author: TRAmmell:

text:
    Lightning Creek Oil & Gas Co. and Consolidated Company, Carey Oil & Gas Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8584, 23204.
    Promulgated January 11, 1928.

      E. G. Gmen, O. P. A., for the petitioners.

      P. M. Ciarle, Esq., and G. G. Holmes, Esq., for the respondent.
   OPINION.

TRAmmell:

The petition filed for the year 1919 alleges that the respondent erred in eliminating from invested capital as appreciation an amount of $40,000, which is the difference between the total par value of the stock of the Lightning Creek Oil & Gas Co. and the Carey Oil & Gas Co., or $112,000, and the amount paid therefor, $72,000, when the stock Ava.s purchased in 1906 and 1916.

The petition for 1920 in addition to alleging the same error as for 1919 also alleges that the respondent erred in eliminating from invested capital (1) an amount of $1,231.99 as “ 1917 tax adjustment ” of which. $186.09 is outlawed and uncollectible and the remainder based on an erroneous determination of income and profits taxes payable for that year; (2) $51,977.60 as “ Liquidating deficit ” which is largely depletion computed by respondent for the years 1906-1919 inclusive and not deducted from income in determining tax due; (3) $573.40 “ 1919 tax prorated,” which is an erroneous determination based upon a tax the correctness of which is now pending before this Board; (4) $1,750.61 as a “Dividend adjustment” which was computed by the use of a “ tentative tax ” to determine income available for distribution; (5) $605.25 as “ 1918 income taxes ” based upon an erroneous determination of the tax due for that year.

The respondent denies the commission of any error.

With respect to the elimination from invested capital of $40,000 as appreciation, the respondent determined that the assets of the two companies at the time acquired had an actual cash value of $72,000. The evidence offered in support of the contention that the respondent’s valuation was erroneous consists of copies of the articles of incorporation of the two companies, copies of the minutes of certain meetings of the boards of directors and stockholders and various letters from the respondent as to the action taken by him on the returns of the Lightning Creek Oil & Gas Co. from 1913 to 1921 and the Carey Oil & Gas Co. from 1916 to 1921.

We have found that on September 6, 1904, the Lightning Creek Oil & Gas Co. authorized the issuance of 995 shares, or $99,500 par value of its stock, in exchange for oil and gas mining leases. On October 31, 1904, the Carey Oil & Gas Co. authorized the issuance of 7,840 shares or $196,000 par value of its capital stock for oil and gas mining; leases and on January 3, 1905, authorized the issuance of 5,600 shares or $140,000 par value of its stock under contract for the drilling of wells and the constructing of a pumping station. It is not clear from the record how this $336,000 par value of stock could be issued by the corporation after it had already issued $200,000 par value, when its authorized capital stock was $300,000. Nor does the record show more than the authorization contained in the minutes for the issuance of such stock for the drilling of wells and the leases. There is no evidence that any wells were drilled pursuant to the contract. We are urged to find from these facts that the respondent erred in his determination of the amount of $72,000. It is also insisted that “ under the conditions here prevailing the assumption of the legality,- validity and value back of this stock issue should prevail ” and the determination of the respondent be overruled.

We have heretofore considered the question as to the weight to be given the presumption that assets acquired for stock have a value equal to that of the par value of the stock issued therefor and have held that such presumption unsupported by any evidence is insufficient to sustain the burden of proof. Barnes Coal & Mining Co., et al., 3 B. T. A. 891. In the absence of any other evidence we must approve the action of the respondent in reducing the invested capital by $40,000 for each of the years 1919 and 1920.

With reference to the allegation that invested capital for 1920 was reduced by $1,231.99 representing “ 1917 tax adjustment ” of which $186.09 is barred by the statute of limitations and uncollectible and the remainder based on an erroneous determination of tax for that year, we find upon examination of the respondent’s notice of the deficiency for 1920 which was put in evidence by the petitioner, that the respondent reduced the invested capital by only $1,045.90. Invested capital, therefore, was not reduced by the $186.09 which it is claimed is uncollectible. We have found that in determining the tax liability for 1917 the respondent reduced invested capital for that year by computing a tentative tax ” in determining the amount of earnings available for distribution as dividends. This was erroneous. L. S. Ayers & Co., 1 B. T. A. 1135. The amount of earnings available for dividends should not be so reduced.

With reference to the contention that there was eliminated from invested capital for 1920 an amount of $51,977.60 as a “ Liquidating Deficit ” composed largely of depletion computed by the respondent for the years 1906 to 1919, inclusive and not deducted from income in determining tax due, we have found that the respondent determined that to January 1, 1920, the Lightning Creek Oil & Gas Co. had sustained depletion of $43,710.15 for which provision had not been made in its depletion reserve. There is no evidence that the computation of the respondent of the amount of depletion sustained was erroneous. The respondent included this amount in his computation of the deficit arising from the declaration of dividends in excess of earnings.

The evidence discloses that for the years 1913 through 1918 the company in the determination of its tax liability was given the benefit of the depletion deductions as determined by the respondent subsequent to the filing of the returns.

The amount of the depletion actually sustained in excess of the amount shown by the petitioner’s books should be considered in determining the earnings available for dividends. If the dividends paid are in excess of earnings after allowance for sustained depletion, to the extent of the excess they amount in effect to a distribution of capital. W. S. Bogle & Co., et al., 5 B. T. A. 541.

The respondent in his determination of the earnings available for dividends correctly followed this principle which we think is correct. The same principle is applicable to the depletion sustained in years prior to 1913 for invested capital purposes. The invested capital should be reduced to the extent that the distributions made to stockholders exceeded earnings available therefor considering in determining the amount thereof the depletion actually sustained. This appears to have been done by the respondent in determining the deficiency.

It is contended that the respondent’s determination that invested capital for 1920 should be reduced by $573.40 representing “ 1919 tax prorated ” is erroneous since it is based upon a tax the correctness of which is pending before this Board. It is sufficient to say that in the recomputation of the tax to be submitted in connection with notice of settlement the amount of this item should be computed upon the basis of the tax finally determined for the year 1919 in accordance with our findings of fact and this opinion.

With respect to the remaining contentions that invested capital for 1920 was erroneously reduced by $1,750.61 representing “ Dividend adjustment ” and $605.25 representing “ 1918 income taxes,” we have found that for the years 1917, 1919, and 1920 the respondent made use of a “ tentative tax ” in determining the amount of earnings available during these years for distribution as dividends. As heretofore pointed out, such action is erroneous.

Reviewed by the Board.

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


source: Caselaw Access Project

author: Phillips:

license: Public Domain

text:
    Frederick McLean Bugher, et al., Executors, Estate of Frederick H. Bugher, Petitioners, v. Commissioner of Internal Revenue, Respondent. Mildred McLean Dewey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6035, and 5040, 10012.
    Promulgated January 11, 1928.

      Eugene Untermyer, Esg., and Adrian O. Humphreys, Esg., for the petitioners in No. 6035. •

      Adrian O. Humphreys, Esg., for the petitioner in Nos. 5040 and 10012.

      Unce Toole, Esg., for the respondent in No. 6035, and Ward Loveless, Esg., for the respondent in Nos. 5040 and 10012.
   Phillips:

The executors of the estate of Frederick H. Bugher petition for the redetermination of deficiencies, of $4,836.52 for 1917, $44,716.54 for 1918, and $1,665.92 for 1919, determined by the Commissioner to be due from the decedent. It appears that jeopardy assessments of such amounts were made under section 274 (d) of the Revenue Act of 1924 and that the proceeding arises from the determination of the Commissioner that such assessments should not be abated.

The appeal of Mildred McLean Dewey, Docket No. 5040, is from the determination of deficiencies of $8,247.46 for 1917 and $36,839.21 for 1918. The deficiency for 1917 arises from a jeopardy assessment of $9,572.73 and the determination of the Commissioner that said assessment should be abated in the amount of $1,325.27. Docket No. 10012 arises from the determination by the Commissioner of a deficiency of $182.86 in income tax for 1919.

The basic facts in each of these proceedings are the same, although there are differences with respect to such details as amounts of payments or receipts. The same questions of law are involved in each and on request of counsel they were consolidated for the purpose of decision. There are no questions of fact involved, each of the cases having been submitted on a stipulation of facts which has become a part of the record. In such circumstances it seems unnecessary to set out here the details contained in the stipulations since a summary of the principal facts will serve every purpose.

