author: McMahon :

text:
    Merrill Silk Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39232.
    Promulgated May 12, 1932.

      R. M. Heth, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

McMahon :

The respondent has allowed the petitioner a deduction for depreciation of its machinery in the year 1920 at the rate of 10 per cent. Petitioner contends that it is entitled to an additional 6 per cent depreciation because the machinery was operated overtime at night. It is petitioner’s contention that the rate of 10 per cent which respondent has allowed represents the depreciation sustained by the machinery for operation for 10 hours during the daytime. Petitioner contends that its normal operation of machinery was ten hours per day, but that the night operations in 1920 constituted extra operations entitling petitioner to additional depreciation. However, the evidence discloses that from 1906 through 1920 it was normal for petitioner to operate its machinery both day and night and that ten hours per day and twelve hours per night constituted the normal operation of the plant. There is no evidence to show that the respondent did not take into consideration the night operations in arriving at the rate of depreciation, and since the petitioner has not furnished us with any evidence from which we can determine that the respondent’s determination is erroneous, such determination must be approved. See San Angelo Telephone Co., 6 B. T. A. 1189, wherein it is held that the burden is upon petitioner to prove all the elements necessary for the Board to determine a reasonable allowance for depreciation. Furthermore, there is considerable evidence to support the view that the rate of depreciation allowed by the respondent is reasonable.

The petitioner contends that for the years 1920 and 1921, the respondent erred in refusing to compute petitioner’s tax in the manner specified in section 328 of the Revenue Acts of 1918 and 1921.

It is the contention of the petitioner that there were four abnormal conditions affecting its income and capital which bring it within the provisions of section 327 of the Revenue Acts of 1918 and 1921 as follows: (1) Petitioner was practically a one-man concern, its treasurer and general manager having complete control and management of its affairs, and he and the members of his immediate family owned the controlling interest in its capital stock; (2) no salaries were paid to any of the petitioner’s officers except to the treasurer and general manager, who received as high as $12,000 per year; (3) that an unusually large percentage of petitioner’s working capital was borrowed; and (4) that certain of petitioner’s records were de-stroj'ud which would, have, shown that amounts were charged to expense which should have been charged to capital account and that now it is unable to prove this by its records.

There is no proof to show that the first alleged circumstance was abnormal in the type of business in which petitioner was engaged, and there is no basis for holding that petitioner is entitled to special assessment upon this ground.

The second and third points upon which the petitioner relies are not sufficient to entitle petitioner to special assessment because there was no showing that either the salary paid by the petitioner (see New Albany Hotel Co., *1 B. T. A. 1102; Denver Powerine Co., 7 B. T. A. 1186; and Green, Matthews, Taylor Co., 19 B. T. A. 359), or the amount of borrowed capital which it employed (see Higginbotham-Bailey-Logan Co., 8 B. T. A. 566; Dibrell Bros., Inc., 18 B. T. A. 1046, and Clark Brown Grain Co., 18 B. T. A. 937), was abnormal in the character of business in which the petitioner was engaged.

We turn next to the petitioner’s fourth alleged abnormal condition. To entitle it to special assessment, the burden is upon the taxpayer to show that abnormal conditions existed affecting its capital or income. Peytona Lumber Co., 21 B. T. A. 354. Here petitioner is contending that the inability to show such abnormalities is itself an abnormality entitling it to special assessment. We do not consider the contention sound.

D. L. McDowell, secretary of the petitioner, testified that in 1908 the petitioner built an addition to its plant at Dunkirk and that the cost thereof was charged to expense. It has not been shown by the petitioner that the amount paid for this addition can not now be determined and restored to invested capital. In this state of the evidence the petitioner has not shown any right to special assessment upon this ground. Edwin M. Knowles China Co., 9 B. T. A. 1292; William B. Dana Co., 11 B. T. A. 90; Union Drawn Steel Co., 15 B. T. A. 761, and Cramer & King, 13 B. T. A. 399; affirmed in Cramer & King v. Commissioner, 41 Fed. (2d) 24. The case of J. G. Curtis Leather Co., 13 B. T. A. 1259, cited by petitioner is not in point. In that case it was shown that it was entirely impracticable to determine the amounts that should have been included in invested capital.

McDowell testified that, if the various items of capital expenditures which were charged to expense had been properly charged to capital account, the petitioner’s tax would have been reduced. However, we can not accept this ultimate conclusion of the witness. We do not know from the evidence whether the amounts not reflected in invested capital are substantial or relatively small, or whether their absence from invested capital would work upon petitioner an exceptional hardship evidenced by gross disproportion between its tax computed in the ordinary manner and that computed by reference to representative corporations. See Sanford Cotton Mills, 14 B. T. A. 1210; Enameled Metals Co., 14 B. T. A. 1392; and Lowe & Campdell Athletic Goods Co., 18 B. T. A. 1134.

Nor does an aggregate of a number of conditions, each inadequate in itself, necessarily constitute a cause for special assessment. B. Hayman Co., 25 B. T. A. 736.

We hold that petitioner has failed to show that there were abnormalities affecting its income and invested capital within the meaning of the statute, and hence has failed to show its right to special assessment.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Matthews:

license: Public Domain

text:
    Sather Lease—Thomas Sather & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31979.
    Promulgated May 13, 1932.

      J. E. Baldeen, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Matthews:

The only question in this proceeding is whether the petitioner was an association taxable as a corporation, or a partnership, the income of which is taxable to the individual members. A very similar situation was presented in the case of Joe Gilovich & Co., 6 B. T. A. 864, wherein we held that a group of individuals operating under a mining lease constituted a partnership and not an association. The petitioner in this proceeding was, in its organization and operation, very like the petitioner in that case. It had no officers, did not carrjr on its business upon any corporate forms or methods, and in fact bore no resemblance to an association in the usually accepted meaning of that term. See Hecht v. Malley, 265 U. S. 144.

