposited in escrow, to be delivered upon the performance of certain conditions, dividends declared before such performance belong to the vendor. 6 Fletcher Enc. Corps., section 2701. There can be no doubt but that parties can by agreement provide to- whom dividends shall be paid, and the effect of this contract was to assign the future dividends to the taxpayer. The right to receive dividends, however, is an incident of stock ownership, and the transfer of such a right does not operate to constitute the person to whom the right is assigned a stockholder.

The contract with the Boiling Mills did not provide that Aldrich should have the right to vote the stock held in escrow. It appears that the stock was voted by him at stockholders’ meetings without objection, but this fact would not constitute him a stockholder, for here again the right to vote stock is an incident of ownership which may by contract be given to another; nor do we think the fact that he acted as director of the Pump Co. could make him a stockholder therein if he was not such in fact. Looking to the agreement, or what was done under it by the parties thereto, we are unable to conclude that the taxpayer was a stockholder of the Pump Co. prior to the transfer and delivery to him of the escrow stock in 1919. Appeal of James R. Lister, 3 B. T. A. 475.

The Bevenue Act of 1918 defines a dividend as follows:

Sec. 201. (a) That the term “dividend” when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property * * * out of its earnings or profits accumulated since February 28, 1913, * * ⅜.

The taxpayer not being a stockholder of the Pump Co., he does not come within the terms of this section, and we conclude that the amounts received in 1918 did not constitute dividends as to him. We are of opinion that, by the very terms of the contract, the payment of the dividends to him was intended to be and was compensation for his services to be rendered to the Pump Co. and that the Commissioner properly so held.

On the second question, the taxpayer does not contend that the transfer and delivery of the stock in 1919 would not constitute income to him in that year to the extent of its fair market value. His claim is that the stock had no fair market value at that time and that, therefore, the determination of any gain must be postponed until the stock had been disposed of by sale.

The evidence does not show the value of the assets of the Pump Co. It does disclose, however, that the company paid dividends of 10 per cent in the years from 1915 to 1918, and that in the year 1919 a dividend of 12 per cent was paid. No effort was made by the taxpayer during the year 1919 to sell the stock and there were no other sales. The stock of the Pump Co. was held in its entirety by the Boiling Mills and Aldrich, and it was not until 1923 that Aldrich offered to sell his stock to the managing director of the Bolling Mills. Again, in 1924, he sought to sell the stock to the same party, who declined to make any offer therefor. The evidence further discloses that during 1924 the taxpayer made efforts at two local banks to borrow money on this stock but that they declined to make any loans on the security thereof, for the reason that they would not be able to satisfy their boards of directors that the stock had a market value.

We do not think this evidence of efforts to sell the stock to the same person in 1923-and 1924 and the failure to secure loans in 1924 has1 any material bearing on the question of whether the stock had a fair market value in 1919. In the first place, it is too remote, and, further, the facts disclose that no dividends were paid by the company after 1920, which would necessarily have a material influence on the question of fair market value in 1923 and 1924. Assuming that the evidence establishes that the stoek had no fair market value in 1923 and 1924, it does not establish that the stock had no fair market value at the time of its receipt in 1919. The Commissioner determined that ihe stock had a fair market value in 1919 of $100 per share, and, in view of the fact that dividends of 10 per cent per annum were paid on this stock over a period of four years immediately preceding the year of receipt, and a dividend of 12 per cent was paid in that year, there is certainly some evidence to support his determination. We must therefore approve the action of the Commissioner.