In 1892 Mrs. Mary L. McLean and her three children, Mrs. Mary McLean Bugher, Mrs. Mildred McLean Dewey, and John E. McLean, together with one Hopkins Loudon, caused the Argyle Lead and Fluorspar Mining Co. to be formed to take over the operation of a property producing flúor spar mineral and some lead. Somewhat less than one-half of the stock was issued to Loudon and the balance divided equally among the four members of the McLean family. The company was not successful and went into the hands of a receiver. In 1895 John E. McLean bid in the properties of the said company at a receiver’s sale for $60,000 and at the same time divided the interest in these mines in equal shares between his mother, his two sisters and himself and thereafter until his death conducted the mines for the joint benefit of these persons and their successors in interest.

In 1901, the mother, Mary L. McLean, died and her interest was .left to be divided in equal portions among her three children for life, with remainder over to their next of kin. Mrs. Mary McLean Bugher (then Ludlow), died on November 21, 1915, and thereupon her interest in these mines descended to her son, Frederick H. Bugher. The latter died November 25; 1924, and the executors of his estate are the petitioners in one of the proceedings before us. John E. McLean died on June 9, 1916. The American Security & Trust Co. became executor under his will and thereafter proceeded to operate the mines in the interest of his estate and the other parties in interest.

For many years after 1895 no substantial profits were made from the operation of the mines. In 1909, John E. McLean caused assignments to be executed by Mrs. Bugher and Mrs. Dewey, transferring to him one-half of their interest, thereby purporting to acquire a two-thirds interest~and leaving a one-sixth interest in each of his sisters. After the year 1910 the earnings from the mine improved and prior to 1917 some of the earnings had been distributed on the basis of two-thirds to McLean and one-sixth to each of his sisters. After the death of his mother in 1915, Frederick H. Bugher made investigations and employed counsel in respect of the transactions in 1909 by which McLean had secured assignments of one-half the share of each of his sisters and in the autumn of 1916 Bugher brought action in the Supreme Court of the District of Columbia to establish his right to a one-third interest instead of a one-sixth interest in the mines. In 1918 Mrs. Dewey retained counsel to protect her interests and to join in this suit for the purpose of establishing her right to a one-third interest in these mines. This action came on for trial on January 2, 1919. On January 15, 1919, an agreement of settlement was executed. Under this agreement the interests of Bugher and of Mrs. Dewey were increased from one-sixth to one-fourth with the right to an accounting on that basis from the date of the receiver’s sale in 1895, interest to be adjusted on the basis of 4 per cent. It was further provided that after the death of Mrs. Dewey, one-twelfth of her one-third interest was to pass to Bugher.

In the meantime Loudon, who had owned an interest in these mines prior to the foreclosure in 1895, appeared and asserted a one-half interest therein, claiming that McLean had agreed at the time of the foreclosure suit to protect his interest. Neither Bugher nor Mrs. Dewey, the taxpayers here involved, learned of this claim of Loudon until 1916. In March, 1917, Loudon filed a suit in equity against the estate of McLean, Mrs. Dewey, and Bugher for an accounting of one-half of all of the earnings of the mines from 1895 to the date of judgment and for an undivided one-half interest in the mines. After such suit was brought the Trust Company refused to distribute any of the accumulated or current earnings of the mine pending a determination of the rights of Loudon. After a three weeks’ trial in April, 1919, the Loudon case was settled before decision in consideration of the payment to Loudon of $325,000, all of which was paid to him in cash in 1919 from the accumulated earnings of the mine.

Although the earnings were not distributed in full, the taxpayers have in each year returned their distributive share of the profits, whether distributed or mot, apparently regarding the operation of the mine as a partnership or joint venture. This method of returning the profits has been followed by the Commissioner and the parties are agreed that it is proper. Their differences arise in attempting to determine how much, if any, of the amount paid Loudon is to be deducted from income and how much is to be regarded as a capital expenditure. This same question arose before the Supreme Court of the District of Columbia Avhen it became necessary to apportion this payment between the corpus and the income of the estate of John E. McLean. The court there decided that 71.3985 per cent was to be charged to corpus and 28.6015 per cent to income. In computing the deficiencies the Commissioner used these same percentages with respect to the taxpayers. The petitioners point out that the division directed by the Supreme Court of the District in the McLean estate was based on the ratio existing between the capital value of the mine at the date of death of John E. McLean and income subsequently derived and that the same ratio is not to be applied in the case of the petitioners. This the respondent now admits and claims that no allowance should have been made because of such settlement.

We can not agree with the petitioners that the amount paid Loudon is entirely chargeable against income or deductible as a loss, nor can we agree with the respondent’s contention that it was all paid to protect or enlarge the petitioners’ capital.

Loudon sought two things: First, to establish his ownership to a one-half interest in the mine and, second, to secure one-half of the past earnings. Had he been successful the taxpayers would have lost one-half of their capital and one-half of the earnings of the mine, whether previously distributed or accumulated. The payment to Loudon settled both claims. It seems that the court was clearly correct in apportioning such payment between income and corpus and that the same principles require that such an apportionment be made for income-tax purposes. The date nearest to the settlement and as of which figures are available is January 1, 1919. The parties have stipulated the depleted value of the mine as of that date and have also stipulated the amount of the earnings to that date. It was to protect their interest in these two amounts that the taxpayers made the payment to Loudon and it is proper that such payment should be prorated between capital and income upon the basis of the stipulated amounts of each as of January 1,1919.

In the last analysis the question is not whether this payment to Loudon may be deducted but involves a determination of the amount of the actual income of each year as distinguished from the apparent or bookkeeping income. Assuming that the taxpayers each owned a one-quarter interest in the mine and its income, the respondent determined that their income was a certain amount. But Loudon claimed one-half of it. Until Loudon’s claim had been adjudicated or settled, it was not possible to say what were the distributive shares of the taxpayers. The most that could be said was that they claimed certain amounts and if their claims were sustained their income would be that amount. But it was necessary to pay over a portion of the claimed amount to Loudon and it is the reduced amount which in fact is their distributive share in the profits.

The Commissioner suggests that if this payment is to be .apportioned, it should be on the basis of the March 1, 1913, value of the mine and the earnings subsequent to such date. Though ingenious, the suggestion is not sound, for the March 1,1913, value had nothing to do with the claims advanced by Loudon and settled by the taxpayers and, moreover, such a basis would entirely disregard the depletion which had subsequently taken place and been transmuted into earnings. The distributive share of each of the taxpayers in the income from the mine should be adjusted in each of the taxable years by prorating the payment made to Loudon on the basis indicated above.

In connection with the prosecution of their claims against the McLean estate and in defense of the action brought by Loudon, the taxpayers paid various amounts for attorneys fees and expenses as follows:

The services rendered by the attorneys included counsel and advice on the matter of the income impounded by the trustees of the McLean estate and approval of disbursements made by such trustee. The payment of $15,000 made in 1925 represents a compromise of a larger claim made by an attorney for services rendered in said suits. Petitioners contend that such payments are either ordinary and necessary expenses of conducting the mining venture, or losses, and in either event deductible from income. The respondent contends they are not allowable as deductions. It is our opinion that to the extent that such payments related to the rights of the taxpayers to retain the income or enlarge their share in the income of the mine, they are deductible; while to the extent that they represented expenditures made to acquire Loudon’s interest in the mine or to enlarge their own interests as against the McLean estate, or to defend their title to the mine, such payments are in the nature of capital expenditures to be added to the other costg of the property and recovered as are such other costs. The ratio to be used will be the same as that with respect to the Loudon settlement.

We are confronted with a further difficulty when we come to determine over what years the portion of the expenditure for legal services which is chargeable against income should be allowed as a deduction. The situation here is different from the payment made to Loudon, for that payment went to decrease the amount of gross income from the mine which should be reported, while here the question is not one of arriving at gross income to be 'reported but of establishing the amount which is deductible from gross income in arriving at net income. It might be possible to so apply the statute with respect to deductions as to prescribe a complicated mathematical formula for computing the amount which should be deducted in the year in which each payment was made. We have before us in these proceedings, however, all of the years which are affected to any substantial degree by these expenses and the advantages of knowing the outcome of the suits. When we consider these matters and the basis on which income from the operation of the mine is returned, we conclude that the portion of these expenditures which is deductible should be prorated over the years involved on the basis of the income from the mine for each of such years.

Under the agreement which was entered into by Mrs. Dewey, Bugher and the McLean estate, an accounting was to be had adjusting their rights to receive income from the mine on the basis of a one-quarter interest in each of the first two named and a one-half interest in the McLean estate. Interest was to be charged on over-payments and credited on underpayments at the rate of 4 per cent. The result disclosed that each of the petitioners was entitled-to a net credit of interest although the adjustment for some of the years in question was a charge against the petitioners. It is claimed by petitioners that this interest is properly to be accounted for as chargeable to each of the years in which there was a credit or debit adjustment, while the respondent has included the net adjustment as income in 1919.