The respondent contends, however, that the petitioner is a “ mining partnership ” under the statutes of Idaho and as such, by construction in all of the local courts, is in all essentials a corporation, and that as a result of its status as a corporation under state law it is taxable as an association under Federal income-tax laws.

The applicable provisions of the Idaho statutes are as follows:

§5856. When mming partnership exists. A mining partnership exists when two or more persons who own or acquire a mining claim tor the purpose of working it and extracting the mineral therefrom, actually engage in working the same.
§5857. Express agreement not necessary. An express agreement to become partners or to share the profits and losses of mining is not necessary to the formation or existence of a mining partnership. The relation arises from the ownership of shares or interests in the mine and working the same for the purpose of extracting the minerals therefrom.

The respondent devotes a large part of his brief to his contention that the petitioner is a mining partnership, pointing out the distinction between an ordinary and a mining partnership. We can not agree with the respondent that these three men working together constituted a mining partnership. It is true that they all three worked in the mine and shared the profits and losses equally. The lease, however, was taken in Sather’s name. The evidence shows that the lessor company had adopted the policy of making leases to an individual only and that it would not make a lease to a partnership as such, and that this policy was followed in the instant case. The law of Idaho expressly provides that a mining partnership exists when two or more persons own or acquire a mining claim. The respondent refers to the case of State ex rel. Cole v. District Court for Granite County, 254 Pac. 863, for the proposition that the leasing of a mining claim amounts to “ acquiring ” it within the meaning of the statute. But the court in that case did not hold that it was sufficient for one person to lease the claim. It said:

The fact that the mining claim, in this instance, was merely leased does not prevent a mining partnership as a result of law. The partners do not have to own the claim. They have to own only a possessory right. That may he acquired by lease. Our statute says “ own or acquired ” Section 8050 supra. That shows that “ own ” and “ acquire,” in the statute, have different meanings. Lessees, as well as owners, may be mining partners. * * * [Italics supplied.]

In the case of Madar v. Norman, 13 Idaho 585; 92 Pac. 572, the Supreme Court of Idaho held that in order to constitute a mining partnership there must be two factors; one, that two or more persons shall own or acquire a mining claim, and the other that the coowners actually engage in working the mine. See also Drake v. O'Brien, 130 S. E. 276 (West Virginia); First National Bank of Harley v. G. V. B. Mining Co., 89 Fed. 449; and Kahn v. Smelting Co., 102 U. S. 641. Our attention has not 'been called to any authority, nor have we been able to discover any, holding that a mining partnership exists where only one member of the alleged partnership owns mining property or acquires a lease thereon. The case of Settembre v. Putnam, 30 Cal. 490, is not in point, since in that case it appeared that the lessee acquired the lease as agent for the other members of the partnership. There is no evidence in this case of any agreement of agency. It is our opinion that the petitioner was not a mining partnership under the laws of Idaho, and it is therefore unnecessary to consider the further contention of the respondent.

Since it is clear that the petitioner is either an ordinary partnership or a joint venture and bears no resemblance in any way to an association, the respondent erred in taxing the petitioner as an association.

Judgment will be entered for the 'petitioner.


author: Van Fossan:

text:
    Anthracite Trust Company, Jane H. Connell and Edwin E. Connell, Trustees of the Estate of Alfred E. Connell, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47158, 53083.
    Promulgated May 13, 1932.

      L. E. Renard, Esq., for the petitioners.

      Frcmh B. Sohlosser, Esq., for the respondent.
   OPINION.

Van Fossan:

The fundamental question presented by the stipulated facts is whether the estate is liable for income taxes on its income where the widow elected to take under the will in lieu of dower . and the sums so paid her by the trustees aggregate less than her dower interest. This question was before us and fully considered in Julia Butterworth et al., Trustees, 23 B. T. A. 838. We held the estate taxable. Petitioners concede in their brief that the present case falls squarely within the Butterworth case as 'to the years 1926 and 1928, but argue that a different situation obtains as to 1927.

The burden of petitioners’ argument as to 1927 rests on the fact that the beneficiary reported this income in her return for 1927 and, for whatever reason, entered into an “Agreement as to Final Determination of Tax Liability ” with the proper officials of the Treasury Department. By executing the agreement she precluded herself from claiming a refund of the taxes so paid. Apparently no such agreement was entered into as to 1926 and 1928 and the respondent refunded the tax paid for those years. Petitioners argue, in effect, that it is unconscionable for respondent to retain the tax paid by the beneficiary and at the same time insist on the additional payment by the estate.

We know only the bare facts set out in the stipulation, but in their brief petitioners absolve the Government of any suspicion of “ fraud, malfeasance or misrepresentation.” The beneficiary is not a party to these proceedings and we have no duty to perform in her respect. The law is well settled that the estate, in the stated circumstances, is liable for the tax. If the beneficiary feels aggrieved, and we have no knowledge on that score, her redress, if any exists, lies in some other forum.

So far as the facts pertinent to the estate go, the situation obtaining in 1927 is identically the same as in 1926 and 1928. The ruling of the Board in the Butterworth case, followed in Frank Pardee et al., Trustees, 23 B. T. A. 846, and Estate of T. S. Martin et al., 24 B. T. A. 862, is controlling.

Decision will be entered for the respondent.


author: MuRdook. Van Fossan,

text:
    National Paper Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Zellerbach Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41758, 41759.
    Promulgated May 17, 1932.

      John Francis Neylmi, Esq., for the petitioners.

      II. A. Gox, Esq., and F. R. Shearer, Esq., for the respondent.
   OPINION.

MuRdook.

The notice of deficiency was sent within four years of the date of filing of the first return, within three years from the date on which the Revenue Act of 1926 was approved, and within three years from the date upon which the last return was filed, but more than three years after the date upon which the first return was filed. The petitioners concede that the Commissioner may proceed to assess and collect the deficiencies unless the three-year period of limitation provided by the Revenue Act of 1926 applies and began to run on July 15, 1925, the date upon which the first return was filed.

We agree with the Commissioner that the return filed May 14, 1926, was the original return required under the 1926 Act to start the three-year period of section 277(a) (1). We held in John Wanamaker Philadelphia, 8 B. T. A. 864, and in Hutchinson Company, 14 B. T. A. 367, that a return filed under one act would not start the period of limitation provided in a later act if additional tax was due under the new act for the period covered by the return. Other Board decisions to the same effect are Valentine-Clark Co., 14 B. T. A. 562 (reversed, 52 Fed. (2d) 346); Gus Holstine Dry Goods Co., 16 B. T. A. 1124; Isaac Goldmanm Co., 17 B. T. A. 1103 (reversed, 51 Fed. (2d) 427); Myles Salt Co., Ltd., 18 B. T. A. 742 (reversed, 49 Fed. (2d) 232); Adams, Cushing & Foster, Inc., 19 B. T. A. 89; G. Corrado Coal Coke Interests, Inc., 19 B. T. A. 691; and E. J. Lorie et al., 21 B. T. A. 612. Cf. Mill Goldwater, 21 B. T. A. 73. We refer to our discussion of the question in the cited cases. The circumstances under which the additional tax arises in this case are different from those under which the additional taxes arose in the cases just mentioned, but perhaps the difference is not material. We have, however, some additional reasons for our position not expressed in those cases. We want to again call particular attention to the discussion of a similar issue in United States v. Updike, 1 Fed. (2d) 550, and in Updike v. United States, 8 Fed. (2d) 913 (certiorari denied, 271 U. S. 661), affirming the above decision. That case differs from the present one only in degree. See also Davis Feed Co., 2 B. T. A. 616, and Covert Gear Co., 4 B. T. A. 1025.

Perhaps no revenue act specifically required the taxpayer to compute the tax as a part of his return. (See, however, section 240(a), Bevenue Act of 1926.) Yet, a study of the various revenue acts, the rules and regulations of the Commissioner, the forms regularly used for making returns, and the way taxpayers themselves have interpreted the laws and regulations in making their returns, shows that a complete return is required and is understood to include a computation of the tax by the taxpayer himself. The acts gave the Commissioner authority to make and publish necessary rules and regulations. He required taxpayers to make their returns on certain forms which he furnished. These are called income-tax returns. They provided a place for a computation of the tax by the taxpayer. The tax thus shown to be due on the return becomes due and payable within nine months. No further assessment is necessary. If the Commissioner determines that more tax is due than that shown on the return, he must assess the additional tax within a prescribed time. This is the assessment which must be made within the period of limitation. If Congress has not specifically provided that the taxpayer shall make the computation and show on his return the amount of tax he believes is due, it has at least given clear indication that it intended to impose this duty upon each taxpayer. For example, in section 273 of the Bevenue Act of 1926, “ deficiency ” is defined to be:

(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax hy the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax; * * * [Italics supplied.]

The petitioners did not compute, on the return filed in 1925, the tax which they believed to be due under the 1926 Act. Such a computation was impossible at the filing date. We think Congress intended that each corporation affected by the 1926 Act should file a return after the passage of that act, showing all required information, including the tax it believed to be due, and this return would start the three-year period for assessment. Furthermore, the Commissioner was required to make all needful rules and regulations for the enforcement of the act (section 1101); he required this taxpayer to file a new return; this rule was reasonable; and it must be given the force and effect of law. Maryland Casualty Co. v. United States, 251 U. S. 342. The petitioners complied with the law and the ruling by filing the required return on May 14,.1926. Cf. section 1102 (a) and (b). This return, filed under the 1926 Act, could not amend the return filed under the 1924 Act so that the latter would become a return under the 1926 Act. The petitioners, in filing their return under the 1926 Act, adopted as a part thereof so much of the return theretofore filed under the 1924 Act as was appropriate and useful. There was perhaps no necessity for them to duplicate the computation of net income and the supporting schedules already on file. But they knew that additional tax was due under the new act and they had not made an income taco return under the new act until they filed a return showing what tax they honestly believed was due. The computation under the 1924 Act was quite a different thing from the computation under the 1926 Act, as is apparent from an examination of the two returns in evidence in this case. The statutory period for assessment began to run on May 14, 1926, when the original return under the 1926 Act was filed.

Reviewed by the Board.

Judgment will be entered for the respondent.

Van Fossan,

dissenting: The principle announced in the decisions of the Board on which the prevailing opinion in these cases is predicated has been considered by the Court of Appeals of the District of Columbia and the Circuit Courts of Appeal in three of the cases cited and in each instance the Board has been reversed. Valentine-Clark Co., 14 B. T. A. 562; reversed, 52 Fed. (2d) 346; Isaac Goldmann Co., 17 B. T. A. 1103; reversed, 51 Fed. (2d) 427; Myles Salt Co., 18 B. T. A. 742; reversed, 49 Fed. (2d) 232. On further consideration of the merits of the issue involved, I am convinced that the Board has be&n in error in all of these cases and that the petitioners should prevail.

GoodRioii agrees with this dissent.


author: Murdock. Van Fossan,

text:
    Zellerbach Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Zellerbach Paper Company, Transferee of A. S. Hopkins Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. National Paper Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39701, 39704, 39715.
    Promulgated May 17, 1932.