The right to interest first arose under an agreement entered into in 1919. While this agreement required that the adjustment be made for prior years, no obligation to pay or right to receive interest existed in such prior years. Such obligation and right first arose in 1919, and we are of the opinion that the respondent acted correctly in determining that the net adjustment of interest was income in 1919.

Reviewed by the Board.

Decision will be entered on 25 days’ notice, under Bule 50.

Trammell did not participate.


author: Trammell :

text:
    Mossberg Pressed Steel Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8757.
    Promulgated January 11, 1928.

      J. Robert Sherrod, Esq., and F. 0. Graves, Esq., for the petitioner.

      Robert Littleton, Esq., for the respondent.
   OPINION.

Trammell :

In its original petition the corporation claims that the respondent erred by refusing to allow as part of its invested capital $78,400 representing a patent paid in for stock and $65,580 representing unpaid subscriptions for capital stock. In an amended petition filed at the hearing the petitioner claims that the respondent erred by not including in invested capital (1) all the actual cash paid in by stockholders, (2) that portion of stock subscriptions made by stockholders prior to January 1, 1920, which had not been collected by petitioner but which had been accrued as accounts receivable due from subscribers, and (3) $40,000 representing the actual cash value of patents bona fide paid in for stock of. the corporation having a par value of $75,000. In the amended petition it is also claimed that the respondent erred by failing to allow a reasonable allowance or one-seventeenth of the patent’s actual cash value for exhaustion, and that the respondent further erred by failing to determine that the petitioner had no net income for the calendar year 1920 due to erroneous credits to profit and loss representing excessive overhead charges as cost of manufacture of tools and other shop equipment.

The respondent denies that error was committed by him in the determination of the petitioner’s tax liability.

We have found that prior to January 1,1920, the petitioner, besides having received $9,900 as payment in full for preferred stock subscribed, had also collected $33,470 on unpaid subscriptions to preferred stock. In addition to the $33,470 collected during 1919, the petitioner collected $132,625 during 1920, which, when prorated for the portion of the year in which the respective collections were paid, gives an average amount of $52,228.08 to be included in invested capital. We have heretofore held that payments on stock subscriptions may be included in invested capital from the time paid in. Central Consumers Wine & Liquor Co., 1 B. T. A. 1190; Barker-Jennings Hardware Corporation, 4 B. T. A. 20; Meadows & Co., 5 B. T. A. 241. There should therefore be included in petitioner’s invested capital, on account of collections for stock, $95,598.08, composed of the amounts of $9,900, $33,470, and $52,228.08.

With respect to petitioner’s contention that there should be included in invested capital amounts of subscriptions made prior to January 1, 1920, for stock not issued and which had not been collected by petitioner, we are of the opinion that such amounts can not be included in invested capital until paid. Central Consumers Wine & Liquor Co., supra; Forge Coal Mining Co., 2 B. T. A. 975; Barker-Jennings Hardware Corporation, supra; Meadows & Co., supra. The decisions in those cases are applicable and controlling here.

We have also found that on August 27, 1920, preferred stock to the amount of $5,000 was issued to Mossberg in consideration for his paying a note for $4,000 owing by the company and the partial payment by him of invoices of goods received by it and that common stock amounting to $2,500 was issued to him as a bonus with the preferred. Inasmuch as the payment of the note extinguished a liability of the company amounting to $4,000, that amount should be included in the petitioner’s invested capital. Since the evidence does not show the amount of that portion of the invoices paid by Moss-berg, we have no basis for determining the amount to be included in the petitioner’s invested capital as a result of this transaction.

Relative to the patent assigned by Mossberg to the petitioner on September 24, 1919, we have found that with the exception of one carrier the carrier produced under the Mossberg patent was in several respects superior to the old style carriers then being manufactured. While no carriers had been manufactured under the patent there was at the time the petitioner acquired it an established market for braider carriers. There were at least five million then in use and a portion of them had to be replaced either with the old style carrier or with the Mossberg carrier, which was a superior article. A witness for the petitioner, who is an employee of the New England Butt Co. and who was familiar with the various types of carriers manufactured and sold in 1919, expressed his opinion as to an actual cash value of $40,000 on September 24, 1919, of the patent. Mossberg, who had had long experience in obtaining and disposing of patents, testified as to a value of $50,000. In view of all the evidence in the case we are of the opinion that the patent had an actual cash value of at least $40,000 at the time it was assigned to the corporation.

Of this value, the petitioner is entitled to a deduction against income of one-seventeenth of the amount or $2,352.94, representing a reasonable allowance for exhaustion of the patent.

We have found the value of the patent for the purpose of an exhaustion allowance to be $40,000. The respondent contends, however, that section 331 of the Revenue Act of 1918 will prevent the patent being included in petitioner’s invested capital at a greater amount than its cost to Mossberg.

This contention is correct if Mossberg acquired an interest or control of 50 per cent or more of the petitioner corporation.

The petitioner began business with an authorized capital stock of $325,000 divided into $200,000 common stock and $125,000 preferred stock. Each share of both classes of stock had a par value of $100 and the right to one vote. Mossberg assigned to the petitioner for $200,000 par value of its common stock the patent here under consideration, together with such others as he might obtain while “ in the employment ” of the petitioner. Of the $200,000 of common stock the evidence shows that $75,000 was issued to Mossberg for the patent. The evidence does not show that the $125,000 of the common stock was actually issued to him. While in the instrument executed September 29, 1919, he acknowledges having received the stock, he testified that he had no recollection of this portion of the stock actually being issued to him nor did he remember ever voting it, but that this portion of the stock was placed in the treasury of the corporation and later was issued from time to time as a bonus. The books were introduced in evidence and they do not show that the $125,000 par value of the common stock was issued to Mossberg.

Whether the $125,000 par value of stock was actually issued to Mossberg or was held in the treasury of the company or remained as unissued stock the effect insofar as the question in controversy is concerned, is the same. If it was actually issued to him he held it as a trustee for the corporation. It was the corporation’s stock. In effect it was treasury stock, or unissued stock, and should not be considered in determining the amount of outstanding stock. The $75,000 par value of stock held by Mossberg in his own right was immediately after the transfer of the patent to the corporation more than 50 per cent of the outstanding stock. On the other hand, even if it be held that the $125,000 par value of stock was actually issued to Mossberg and it be held to be effective outstanding stock, it was controlled by Mossberg, as trustee, who owned in his own right the balance of the common stock. In any event, the situation is one coming within the scope of section 331 of the Revenue Act of 1918, and the petitioner is not entitled to include in invested capital the patent at a value in excess of the cost to Mossberg. Since the evidence does not show the cost to Mossberg, the action of the respondent with respect to the patent is affirmed.

The petitioner’s last contention is that the respondent erred by failing to determine that the corporation had no net income for 1920 due to erroneous credits to profit and loss representing excessive overhead charges in cost of manufacture of tools, and other shop equipment. In regard to this issue, the petitioner contends that instead of $38,858.92, which represented the amount of overhead expenses originally estimated as being applicable to the manufacture of tools and other shop equipment, being eliminated from its total expenses and capitalized, only $12,146.88 should have been so eliminated from its total expenses and capitalized. In support of this the petitioner offered no legal or admissible evidence. On the basis of the evidence before us, we are unable to hold that this contention of the petitioner is correct.

Reviewed by the Board.

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


author: Tkammell :

text:
    Welsh Packing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5199.
    Promulgated January 11, 1928.

      W. D. Tatlow, Esq., for the petitioner.

      G. H. Curl, Esq., for the respondent.
   OPINION.

Tkammell :

The $39,147.25, which forms the principal controversy in this proceeding, should, in the opinion of the Board, be restored to the capital account at December 1, 1912, as claimed by the petitioner, so that the asset account on that date will reflect the value of $100,000. The Commissioner’s refusal to restore this item was entirely due to the fact that he concluded that the balance sheet at December 1, 1912, showing the net worth of $60,852.75 correctly reflected the true situation. The petitioner has clearly overcome the Commissioner’s determination in this regard. While the petitioner is without original books and records for any period prior to May, 1915, the owners and officers of the business from its inception testified at length regarding the property and business of the corporation. We are convinced from all of the testimony that the amount claimed by the petitioner should be restored to capital account for invested capital and depreciation purposes. The values reflected by the balance sheet at December 1, 1912, were purely arbitrary and have been shown to be far less than the actual cost of the assets. The evidence shows that the actual net worth at December 1, 1912, was in excess of $118,000.