      John Francis Neylan, Esq., for the petitioners.

      H. A. Cox, Esq., and F. R. Shearer, Esq., for the respondent.
   OPINION.

Murdock.

The Board has consistently held in situations like the one here present, that a return filed pursuant to the Revenue Act of 1918 is not sufficient to start the period of limitation. The first case of this kind was C. A. Lawton Co., 13 B. T. A. 8, where the Board cited John Wanamaker Philadelphia, 8 B. T. A. 864, in which a somewhat similar question had been discussed. The other decisions are Hutchinson Co., 14 B. T. A. 367; Valentine-Clark Co., 14 B. T. A. 562 (reversed), 52 Fed. (2d) 346); Gus Holstine Dry Goods Co., 16 B. T. A. 1124; Isaac Goldmann Co., 17 B. T. A. 1103 (reversed, 51 Fed. (2d) 427); Myles Salt Co., Ltd., 18 B. T. A. 742 (reversed, 49 Fed. (2d) 232); Adams, Cushing & Foster, Inc., 19 B. T. A. 89; G. Corrado Coal & Cole Interests, Inc., 19 B. T. A. 691; and E. J. Lorie et al., 21 B. T. A. 612. Cf. Hill Goldwater, 21 B. T. A. 73, and particularly National Paper Products Company et al., 26 B. T. A. 92. The Board’s reasons for its position are fully set forth in the above opinions and need not be repeated here. Those decisions are supported by Updike v. United States, 8 Fed. (2d) 913. With all due respect to the Courts of Appeal which have reversed the Board, we adhere to our original position, because we still feel that it is the correct one.

The Commissioner would support his determination in these cases on another ground. The A. S. Hopkins Company was affiliated with the other companies from November 1, 1920, until the end of the fiscal period April 30, 1921. The Commissioner contends that its income was never properly reported for this period, since its income for November and December, 1920, was reported in a separate return, and its income from January 1, 1921 to April 30, 1921, was included in that of Zellerbach Paper Company without even disclosing that it was so included and without setting forth separately its income and deductions from those of the Zellerbach Paper Company. He cites Commissioner v. Colmer-Green Lumber Co., 49 Fed. (2d) 234, in support of his contention that the statute has not barred him from proceeding further against the Zellerbach Paper Company as a taxpayer and also as a transferee of the assets of A. S. Hopkins Company. The case cited may not be distinguishable from the present case in this connection, but the Board has consistently held that no such segregation in the return is necessary to start the running of the period of limitations. Its first decision to this effect has been affirmed by the Circuit Court of Appeals for the Third Circuit. Stetson & Ellison, 11 B. T. A. 397; aff'd, 43 Fed. (2d) 553. See also Peerless Iron Pipe Exchange, Inc., 23 B. T. A. 900.

Reviewed by the Board.

Judgment will he entered v/nder Rule 50.

Van Fossan,

dissenting: I am unable to agree with the prevailing opinion in these cases. The conclusions of the Board have been tested by appeal to the courts on three occasions and in each case the Board has been reversed. Valentine-Clark Co., 14 B. T. A. 562; reversed, 52 Fed. (2d) 346; Isaac Goldmann Co., 17 B. T. A. 1103; reversed, 51 Fed. (2d) 427; Myles Salt Co., 18 B. T. A. 742; reversed, 49 Fed. (2d) 232. I believe the position taken by the Board in these and like cases has been erroneous and that in the instant case the petitioners should prevail.

Marquette agrees with this dissent.


author: MuRDOCK:

text:
    Mollie Netcher Newbury, Petitioner, v. Commissioner of Internal Revenue, Respondent. Townsend Netcher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ethel Netcher Vaillant, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mollie Netcher Newbury, Trustee of Separate Trust Fund for Irving Netcher under the will of Charles Netcher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gladys Oliver Netcher, Executrix of the Estate of Charles Netcher, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38049-38053.
    Promulgated May 17, 1932.

      J. R. Little, Esq., for the petitioners.

      B. M. Goon, Esq., for the respondent.
   OITNION.

MuRDOCK:

The only question in these proceedings is to determine the amount of income of the trust which is taxable to the beneficiaries. Its solution depends upon the rights of these beneficiaries under the will of Charles Netcher. They claim the trustee had a right and a duty to retain enough from the annual income from rents to offset depreciation on the building. The Commissioner maintains that he made no mistake in adding this retained amount to the income of the beneficiaries.

Where a trustee makes investments with the corpus of an estate, he is duty bound to see that, so far as reasonably may be, the corpus alwaj^s includes the equivalent of the amount invested. If bonds belong to a testator and are worth more than par at his death, the trustee may not have to retain any of the interest. But courts have frequently held, for example, that a trustee who buys bonds at a premium, should retain the equivalent of the premium from interest and pay only the excess to the life tenants. In re Stevens et al., 187 N. T. 471; 80 N. E. 858; New England Trust Co. v. Eaton, 140 Mass. 532; 4 N. E. 69; In re Allis Estate, 123 Wis. 223; 101 N. W. 365; Curtis v. Osborn, 79 Conn. 555; 65 Atl. 968; In re Garterdaub's Estate (Cal.), 198 Pac. 209; Kate M. Simon, 10 B. T. A. 1186; Ballatine v. Young, 74 N. J. E. 572; 70 Atl. 668; aff'd., 76 N. J. E. 613; 75 Atl. 1100. Might he accomplish a contrary result by simply erecting a building with corpus or borrowed funds and paying all of the rents to life tenants ? He could if he had authority from the grantor expressed in the instrument creating the trust. Here the will gave no such authority.

This case is distinguishable from those where the exhausting property was originally a part of the trust estate. The building in question was not in existence when the testator died, but was built at some later date. The principal part of the cost was paid from borrowed funds. The balance came from the corpus of the estate. The building was erected on land in Block 58 of the original town of Chicago. The will gave the trustee authority to thus borrow and build. There is nothing in the will indicating that the testator intended the trustee should not deduct depreciation on any buildings she might erect. In the only provision of the will specifically referring to this property, the testator indicated a wish that the real estate in this Block 58 should be held together for the benefit of his entire estate and the beneficiaries thereunder. Had the trustee made no provision for replacing the building or paying off the mortgage from the income of the building, obviously the testator’s wish could have been carried into effect only at the expense of other property constituting corpus of the estate in violation of the rights of remaindermen. If the language of the will is not clear on this point, the interpretation placed upon it by the parties may be the decisive factor. William E. Scripps et al., Trustees, 1 B. T. A. 491; Mary L. Barton, Trustee, 5 B. T. A. 1008; E. L. E. Brenneman et al., 10 B. T. A. 544; Kate M. Simon, supra; John L. Whitehurst, 12 B. T. A. 1416; Anna M. Chambers, 17 B. T. A. 820; Rita M. Kohler White et al., 25 B. T. A. 243. The trustee retained a part of the income for the purpose of maintaining the corpus whole. The life beneficiaries not only made no objection to this action, but now insist it was proper. The will required, or was at least susceptible of, the construction which the trustee and the beneficiaries placed upon it. This construction was adverse to the interests of these petitioners. We think that they had no right under the will to have the annual income from the building distributed to them except as it exceeded an appropriate amount to restore the cost of the building at the end of its estimated life.

Reviewed by the Board.

Judgment will be entered, wnder Rule 60.


author: Black :

text:
    The Reuben H. Donnelley Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22698.
    Promulgated May 18, 1932.

      Rickard E. Dwight, Esq., for the petitioner,

      Eugene Meacham, Esq., for the respondent.
   OPINION.

Black :

Respondent determined an overassessment for 1920. Consequently, we have no jurisdiction of that year. Cf. Cornelius Cotton Mills, 4 B. T. A. 255. Accordingly, as to the year 1920, the appeal is dismissed.

As to the year 1921, the deficiency determined by the Commissioner is based solely upon the disallowance of the claimed loss stated in our findings of fact. Because of the fact that respondent stated in his deficiency notice that he was allowing $177,947.69 of the claimed loss, but placing it in the year 1920, petitioner contends that the fact that it suffered such a loss is not in issue at all, but that the only thing which is in issue is whether petitioner suffered such loss in 1921, as it claims, or whether it took place in 1920, as respondent claims. Respondent in his answer denied that petitioner had suffered any loss at all in 1921 and his counsel at the hearing and in his brief contends that the burden of proof is on petitioner to show two things — (1) that the items making up the loss which petitioner claims were capital expenditures and therefore properly capitalized on its books, and were in the amounts which petitioner claims; (2) that the abandonment of the publication of the National Directory took place in 1921, as contended by petitioner, and not in 1920, as determined by the respondent. We agree with respondent that in view of the pleadings, the burden of proof is on petitioner to prove both these things before it can prevail. Respondent in his answer is not limited by the grounds stated in the deficiency notice. Cf. John I. Chifley, 25 B. T. A. 1103; Austin Co., 8 B. T. A. 628; aff'd., 35 Fed. (2d) 910; certiorari refused, 281 U. S. 735.

We will first take up the question whether the $177,947.69 loss claimed by petitioner was made up of items which were really capital expenditures. A taxpayer has no right of election to treat items which are properly expense items as capital expenditures, and, vice versa, he has no right of election to treat capital expenditures as expense items. The nature of the expenditures must be determined upon the facts in each case. Gilliam Manufacturing Co., 1 B. T. A. 967.

If all or any of the items which go to make up petitioner’s claimed loss were items which should have been charged to expense when made, then petitioner is not entitled to prevail as to such items, even though it is held that abandonment of the National Directory did take place in 1921, as contended by petitioner, for items which are properly classified as ordinary and necessary business expenses must be taken as deductions in the year when paid or incurred and not later. Revenue Acts of 1918 and 1921, section 234 (a) (1).

Were these expenditures (enumerated in detail in our findings of fact) capital expenditures such as petitioner was entitled to capitalize on its books and carry as an asset until 1921, when the publication of the National Directory was definitely and finally abandoned? In Successful Farming Publishing Co., 23 B. T. A. 150, we held that the cost of building up a magazine circulation structure is a capital expenditure, while the cost of maintaining a circulation structure, once established, is an ordinary and necessary business expense. Cf. also Danville Press, Inc., 1 B. T. A. 1171. We think the situation we have before us in the instant case is similar in many ways to the one in Successful Farming Publishing Co., supra. The expenditures incurred by petitioner connected with the launching of the publication of the National Directory and building up its advertising patronage were capital expenditures in the years preceding and including the year of its first publication, 1916, 1917 and 1918, and, wherever it was possible to segregate them from the ordinary and necessary expenses of' petitioner’s business, it was proper to capitalize them on the books.

The expenses of “ maintaining its circulation in later years ” were, as we said in Successful Farming Publishing Co., supra, ordinary and necessary business expenses. Such were the kind of petitioner’s expenses in 1919 and 1920, in connection with the publication of the directory for those years. These expenses for those j^ears were much greater than the receipts, but petitioner makes no contention that it is entitled to capitalize them, and has not done so. It concedes that all such losses incurred in the publication of the 1919 and 1920 directories must fall in 1919 and 1920, when such expenses were paid and incurred. But it does contend that the items capitalized and detailed in our findings of fact, representing expenditures in 1916, 1917 and 1918 in connection with the launching and establishing of the National Directory, were properly capital items. We agree with this contention except as to item (6) shown in our findings of fact, amounting to $37,371.37. Petitioner, by a careful and exhaustive analysis o.f its books of account, made by a reputable certified public accountant, a,nd offered in evidence, and by other evidence offered at the hearing from the mouths of several witnesses, has, we think, sufficiently identified and established these items, with the exception stated, to meet the burden of proof that they were capital expenditures, and we so hold.