The Commissioner based his computation of petitioner’s invested capital on the net worth of -$60,852.75 as shown by the balance sheet at December 1, 1912, on the theory that the $39,147.25 written off as of that date represented depreciation of tangible assets not theretofore taken and which, to that extent, constituted a distribution of capital assets in dividends of $73,000 declared and paid from 1908 to 1912. Under the evidence this theory can not be supported. The testimony is that the dividends were paid out of surplus earnings and there is also in the record sufficient evidence to show that petitioner’s actual net worth at December 1, 1912, was in excess of $118,000 and that the excess over the amount which the petitioner seeks to restore was more than adequate to take care of the depreciation sustained to that date.

The Board is also of the opinion from all of the evidence introduced that the Commissioner was in error in holding that invested capital should be reduced for insufficient depreciation taken in the years 1913 to 1916. Wh,ile the depreciation taken by the petitioner was not on any systematic basis, it was substantial in amount and,' in view of the evidence submitted by the petitioner, we reverse the Commissioner on this point. The Commissioner has submitted no evidence which would warrant us in holding that the deductions taken by the petitioner for depreciation were not adequate. Bub-No-More Co., 1 B. T. A. 228; Cleveland Home Brewing Co., 1 B. T. A. 87.

Reviewed by the Board.

Judgment will be rendered on 15 days' notice, under Buie 50.

Siefkin did not participate.


author: Trussell :

text:
    Appeal of The Daily Pantagraph, Inc.
    Docket No. 4126.
    Promulgated January 11, 1928.

      Arnold L. Guesmer, Esq., for the petitioner.

      J. K. Moyer, Esq., for the Commissioner.
   OPINION.

Trussell :

The record of this action contains the testimony of three disinterested witnesses, all of whom were or had been engaged in the business of publishing newspapers in the smaller cities of Illinois, Iowa, Missouri, and Wisconsin, and one of them had had experience in the purchase and sale of daily newspapers in such cities during a period of 45 years. These witnesses all gave opinion testimony upon the value of the Pantagraph circulation structure, Associated Press franchise, and good will. They discussed these questions from the standpoint of their personal knowledge of the business of the Pantagraph and generally from their experience and knowledge acquired in the publication and the purchase and sale of newspaper properties. All of them agreed that the circulation structure of the Pantagraph had on January 1, 1908, a value of not less than $10 per unit of individual subscriptions. One of these witnesses gave it as his opinion that the Associated Press franchise had a cash value of $30,000; another that this franchise was worth not less than $25,000. Respecting the value of petitioner’s good will, one of these witnesses gave it as his opinion that it was worth $50,000; another that the going business, including tangibles and intangibles, was worth between $325,000 and $375,000; and the third testified that if he had had the money he would have been willing to pay for the going business of the Pantagraph one-half million dollars.

Concerning the value of petitioner’s land, buildings, and equipment, the record contains the testimony of the general manager of the Pantagraph, another employee who had been with the business since 1882, and a disinterested witness who had been engaged in the building business in Bloomington since 1889. The last witness gave it as his opinion that the building owned and occupied by the Panta-graph on January 1, 1908, had a value of $35,000. The business manager of the Pantagraph and the employee witness testified in detail with respect to all the properties and equipment of the company, showing the history of such properties from the time acquired and their condition on J anuary 1,1908, and the probable life of both buildings and equipment.

Upon consideration of all of this testimony we have arrived at the conclusion that the tangible and intangible properties, which were turned in to the Pantagraph Company in exchange for stock and paid-in surplus, had on J anuary 1, 1908, a total value of $320,930.01 as set forth in the findings of fact and that the probable life of the buildings and equipment was, buildings 55 years, plant and equipment 33 years, and furniture and fixtures 25 years. We, therefore, find (1) that the additional cash values of land, buildings, and plant aggregating $39,397.68, should be reflected in the invested capital computation for the calendar years 1919 to 1921, inclusive; (2) that the values of circulation structure, Associated Press service and good will, although properly reflected in paid-in surplus in accordance with the opinion and decision of the Board in Shope Brick Co., 5 B. T. A. 1042, may not be, under the provisions of the Revenue Acts of 1918 and 1921, and in the opinion and decision of the Board in the case of the Herald-Despatch Co., 4 B. T. A. 1096, included or reflected in invested capital; (8) the amount of current earnings available for dividends in any year may not be reduced by any so-called tentative tax computation. L. S. Ayers & Co., 1 B. T. A. 1135; (4) income and profits taxes for prior years, the collection of which is not barred by the statute of limitations, may be deducted from surplus in accordance with section 1207 of the Revenue Act of 1926; (5) in the computation of net income and invested capital as affected by depreciation, the reasonable allowance for exhaustion, wear, and tear upon the petitioner’s buildings should be computed at the rate of 1.8 per cent of the value here found as of January 1, 1908, and upon the plant and equipment at the rate of 3 per cent, and upon furniture and fixtures at the rate of 4 per cent; (6) the asserted deficiency for 1916 is barred by the statute of limitations. Respecting the alleged deficiencies for 1909, 1912, 1913, 1914, and 1915, and the overassessments shown for the years 1910 and 1917, the Board has no jurisdiction.

The deficiencies for the years 1919 to 1921, inclusive, may be redetermined in accordance with the foregoing findings of fact and conclusions of law.

Reviewed by the Board.

Judgment will be entered upon 15 days’ notice, pursuant to Rule 50.


author: MoRRis:

text:
    E. R. Kaufman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. E. R. Kaufman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 12811, 12812.
    Promulgated January 12, 1928.

      Victor Corn-field, Esq., for the petitioners.

      Brice Toole Esq., for the respondent.
   OPINION.

MoRRis:

The respondent in his answer admits that salaries of State officials and salaries and wages of employes of a State are not liable to income tax under the Eevenue Act of 1921, and that the position of attorney to the tax collector of any parish in the State of Louisiana is created by statute and the attorney is a regular State employe as defined by regulations issued by authority of the Revenue Act of 1921. The statement attached to the deficiency letter gives as the reason for including the compensation in question in income that “ no part of the fee was earned prior to the termination of the suit and since you (E. R. Kaufman) did not hold the office of attorney for the tax collector at the time the suit was concluded and the fee was earned.”

We can not agree with the respondent’s reason for the inclusion of the compensation in income. The evidence is clear that during E. R. Kaufman’s tenure of office as attorney to the tax collector of Cal-casieu Parish, a suit was instituted by the Union Sulphur Co. against said collector; that as his attorney the statute required him to defend the suit. After having represented the collector up to and during the presentation of the evidence, he was succeeded in office by an appointee of a newly elected governor. He subsequently argued the case, however, and was given the statutory fee. His compensation was not determined by any contract entered into for that particular case, but was received for services which he started to perform and almost concluded admittedly as an employe of a State, and which he did furnish by reason of such prior employment. We can, not agree with respondent’s position that no part of the fee was earned prior to the .termination of the suit. The decision of the court merely fixed the amount of the compensation. All the services were performed, except the argument of the case, during petitioner’s tenure of office. In view of the respondent’s admission, the facts presented do not warrant the narrow interpretation contended for by him.

The respondent advances the additional ground for the denial of the exemption to Mrs. Kaufman that the rule of the exemption of salaries of employes of a State has no application to her as she did not receive such income for services rendered as an employe of a political subdivision of the State of Louisiana. This contention is based upon an erroneous conception of community income. The earnings of the husband from personal services become immediately a part of the community. Any exemption from taxation in relation to those earnings immediately attaches to the total amount, and whatever right the wife may have to report one-half thereof can not affect its taxable status and convert into taxable income that which was exempt when it came into the community. In view of the respondent’s admission and our conclusion, based thereon, that the compensation in question was exempt when it came into the community, one-half thereof is not made subject to tax on respondent’s ruling that petitioners may file returns on a community property basis.

Reviewed by the BoaRd.

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


author: Lansdon :

text:
    Joseph Rubin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8959.
    Promulgated January 12, 1928.

      Paul L. Lo'ioenwarten, O. P. A., for the petitioner.

      Bruce Low, Esq., for the respondent.
   OPINION.

Lansdon :

The deduction claimed by petitioner as a bad debt arises through payment on an oral guaranty of his brother’s debts to two corporations, of which petitioner is president. The respondent contends that payment under the oral guaranty, which was clearly unenforceable under the New York Statute of Frauds, does not create a debt, and that, assuming the existence of the debt, there has been no ascertainment of worthlessness during the taxable year, within the meaning of section 214 (a) (7) of the Revenue Act of 1921.

The Statute of Frauds will not operate as a defense, in an action by one who has paid under a verbal guaranty, to recover from the original debtor. The Statute only withholds remedial aid, and if the guarantor pays under the oral contract, the courts will give him a remedy against the original debtor. Beal v. Brown, 13 Allen (Mass.) 114; Slack v. Kirk, 67 Pa. St. 308; 5 Am. Rep. 438; Craig v. Vanpelt, 3 J. J. Marshall (Ky.) 489; Arnold on Suretyship, p. 136. The existence in fact of the debt seems clearly established since petitioner could have recovered from his brother in an action at law.