As to item (6), an expert accountant, who testified for petitioner on this item, said that overhead charges can not be specifically assigned to either capital or operating expense and must be apportioned on some equitable basis and that his allocation for petitioner of a proportion of the overhead expense to capital expenditures was in accordance with the usual accounting practice. We do not consider however that we have sufficient evidence in the record to enable us to accept this allocation and to hold that $37,371.37 of petitioner’s overhead expense in 1916,1917 and 1918 was a proper capital item in connection with the launching of the publication of the National Directory. The segregation is not sufficiently supported by the facts. We do not feel that petitioner has sustained the burden of proof as to this item, and to the extent of the amount thereof, respondent’s dis-allowance is approved.

The next issue which we must decide is whether petitioner abandoned the enterprise of publishing the National Directory in 1921, as it contends, or whether such abandonment took place in 1920, as respondent determined in his deficiency notice. In Belridge Oil Go., 11 B. T. A. 127, we said: “ Whether or not there has been an abandonment * * * depends on the intention of the owner, coupled with the act of abandonment, both to be ascertained and determined from all the facts and surrounding circumstances.” To the same effect is I. G. Zumwalt, 25 B. T. A. 566; cf. Liberty Baking Co. v. Heiner, 37 Fed. (2d) 705; Tom (Fayette T.) Moore, 19 B. T. A. 140; Kilby Car & Foundry Co., 4 B. T. A. 1294.

All of those who were directors of petitioner in 1920 and 1921, except Beuben H. Donnelley, who is now deceased, were witnesses at the hearing and all testified that, when it was decided in May, 1920, to suspend the publication of the 1921 edition of the directory, there was no decision to permanently abandon the publication of the directory, but that, on the contrary, it was the intention to resume its publication when the cost of print paper and other costs which entered into its publication had reached more normal levels. Thomas E. Donnelley, president of It. It. Donnelley and Sons Company, printers of the directory, testified that the plates, electrotypes, etc., used in publication of the 1920 directory were not melted up following the May,' 1920, meeting of the directors of petitioner, at which time it was decided to suspend publication of the 1921 edition, but that, on the contrary, this -material was kept stored in cabinets for future use and that this was done at considerable expense to B. B. Donnelley and Sons Company.

The directors all testified, with the exception of Reuben H. Don-nelley, deceased, that at a meeting of the directors in the fall of 1921 it was definitely and finally decided to permanently abandon the publication of the National Directory. Thereafter the accountants of petitioner were instructed to charge off the books the $203,311.99 which had been carried as an asset and it. R. Donnelley and Sons Company, printers, were ordered to “ kill ” the type, and plates and electrotype of the National Directory, which had been stored for future use.

We believe that these facts are sufficient to establish that petitioner abandoned publication of the National Directory in 1921, and that it is entitled to take in 1921 its loss to the extent we have stated.

Respondent contends that because petitioner entered this capital item on its books: “ National Investment December 31, 1918, second issue $101,655.99; third issue $101,656,” it thereby evidenced an intent to take all this deduction in two years, 1919 and 1920, and that it should be held to that election.

We think a sufficient answer to this contention of respondent is the fact that petitioner did not make any such charge-off in 1919 and 1920 on its books, and made no attempt to take any such deductions in its income-tax returns for those years. But, even if it had made such attempt, it is doubtful if it could have succeeded, because a taxpayer is not permitted arbitrarily to write off capital assets as losses and take deductions therefor from his gross income. Danville Press, Inc., supra; Frischkorn Real Estate Co., 21 B. T. A. 965. Such losses can only be taken when there is some event to identify them, such for example as actual and permanent abandonment.

Reviewed by the Board.

Further proceedings will be had under Rule 6£, or, in the absence of such proceedings, judgment will be entered under Rule 50.

SteRNhageN dissents.


author: Smith: SteRNHageN, Love,

text:
    Marshall Field, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36908.
    Promulgated May 18, 1932.

      Beverley R. Robinson, Esq., Edward N. Perkins, Esq., Daniel B Priest, Esq., and Samuel L. Rosenberry, Esq., for the petitioner.

      John D. Foley, Esq., and James 0. Maddox, Esq., for the respondent.
   OPINION.

Smith:

(1) The first question presented by this proceeding is the deduction from gross income of losses sustained from the operation of the Caumsett Farm. Section 214 (a) of the Revenue Act of 1921 permits a taxpayer to deduct from gross income, in computing net income:

(1) All tlie ordinary and necessary expenses paid or incurred during the taxable year in carrying- on any trade or business, * * *
* sjs tfs * Hi 5ft
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.

The losses are deductible, provided the Caumsett Farm was’ operated as a trade or business for profit. Plant v. Walsh, 280 Fed. 722; Thatcher v. Lowe, 288 Fed. 994; A. F. T. R 1931; Deering v. 722; Thatcher v. Lowe, 288 Fed. 994; Peering v. Blair, 23 Fed. (2d) 975. The petitioner contends that the Caunisett Farm was operated for profit within the meaning of the taxing statute and the mere fact that it was operated at large losses in 1923, and subsequent years, does not change the character of the enterprise as a business for profit. In support of his contention the petitioner cites numerous decisions of the Board and of the courts in which losses sustained on farm operations have been held legal deductions from gross income. Plant v. Walsh, supra; J. H. Sanford, 2 B. T. A. 181; Kansas Savings & Trust Co. et al., Administrators, 2 B. T. A. 1253; H. T. Cochran, 3 B. T. A. 215; Thomas F. Sheridan, 4 B. T. A. 1299; Samuel Riker, Jr., Executor, 6 B. T. A. 890; August Merckens, 7 B. T. A. 32; Moses Taylor, 7 B. T. A. 59; James Otis, 7 B. T. A. 882; Rose P. Crane, Executrix, 9 B. T. A. 437; Hamilton F. Kean, 10 B. T. A. 97; Walter P. Temple, 10 B. T. A. 1238; E. S. Hass, 13 B. T. A. 1352; George B. Lester, 19 B. T. A. 549.

We have carefully examined the cases referred to above and others in which the Board has allowed the deduction from gross income of losses sustained in the operation of farms. From a consideration of all of them we reach the conclusion that the intention of the taxpayer with respect to the operation of the farm is material. Cf. Plant v. Walsh, supra; Thatcher v. Lowe, supra; Deering v. Blair, supra. If the taxpayer operates a farm with the intention of making a profit and not merely “ as a place of pleasure, exhibition, and social diversion” (Deering v. Blair, supra), the fact that losses may-be sustained from the operation of the farm does not change the character of the enterprise from one operated for profit to one not operated for profit.

The testimony of the petitioner in the proceeding at bar is most emphatic that the Caumsett Farm was operated for profit. He testified that, even though expensive buildings were placed on the Caum-sett Farm, he did not regard it as fair to charge the farm operations with any expense in respect of the excess cost of such buildings over the cost of ordinary farm buildings. He also, ascribed his losses from the farm operations up to 1928 as being attributable largely to the fact that the first Guernsey bull purchased for breeding purposes proved not to be valuable for such purposes; that the bull was disposed of in about 1928, and another pure-bred bull acquired. He stated that subsequent results were far more satisfactory and it was his opinion that the herd could be sold at the present time, even with the depressed prices now prevailing, at a profit over all losses. There is no evidence that the Caumsett Farm was operated as a place of pleasure, or for social diversion. In the circumstances it must be held that the Caumsett Farm was operated for profit, within the meaning of the statute, and that the petitioner’s losses sustained from the operation of the farm in 1923 are legal deductions from gross income.

A similar situation exists with regard to the venture of racing and breeding horses. The petitioner had a considerable income from his racing operations for the period September 4, 1920, to December 31, 1921, which he testified he had included in his gross income for 1921 and paid a tax thereon. There can be no question that the business of racing and breeding horses, entered into in 1921 or 1922, was for the purpose of making a profit. Part of the petitioner’s testimony upon this point follows:

Q. Now, you, Mr. Field, are interested, are you not, in the raising and breeding of horses?
A. Yes, sir.
Q. When did you first do that?
A. Well, I, first of all, started in 1920, when I bought the first yearling I ever bought. The outcome of that was extremely successful, financially, and after that I invested some other money that I bad in stock, with the idea of starting a stud.
It so happens that out of the first yearlings I bought, one of them I thought turned out to be a good brood mare, and I started a stud. From that time on, I had carried it on with business-like ideas, with the idea of a further stud and raising for profit.
Q. Did you have any definite [idea] or purpose in it with reference to making money out of it?
A. Yes, sir; when I first started, in 1929, I did not know — I mean I started it as more or less of a. fluke.
Q. Did you say 1929?
A. No; I mean in 1920. Then, having made some money out of it and having a chance to enlarge upon it, with the starting off of such good brood mares as I then had, I decided to start it. I talked to several people about it and they all seemed to think it was a real good chance of making a profit, if one was able to put the capital into it; * * *

The losses sustained from the racing and breeding of horses in 1923 are deductible from gross income, in accordance with the following decisions: George D. Widener et al., 8 B. T. A. 651; aff'd., 33 Fed. (2d) 833; Margaret E. Amory, 22 B. T. A. 1398; James Clark et al., Executors, 24 B. T. A. 1235; Wilson v. Eisner, 282 Fed. 38.

The petitioner’s contribution of $1,000 to the Insulin Committee was in fact a contribution to a “ fund ” for charitable and/or scien-tifie purposes within the purview of section 214 (a) (11) of the Revenue Act of 1921, since the committee was the agency of the hospital for raising the fund for the purchase of insulin for use by the hospital, an institution doing charitable work, for experiments in the cure of diabetes, a scientific endeavor. Subject to the 15 per cent limitation, the contribution should be allowed as a deduction from petitioner’s gross income.

Reviewed by the Board.

Judgment will be entered under Bule 50.

SteRNHageN,

dissenting: In my opinion, the evidence is not suf- • ficient to establish that the petitioner’s place on Long Island or his racing and breeding of horses was a trade or business. Furthermore, the artificial accounting by which petitioner’s consumption of his own produce is made to appear like a sale and purchase should have no legal weight, even although it may afford useful or interesting statistics, as many household accounts do. Cf. Louise Cheney, 22 B. T. A. 672.

AeuNdell and MtjRdock agree with this dissent.

Love,

dissenting: I dissent from the prevailing opinion because the record fails to convince me that a man of Field’s known and recognized business experience and sagacity would invest in an enterprise of that kind the amount of capital which the record shows he put into the Caumsett Farm and expect it to prove a profitable investment from a financial standpoint. His ambitions and motives evidently were along other lines.


author: Arundell:

text:
    F. C. Nicodemus, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52326, 62569.
    Promulgated May 19, 1932.