Before a deduction can be allowed as a bad debt, the fact of worthlessness during the taxable year must be proved. Equinox Co., 2 B. T. A. 466; Valdosta Grocery Co., 2 B. T. A. 727. The only evidence offered of David Rubin’s financial condition at the time the debt was charged off was petitioner’s testimony to the effect that his affairs were in “bad shape,” and that “we saw what he had outstanding — he showed us his books; we saw he had nothing that we could collect on.” The Board does not regard this statement of the petitioner as sufficient to enable it to determine that the debt was worthless. The worthlessness of a debt is a question of fact to be determined by the Board from evidence concerning the assets, of the debtor and his ability to pay. The conclusion of the petitioner that the books showed nothing on which he could collect is not sufficient. Alemite Die Casting & Manufacturing Co., 1 B. T. A. 548. David Rubin continued in business until his death in 1925, buying merchandise for resale to retailers. Nothing in the record indicates that he was at any time insolvent, or that petitioner’s claim could not have been paid, at least in part. Neither is there any showing that it would have been futile to secure a judgment against David Rubin.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Teammell :

text:
    Louis Reizenstein, Trustee, Rosa Reizenstein Trust Estate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8146.
    Promulgated January 12, 1928.

      Charles E. Sachs, Esq., for the petitioner.

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

Teammell :

The petitioner, both in his pleadings and at the hearing, contended that there was no such estate as the Rosa Reizenstein Trust Estate, and that he was not trustee of such an estate. An examination of the record before us discloses that there can be no doubt as to the identity of the taxpayer against whom the respondent has determined the deficiencies involved. Hence, we regard as unimportant the question of whether a more accurate or appropriate designation of the taxpayer might have been used.

The petitioner’s further contentions, briefly summarized, are that Louis Reizenstein, as executor under his father’s will, took possession of and the legal title to the estate, which consisted solely of personal property; that sometime thereafter the administration was abandoned and no final settlement of the estate was had; that upon abandonment of the administration, the legatees took title to the property of the estate under and by virtue of the will, and that thereafter their possession should be regarded as analogous to that of tenants in common; that petitioner continued in actual possession and administered the estate as the agent of the legatees, and that the income should accordingly be taxed to the respective owners according to their distributive shares.

The respondent has determined that the income in question was received by Louis Reizenstein as trustee of what he calls the Rosa Reizenstein Trust Estate, and that the income is taxable to the said trustee.

There is no dispute with respect to the facts. It is not controverted that the income involved here was received by Louis Reizen-stein, and that it was not his income in the sense that he had the legal title thereto and the beneficial interest therein.

In our view of the case, it is not necessary to decide whether the petitioner was a trustee for the benefit of the legatees, or was acting as agent for them. If he was their agent it is clear that the income received was taxable to the legatees and not to him as contended by the petitioner. Maryland Casualty Co. v. United States, 251 U. S. 258.

It is conceded that the petitioner during the years involved was not acting in the capacity of executor, as administration of the estate had been abandoned prior to the taxable years involved. If it be conceded for the sake of argument that he was acting in the capacity of trustee, as contended by the respondent he was acting for those whose interests were definitely fixed by the terms of the will. The legatees had the right to their respective shares. There were no contingent interests. The income was neither to be accumulated nor held for future distribution under the terms of the will but each of the legatees was entitled to his share of the income.

The assets and income therefrom belonged to the petitioner and the beneficiarles. The petitioner received the income for and in behalf of himself and the beneficiaries; and in the absence of any agreement that it should be accumulated or held for future distribution, the legatees were entitled to it as it came in. In 1922, the brothers and sisters of Louis Reizenstein claimed their interests in the estate and their rights were not questioned by anyone. Louis at that time purchased the interest of each for the sum of $11,000, which obviously represented compensation for their respective shares or interests in the corpus and also the accumulated profits to which each was entitled.

Under section 219 of the Revenue Acts of 1918 and 1921, the beneficiaries are taxable on their distributive shares of the income, whether distributed or not. Gideon N. Stieff, et al., Executors, 2 B. T. A. 1109; Florence M. Smith, Executrix, 5 B. T. A. 225. Cf. Esty v. United States, 63 Ct. Cls. 455; McCaughn v. Girard Trust Co., (C. C. A., 3d Cir.) 19 Fed. (2d) 218.

It is our opinion that the income involved in this proceeding is not taxable to the petitioner as trustee. Accordingly, the determination of the respondent is disapproved.

Reviewed by the Board.

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

GReen concurs in the result.


author: Moehis :

text:
    H. B. Pence and Mrs. H. B. Pence, Petitioners, v. Commissioner of Internal Revenue, Respondent. W. G. Pence and Mrs. W. G. Pence, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7106, 8408.
    Promulgated January 12, 1928.

      E. G. S. Bminard, O. P. A., for the petitioners.

      Henry Ravenel, Ésq., for the respondent.
   OPINION.

Moehis :

The only question involved in this proceeding is the cost of the Pence Home Ranch, sold by the petitioners in 1920, on which an alleged loss of $33,463.16 was sustained. The petitioners contend that the property in question was sold for less than cost.

There is in petitioners’ brief an amount of $38,800 which appears to be the cost attached to the property in question by the revenue agent. The petitioners state in their brief that this amount was “ conceded by the revenue agent as being a fair value, which value is acceptable to all parties, and upon which there has been no controversy.” We find nothing in the record tending to establish the acceptability of this figure as the “fair value” of the land at the time it was deeded to H. B. and W. G. Pence, nor do we agree with the statement that there has been no controversy over this figure. Indeed, since the March 1, 1913, value was stipulated by the parties and since the parties were apparently in agreement with respect to the selling price, the entire controversy hinged upon the cost of this property to the petitioners. If the petitioners intended to rely upon the fair market value as an element entering into the cost of this property, which they no doubt did, that value should have been established in the same manner as the improvements on the property. We have no definite knowledge of the respondent’s treatment of this figure, nor do we know whether he regarded this sum to be the fair market value at the time the property was acquired by the petitioners or whether he regarded it to be the cost to the petitioners of everything including the improvements herein established. It must be obvious, therefore, that the proof of this sum as fair market value was one of the important elements of cost. Not being evidence before this Board, we can not of course give any weight to the affidavits which are appended to the petitions, nor to the statements in the petitioners’ brief. Appeal of Southern California Loan Association, 4 B. T. A. 223.

On the evidence offered we are able to find that the petitioners had expended $11,530 in improving the property in question prior to March 1, 1913. The March 1, 1913, value was stipulated by the parties to be $100,000 and the sale price, to which the parties agree, was $81,008; hence it will be seen that the sale price is less than the March 1, 1913, value and greater than the cost as proven by the petitioners. Therefore, on the evidence offered we sustain the findings of the respondent.

Judgment will be entered for the respondent.


author: Morris :

text:
    Underwriter Printing & Publishing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5753.
    Promulgated January 12, 1928.

      Fred 8. Knight, Esq., for the petitioner.

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

Morris :

While all of the facts and circumstances surrounding the issuance of the stock in question by the petitioner tend to establish that the publications alleged to have been turned over to the petitioner for that stock were developed by Mack in his capacity as president of the petitioner and were at all times its property, we are not compelled to consider that question in view of the state of the evidence.

Section 326 of the Revenue Act of 1921 provides in part as follows:

(a) That as used in this title the term “ invested capital ” for any year means (except as provided in subdivisions (b) and (c) of this section):
(1) Actual cash bona flde paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona flde paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor,
* m * * # * *
(5) Intangible property bona flde paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the aetual cash value of such property at the time paid in, (b) the par value' of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: * * *

The $7,300 of capital stock not having been paid for in cash it was, under section 326 above, incumbent upon the petitioner to prove “ the actual cash value ” of those periodicals alleged to have been turned over to the company in consideration for the stock issued to Mack, and no evidence having been adduced as to that value the finding of the respondent is sustained.

Judgment will be entered for the respondent.


author: Siefkin:

text:
    Atlantic Coast Line Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10983.
    Promulgated January 12, 1928.

      M. O. Elliott, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   Siefkin:

This proceeding is for the redetermination of a deficiency in income taxes for 1919 asserted in the amount of $41,668.73, of which $9,612.29 is in controversy. Of such deficiency, $8,209.86 consists of the 2 per cent tax paid by the Director General of Railroads during the period of Federal control under a contract between the Director General and petitioner upon net taxable income of $410,-493.27 under facts differing in no substantial respect except as to the amounts involved from the facts considered by us in New York, Ontario & Western Railroad Co. 1 B. T. A. 1172, and Atlantic Coast Line Railroad Co., 2 B. T. A. 892, where we held the railroads not chargeable with the amount borne by the Director General. Of the contested amount, $1,381.12 results from the inclusion in income of petitioner and the taxation at 10 per cent of $13,811.20 on account of sidetracks paid for by customers of petitioner and donated to petitioner under General Order No. 15 of the United States Railroad Administration. Under a state of facts not distinguishable in any essential from the facts in this proceeding we have held that such amounts were not taxable income. Great Northern Railway Co., 8 B. T. A. 225. Twenty-one dollars and thirty-one cents represents a correction in computation.

The parties have agreed that if these two issues are determined in favor of the petitioner, the amount of the deficiency for 1919 is $32,056.44. We affirm the principles decided in the cases cited. The deficiency for 1919 is $32,056.44. An order to that effect will be entered.

Judgment will be entered for the respondent for a deficiency of $S%,056.1¡J¡. for 1919.


author: GREEN:

text:
    Barbara Konold, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9670.
    Promulgated January 12, 1928.

      William J. Kennedy, Esq., and A. G. Frodel, for the petitioner.

      Thomas Martinez Willems, Esq., for the resjiondent.
   OPINION.

GREEN:

The petitioner alleges that the respondent erred, in computing the gain derived from the sale of certain real estate. The respondent, in determining the gain from these real estate transactions, used the assessed value of this real estate as representing 75 per cent of its fair market value on March 1,1913. The petitioner has shown that the property at Ferry and Chapel Streets was worth $13,000 on March 1,1913, and that the other two parcels had as great a value on this date as at the dates of their respective sales. Since the petitioner has offered no evidence as to how the value of the real estate should be allocated as between land and buildings nor as to the rate of depreciation applicable to the buildings, we believe that such allocation should be made on the same proportions as were used by the respondent in his deficiency letter, and that the value thus allocated to buildings should be depreciated at the same rate as used by the respondent. Since the petitioner has failed to prove cost, the gain must be computed by subtracting from the sale price the March 1,1913, value reduced by the allowable depreciation.

As to the alleged errors in including the amounts of $2,092.05, representing interest, and $17,024.23, representing the liquidating dividend received on distribution, in the petitioner’s gross income for the year 1922, the responsibility rested upon the petitioner to show what her correct income was for that period. Not a shred of evidence was offered by the petitioner to show that her income from these sources was something other than that determined by the respondent. On the record confronting us, we must hold that the petitioner has failed to prove the allegation of error that the respondent has overstated the net income for the taxable year 1922.

As to the third assignment of error, the petitioner has alleged as to the years 1921 and 1922, “ Salaries and rents received from the H. Konold & Sons Co. should be allowed to be included in her personal income for said years.” The respondent denied generally that an error had been committed. It was intimated at the hearing that the petitioner expected to have the matter of these salaries and rents adjudicated in the case of H. Konold & Sons Co., Docket No. 7665, then pending before this Board. This case was dismissed on May 4, 1926, on motion of the Commissioner for the reason that the petition for redetermination was not filed with the Board within 60 days from the mailing of the deficiency notice. No evidence was offered relative to these salaries and rents, and on the record as it stands we are compelled to accept the respondent’s determination, except in the case of the above mentioned real estate, as correct.

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


author: Teakmell:

text:
    Gus Sun Booking Exchange Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10786.
    Promulgated January 12, 1928.

      Thomas D. Hodge, Esq., for the petitioner.

      J. Arthur Adamis, Esq., for the respondent.
   OPINION.

Teakmell:

The principal question involved is whether the petitioner meets the tests required by section 200 of the Revenue Act of 1918, which is as follows:

The term “ personal service corporation ” means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 59 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading^as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

The test laid down with respect to capital is clearly met. Capital was not an income-producing factor. The corporation had no capital, either invested or borrowed, except what was invested in its furniture and fixtures and this did not at any time exceed $1,000.

The corporation was engaged in rendering personal service, which consisted of securing vaudeville acts for theatres and obtaining contracts of employment for actors upon a commission basis. It had no responsibility, financial or otherwise, after the contracts had been obtained.

Were the principal stockholders regularly engaged in the active conduct of the affairs of the corporation? One of the principal stockholders of record, the United Booking Offices, a corporation, appears to be the owner of 201.5 shares. It is contended by the petitioner that this corporation did not actually own the shares appearing in its name but that they were merely issued and transferred to it in the nature of security. On that question the provisions of the contract dated June 23,1914, are set out in the findings of fact.

On the question as to whether the petitioner corporation was a corporation coming within the scope of section 209 of the Revenue Act of 1917, that is, a trade or business having no invested capital or not more than a nominal capital, the United States District Court for the Southern District of Ohio, Western Division, in the case of Gus Sun Booking Exchange Co. v. Deane, 10 Fed. (2d) 378, held that during 1917 the petitioner corporation came within the scope of section 209. The court, in its decision, stated as follows:

The ownership of the stock of the United Booking Offices is dependent solely upon the written contracts * * *. When the operation of those contracts is terminated, the stock goes back to the plaintiff company. It must be regarded as a deposit or a pledge for the due performance of the contract, or for some other purpose.

The court also said:

The authorization to issue and the issuance of substantially $50,000 in stock, raises a presumption, or at least casts a suspicion that substantial value in the form of capital is included within the corporate assets. This presumption, if it reaches the dignity of a presumption, may, however, be overthrown by proof that the outstanding stock was not exchanged for something of actual, potential, or substantial value.

Section 209 of the Revenue Act of 1917 is as follows:

That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.

The proceedings in the United States District Court were introduced in evidence here and it was contended that “ the District. Court’s decision on each of such issues is binding on the Government by the rule of res judicata, so that the Board can not be required to decide any of them de novo and that acceptance of the District Court’s determinations upon these issues of fact will result in this Board holding petitioner to be a personal service corporation under the 1918 Act.”

We do not consider that the decision of the United States District Court upon the issue as to whether the petitioner was a corporation having no invested capital or not more than a nominal capital during 1917 is binding upon the Board or is determinative upon the question as to whether the petitioner comes within the scope of section 200 of the Revenue Act of 1918. The two sections are different in material respects. Conceding that the petitioner meets fully the requirements of section 209 of the Revenue Act of 1917, it does not follow that it meets the tests of section 200 of the Revenue Act of 1918. Under section 200 of the 1918 Act, the income must be ascribable primarily to the activities of the principal stockholders. This is one of the tests that must be met. As to this the question of the relationship and activities of the United Booking Co. become important.

All activities of the petitioner at New York and Chicago were carried on principally by the United Booking Offices. It is true that contracts made by it were subject to the approval of representatives of the petitioner in those offices who are not shown to have been stockholders and to the final approval of Sun. It would seem clear, however, that a material part of the income was ascribable to those services of the United Booking Offices. It appears that the principal part of the contracts and the business originated from this source. The petitioner recognized the value of those services of the United Booking Offices in agreeing to give to that company half its income in consideration therefor.

We agree with the United States District Court in the case of Gus Sun Booking Exchange v. Deane, supra, that the United Booking Offices was not a stockholder. The stock in the name of that comp any was merely held pursuant to contract. That company not being a stockholder, it seems clear that a material part of the income was attributable to other sources than the services of the stockholders, especially when we consider the services Tendered by employees who were not stockholders. The statute, however, requires that the income be attributable primarily to the activities of the principal stockholders. Taking this view of the relationship of the United Booking Offices and considering the number and the important services rendered by nonstockholding employees, the petitioner does not meet the test of section 200 of the -1918 Act. This question was not involved in the case decided by the United States District Court in determining whether the petitioner comes within the scope of section 209 of the 1917 Act.

On the other hand, even if the United Booking Offices was a stockholder, it being a corporation, the services rendered by it were not personal in their character. We have heretofore held that if the pi’incipal stockholder of a corporation was itself a corporation, personal service classification should be denied. Hanley-Ried & Co., 2 B. T. A. 315; Manufacturers Insurance Agency Co., 8 B. T. A. 44.

For the foregoing reasons, in our opinion, the petitioner does not come within the scope of section 200 of the Revenue Act of 1918.

Inasmuch as the petitioner introduced no evidence in support of its contention that if it were found not to be a personal service corporation its tax should be computed under the provisions of section 328 of the Revenue Act of 1918, the contention is denied.

Judgment will 5e entered on 15 days' notice, under Rule 50.


author: MoeRis:

text:
    L. A. Thompson Scenic Railway Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10315, 9679.
    Promulgated January 12, 1928.

      V. G. Gormier, Esq., for the petitioner.

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

MoeRis:

The first allegation of error urged by the petitioner is with respect to the deductibility of amounts set aside out of its income in 1920 and 1921 for self insurance. This issue was submitted by the petitioner for consideration on the record made in the Appeal of L. A. Thompson Scenic Railway, 2 B. T. A. 665, wherein the identical issue was raised and it was decided that the amounts set aside in a reserve for self insurance do not constitute ordinary and necessary business expenses within the meaning of the taxing statutes. That decision is controlling in the instant proceedings.

The second issue presented for consideration is whether the respondent committed error in disallowing as a deduction certain expenses incurred by the petitioner in dismantling and removing the Land of O-z. The petitioner contends, and we believe very properly, that the cost of dismantling and removing the properties of the Land of O-z was a deductible expense under the provisions of section 234 of the Revenue Act of 1918, which provides:

(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *

Convinced, as we are, that the expense of dismantling and removing the properties here under consideration is a proper deduction, we sustain the petitioner in its contention.

The third issue raised by the petitioner relates to the action of the respondent in reducing its invested capital for 1920 by the amount of income and excess-profits taxes due for the preceding taxable year.

This issue was not pressed at the hearing nor was any evidence introduced thereon. The respondent’s determination on this point is therefore approved.

In respect to the last three issues raised by the petitioner, the record does not show what action was taken by the respondent. The adjustments of income made in the notice of deficiency are based on a 30-day letter in which additions to income as disclosed in a revenue agent’s report, of certain amounts representing depreciation, increase' in reserve for insurance, and dismantling expenses are made. We are satisfied that the expenditure of $165.61 made by the petitioner for the purpose of inducing the Orangemen’s Association to hold its annual picnic at Woodside Park at which the petitioner was one of the concessionaires, was an ordinary and necessary expense, and should be allowed as a deduction, if such allowance has not already been made. The amount of $304.17 representing the accrued interest on Canadian Pacific bonds which the petitioner paid at the time of purchase and recovered at the next interest date is not income, and the respondent was in error if he included it therein. As no evidence was introduced on the sixth allegation of error, the determination of the respondent is approved in respect thereto.

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


author: Milliken :

text:
    T. J. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11029.
    Promulgated January 12, 1928.

      Chas. E. Garnett, Esq. for the petitioner.

      Bruee A. Low, Esq., for the respondent.
   OPINION.

Milliken :

The only question involved is whether petitioner is entitled to have depreciation computed on the unit-of-production basis rather than on the straight-line basis. Respondent has found that the equipment had a useful life of 10 years. Since 71 per cent of the oil in the reserve was extracted in the year 1920, the year here involved, it at once appears that the estimate of a 10-year life for the equipment bears no relation to the purpose for which the equipment was intended. Under respondent’s allowance, only 10 per cent of the depreciation is allocable to 71 per cent of the total contents of the reserve, while 90 per cent of such depreciation is allocable to 29 per cent of such contents. To put it another way, under respondent’s computation, petitioner’s allowance for depreciation will be effective in years in which the equipment is wholly out of use and at a time when he will be in receipt of no returns from his capital investment. In this proceeding, we have the total cost to petitioner of his share of the equipment and the amount of the salvage value thereof, the amount of oil in the reserve attributable to petitioner’s interest and the amount of extraction for the taxable year. This case falls within the rule laid down in Golconda Oil Co. v. Commissioner, 7 B. T. A. 955. Petitioner is entitled to have the depreciation computed upon the unit-of-production basis.

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


text:
    H. R. Ketcham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14531.
    Promulgated January 12, 1928.

      Claude Collard, C. P. A., for the petitioner.

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

Milliken :

Under the facts as admitted in answer filed by respondent and as stipulated, we are of the opinion that the amount of $1,000 distributed by petitioner in the year 1920 to his employees as Christmas bonuses is a proper item of deduction as a business expense for that year. See First National Bank of Book Rapids v. Commissioner, 6 B. T. A. 816; Appeal of Edwin C. Brandenburg, Executor, 4 B. T. A. 108; and Appeal of Washington Hotel Co., 4 B. T. A. 441.

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


text:
    C. H. Goodwin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mollie Goodwin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 21337, 21338.
    Promulgated January 12, 1928.

      Glaude G ollar d, G. P. A., and M. M. Mahany, Esq., for the petitioners.

      Granville S. Borden, Esq., for the respondent.
   OPINION.

Milliken :

The only question involved in this case is whether petitioners are entitled to deduct, as losses for the year 1920, certain oil investments which they claim became worthless in that year. Petitioners introduced only two witnesses, petitioner C. H. Goodwin and J. E. Hickman. The memory of C. H. Goodwin was quite faulty and we have been required to rely largely on the testimony of Hickman. The vital question is in what year petitioners’ alleged losses were sustained. The burden rests upon petitioners to establish in what year the losses occurred, and where they have not supplied this testimony, the Board is unable to supply it for them. Cf. Avery v. Commissioner of Internal Revenue, 22 Fed. (2d) 6.

Petitioners’ claim for deduction in 1920, of losses incurred in their investment in the royalty interest in the Cooper-Hoffman leases must be denied since the evidence shows that it was known that there was no oil in this tract when the last well was completed. The testimony as to this date is to the effect that the last well was sunk either in 1919 or in 1920; that is, the evidence shows that the loss may have occurred in 1919. This evidence is not sufficient to meet the burden of proof which rests upon petitioner.

The facts found with reference to the Falls royalty clearly show that petitioner suffered a deductible loss in 1920, and the same is true as to the investments in the Keith lease and the Edna Hill Block lease.

We are of the opinion that the facts of this proceeding with reference to the lease on the Thorpe farm and the Barber or Barbee lease, bring it within the rule laid down in A. H. Fell v. Commissioner, 7 B. T. A. 263, and that petitioners are, therefore, entitled to deduct their losses in this transaction in the year 1920.

Respondent’s action in denying a deduction of any loss arising from the M. F. Reed lease is approved, for among other reasons it does not appear what the cost of that lease was to petitioner.

When L. M. White sold to innocent purchasers a large part of land leased to petitioners, he breached his contract with them and the lease was worthless. Petitioners were left with only a right of action for damages. The evidence clearly shows that to bring such an action would have been futile. This deduction is allowed.

The only claim made by petitioners with reference to their loss in the Brooks lease investment is that the lease lapsed by reason of failure to pay rent. But whether rent was paid for 1919, does not appear from the evidence; neither does it appear whether the investment was worthless or was ascertained to be worthless in any year. Respondent’s action as to this item and as to the Shook royalty is approved.

While it is shown that petitioners and one other owner had determined to forfeit the Lacey lease in 1920, and not to pay rent for the year 1921, it appears that another owner of the lease did pay this rent for the year 1921, and upon request petitioners did contribute their share. Respondent’s action in respect to this lease is approved under the authority of Appeal of A. L. Huey, 4 B. T. A. 370.

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


author: MuRdock :

text:
    Sadie S. Davis, Executrix, Estate of David Strauss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3877.
    Promulgated January 13, 1928.

      William A. Ccvrr, Esq., for the petitioner.

      J. F. Greaney, Esq., for the respondent.
   OPINION.

MuRdock :

Section 402 of the Revenue Act of 1918, provides—

That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona tide sale for a fair consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, .made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title * * *.

The transfer in question was an absolute gift taking effect in praesenti and not intended to take effect in possession or enjoyment at or after the death of the decedent, and we are only concerned with the question as to whether it was made in contemplation of death within the meaning of the statute.

We have had occasion to discuss this provision of the Act in several cases, see Appeal of Spencer Borden, Jr., Executor, 6 B. T. A. 255; Appeal of Philip T. Starch, 3 B. T. A. 514; and we have held that it was the intention of Congress to provide for the inclusion in the gross estate of the value of any property concerned of which the decedent made a transfer in contemplation of death within a reasonable time in the near future as distinguished from the general expectation of death entertained by everyone. This construction of the statute has been applied with uniformity, both in the State and Federal courts. Shwab v. Doyle, 269 Fed. 321; Rea v. Heiner, 6 Fed. (2d) 389; Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549; State v. Pabst, 139 Wis. 561; 121 N. W. 351; Commonwealth v. Fenley, 189 Ky. 480; 225 S. W. 154; Conway's Estate v. State, 72 Ind. App. 303; 20 N. E. 717.

The transfer was made less than two years before death and was a final disposition of a material part of the decedent’s property. Therefore, the presumption arises under the statute that the transfer was made in contemplation of death and it must be taxable unless there is evidence sufficient to overcome the presumption fixed by the statute.

From the evidence in this case we are convinced that the decedent at the time he made the transfer in question had no apprehension of death within a reasonable time in the near future and that the motive for the transfer was his desire to provide an income for his daughters during his lifetime. We are of the opinion that the evidence is sufficient to overcome the presumption of the statute; that the transfer was not made in contemplation of death within the meaning of the statute, and that the respondent was in error in including the value of the stock transferred in the decedent’s gross estate.

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


author: Morris:

text:
    J. Duncan Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3152.
    Promulgated January 13, 1928.

      Andrew H. Patón, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Morris:

The first error assigned relates to the exclusion from invested capital of $38,921.68, the depreciated value of patterns paid in for stock. The issue is solely one of fact as to the value of such patterns on October 1, 1912. We have found as a fact that such patterns had a value on that date of $38,850. The depreciated value of such patterns should be included in invested capital for 1919..

In accordance with the stipulation of the parties, depreciation at the rate of 4 per cent should be allowed on the above value of the patterns.

The third error alleged was the understatement of invested capital by the omission of $5,000 earned surplus. The facts are that the stockholders endorsed and returned two quarterly dividend checks to the corporation for the purpose of meeting the payments on a new building. Their accounts were credited with the amounts of the dividend. We are of the opinion that such amounts constitute borrowed capital and can not, therefore, be included in invested capital. Cf. Appeal of Kelly-Buckley Co., 1 B. T. A. 1154; Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215.

In addition to $9,925.80, the amount allowed by the respondent as the petitioner’s opening inventory for 1919, purchases were made late in 1918 amounting to $8,558.77. Purchases representing $7,754.77 of this amount were on hand or in transit on December 31, 1918. The difference of $804 was the cost of certain castings used in the manufacture of 800 switches at an additional cost of $396, the total of which, or $1,200, the petitioner contends should also be included in the inventory. The record shows, however, that these switches were shipped on December 31, 1918. They, therefore, should not be included in the 1918 closing inventory. The, closing inventory for 1918 should be increased by $7,754.77 over the amount allowed by the respondent.

The parties stipulated the remaining assignments of error as set out in the findings of fact. The tax should be recomputed in accordance with the foregoing decision and the stipulation.

Judgment will 5e entered on 15 days’ notice, it/nder Bule 50.


author: Aeundell:

text:
    Shelby D. Scott, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6180.
    Promulgated January 13, 1928.

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

      George G. Witter, Esq., and T. W. Lar drier, Esq., for the respondent.
   OPINION.

Aeundell:

The theory that improvements placed upon leased property by the lessee result immediately in income to the lessor has been established by the courts. Miller v. Gearin (C. C. A.), 258 Fed. 225; Cryan v. Wardell, 263 Fed. 248.

Petitioner does not question the value placed by the Commissioner on the property at the date of .its completion in the amount of $203,-387.25, nor does ho offer any proof sufficient to warrant us in changing the apportionment as made by the Commissioner wherein he assigned to petitioner three-eighths of the whole value so determined, nor does he complain because the Commissioner prorated the income so determined over the life of the lease instead of requiring that it be reported all in the year 1922. His contention is that he is in receipt of no income because the theatre building will be obsolete upon the termination of the lease in 1940, and that if it be then necessary to convert the theatre into commercial property the cost of removing the building will be as much as the salvage value of the material.

To this view we can not agree. The building was substantially constructed and there is no evidence to overcome the Commissioner’s findings that it would have a normal life of 50 years. There is evidence that the trend of development is away from this location and that the economic life of theatres of this sort is much shorter than the physical life of the building. From all the evidence we are of the opinion that petitioner’s interest in the building should be depreciated at the rate of 3y3 per cent per annum over the life of the lease in determining its residual value at the expiration of the lease.

There is no evidence in the record which would permit us to pass on the second assignment of error. The Commissioner must, therefore, be sustained on this point.

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


author: Milliken:

text:
    John T. Sline, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6752.
    Promulgated January 13, 1928.

      J. M. MoMillin, Esq., for the petitioner.

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

Milliken:

The first issue relates to the profit resulting from the sale of 231.2 acres of land. The land was sold for $86,670. Of the acreage sold, 131.2 acres were acquired in 1915, at a cost of $19,012.40. We are of the opinion that the March 1, 1913, value of the 100 acres acquired prior to March 1, 1913, was $17,500. The improvements located on the 100 acres had a value on March 1, 1913, of $9,000, and at date of sale in 1920, the depreciated value was $6,000.

Of the total acreage sold in 1920, petitioner had purchased 100 acres prior to his marriage. The cost of the same was $2,500. The initial payment made was $500. Subsequent to his marriage the remaining $2,000 was paid. Counsel for petitioner insists that one-fifth of the 100 acres was the separate property of petitioner by reason of the fact that $500 of the total cost of $2,500 had been paid prior to marriage and the remaining four-fifths interest was the joint property of petitioner and wife. The decided cases of the courts of the State of Texas do not support this view. We need not extend this opinion by a discussion of the cases. They all are authority for the conclusion that the 100 acres was the separate property of the petitioner when sold in 1920. Nor do we have any evidence that the improvements placed thereon were paid for out of community funds. In the absence of proof we must presume they were paid for out of the separate funds of petitioner. See Welder v. Lambert, 91 Tex. 510; 44 S. W. 281; Pellum v. Fleming, 283 S. W. 531; Jackson v. Jackson, 283 S. W. 923; Price v. McAnelly, 287 S. W. 77; Evans, v. Ingram, 288 S. W. 494. In determining the profit from the sale of the 231.2 acres of land, 100 acres, together with improvements, should be treated as the separate property of the petitioner.

We have set forth in the findings of fact the deductions to which petitioner is entitled. Counsel avers that petitioner should be allowed a deduction of $7,043.84, representing advances made for tenants during the year and for which petitioner was indebted at the close of the year. The petitioner maintained no books of account and reported his income on the basis of actual receipts and disbursements. He had not paid the sum sought to be deducted at the close of the year and in fact a part of the advances were to be reduced by the application of the tenants’ share of the crops for the year. The respondent did not err in refusing to allow the same.

We have set forth in the findings of fact the equipment, machinery, live stock, and various assets used by petitioner in carrying on his business during the year. Counsel requests us to determine a rate of depreciation on the same to which petitioner is entitled. We entertain no doubt that he is entitled to a deduction for depreciation, but no evidence was introduced as to the proper rate of depreciation applicable and accordingly the claimed allowance is denied.

There is no issue between the parties of the community property status of the income from the sale of the 131.2 acres of land purchased in 1915 and sold in 1920, or of the deductions to which petitioner and wife are entitled for the year as herein allowed.

The 25 per cent penalty for failure to file a return was imposed by respondent pursuant to the provisions of section 3176 of the Revised Statutes. Petitioner testified to the circumstances in 1921, resulting in his failure to file a return. However cogent this reason may have been and that his failure was due to reasonable cause and not willful neglect, it is nevertheless true that the petitioner has not, to this day, .complied with the statutory requirement that a return be filed, accompanied by the showing of the reason for the delay, and it- follows from the mandatory provisions of the statute that the 25 per cent penalty should be imposed. See Appeal of John B. Nordholt, 4 B. T. A. 509.

Judgment will be entered on 15 days' notice, %mder Pyle 50.


author: MaRqhette:

text:
    Estate of John A. Hicks (L. R. Hicks and R. A. Hicks, Distributees), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7253.
    Promulgated January 13, 1928.

      Lloyd W. IMnkelspiel, Esq., for the petitioner.

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

MaRqhette:

The evidence herein shows that on April 10, 1920, John A. Hicks transferred to his two sons certain shares of the capital stock of the John A. Hicks Co., and that subsequently upon the-dissolution of that company they participated in its assets in proportion to their stockholdings. But John A. Hicks did not convey to the sons any direct interest in the corporate assets; he gave them only shares of stock which entitled them to share in the earnings of the corporation, and upon dissolution, to aliquot shares in its assets after the payment of its debts. We are therefore unable to perceive upon what theory the respondent included in the gross estate of John A. Hicks, any part of the assets of the corporation which the sons received in liquidation. If there was anything to be included in the estate on account of the transfers involved herein, it was the value of the thing transferred, to wit, 158 shares of the capital stock of the John A. Hicks Co. However, it is clear that the transfer was absolute and in praesenti and that there was no interest in or control over the stock reserved to the grantor. It is also clear, we think, that the transfers were not made by John A. Hicks in contemplation of death. There is not only no evidence to indicate that on April 10,1920, John A. Hicks believed or had any reason to believe he would die in the reasonably near future, but on the other hand the evidence shows that he was in good health at that time and that he made the transfer pursuant to an intention he had formed and expressed several years before, to give to his sons an interest in the corporation, in the affairs of which they had long taken an active part.

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