      F. G. Nieodemus, Jr., Esq., pro se.

      Owen W. Sweeher, Esq., for the respondent.
   OPINION.

Arundell:

The respondent disallowed as deductions one-half of the interest on a mortgage on real estate paid by petitioner in 1928 and 1929 and one-half of the taxes paid on the same property in 1929, which disallowances resulted in deficiencies of $92.45 for 1928 and $408.31 for 1929.

In 1928 petitioner and his wife acquired title, as tenants by the entireties, to real estate in the State of New York. The property is occupied by them as a residence. In the taxable years the property was encumbered by a first mortgage of $25,000. Both petitioner •and his wife signed the mortgage notes and they were jointly and severally liable, thereon.

Petitioner, out of his own separate income, paid interest on the mortgage in 1928 and 1929 in the respective amounts of $1,720 and $l,-570. In 1929 he paid taxes on the property, out of his own separate income, in the amount of $2,897.56.

Petitioner and his wife filed separate returns for each of the taxable years and in petitioner’s returns he claimed as deductions the aforesaid interest and taxes paid by him. The respondent disallowed one-half of each of the deductions from petitioner’s income and allowed it to petitioner’s wife, Dorothy T. Nicodemus.

Upon these facts petitioner contends that he is entitled to deduct the full amounts of interest and real estate taxes paid. He says that he has fully met the two conditions prescribed by the Federal taxing statute as the basis for allowance, namely, liability to pay and actual payment.

Concededly, tenancies by the entirety are recognized under laws of the State of New York. The incidents of that species of ownership in various jurisdictions have frequently been described in our reports and need not be repeated here. See Susie M. Root, Executrix, 5 B. T. A. 696; James O. Murphy et al., 5 B. T. A. 952. The courts of New York recognize the same fundamental attributes inherent in entire-ties which distinguish that form of ownership. In Smith v. Russell, 172 App. Div. 792; 159 N. Y. S. 169, the court says:

The interest of the said tenants by the entirety was not a divisible interest, nor subject of division. Each owned the whole and every part; and Joseph Huson [the husband], against whom the assessment was made, owned the whole and every part.

In the above case Huson and his wife held title to certain real estate as tenants by the entirety. Beal estate taxes were assessed in the name of the husband only and, not being paid, the premises were sold and a tax deed was issued. The validity of the tax deed was attacked principally upon the ground of the assessment having been made in the name of only one of the tenants. An argument in that proceeding similar to the substance of the respondent’s position here, that each of the tenants owned an undivided one-half of the property, was overruled by the court with this statement:

* * * each tenant is tlie owner of the whole or entire premises, each owning said premises per tout et per my, each owning the whole and every part. Both of these tenants resided upon the property at the time of the assessment. It therefore became impossible to separate and state the quantity and value of the interest of each of .said tenants separately. The assessment to Joseph Huson covered the entire property, and he was the owner of the entire premises uunder his tenancy by the entirety.
*******
* * * No reason is stated why the assessors should wish to reach the interest of Joseph Huson in said premises. It was undoubtedly their intention to assess the whole thereof, and in so doing Joseph Huson was named as the owner, as in fact he was.

The above case involved primarily section 9 of the New York tax law. (Consol. Laws, c-60) which provided that an assessment for taxes is deemed against the property itself, and the property is liable to sale for any tax levied on it. Section 71 of the tax law (McKinney’s Consol. Laws, Book 59) provides further:

If the owner of a parcel or portion of real property is a resident of the tax district in which such parcel or portion of real property is assessed, and his name is correctly entered on the assessment-roll, he shall be personally liable for the tax assessed against such parcel or portion of real property.

It seems to us that the statute and decision quoted establish beyond question that for real estate tax purposes each tenant is regarded as the owner of the entire premises and that the owner assessed is personally liable. We have no evidence here of the manner in which the assessment was made, but we presume that it was regular and named both of the tenants. This would make the liability of the husband none the less, as under Smith v. Russell, supra, he would still be regarded as the owner of the whole premises.

It is our opinion that in paying the real estate taxes petitioner paid a tax for which he was liable and for the full amount, of which he may take a deduction in computing his net income. Section 28 (c), Revenue Act of 1928.

The parties stipulate that petitioner and his wife “ were jointly and severally liable ” for the interest sought to be deducted. In paying the interest petitioner was discharging an obligation for which he, individually, could be held liable. It follows that he .is entitled to deduct the full amount.

We believe it is unnecessary to go into the questions of division of “ fruits and profits ” between tenants or the right of contribution, suggested by the respondent, as in this case there is no evidence of any profits and there probably were none, in view of the use of the property as a residence, and likewise there is no evidence of petitioner having sought or obtained contribution.

Our holding here is not contrary to William A. Colslon, 21 B. T. A. 396, as in that case we found that the property on which the husband paid taxes and mortgage interest was in fact owned by the wife.

In William R. Tracy et al., 25 B. T. A. 1055, claim was made by petitioners that the deduction for taxes on property owned by the entireties and other property owned in common should be divided between them, one-half to each. In that case it was not found as a fact that any of the property was owned either by the entireties, or in common, but it was found as a fact that certain parcels were owned jointly. As there was no evidence that the wife paid any part of the taxes, we affirmed the respondent’s action in allowing the full deduction to the husband.

Decision will be entered under Rule 50.


author: Artjndell:

text:
    New York and New Jersey Mausoleum Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36687.
    Promulgated May 19, 1932.

      Allen G. Gartner, Esq., and Edward 1. Sproull, O. P. A., for petitioner.

      O. A. Ray, Esq., for the respondent.
   OPINION.

Artjndell:

The statutes of New Jersey contain the following provisions:

No mausoleum, vault or crypt or structure so erected as aforesaid shall be used for the purpose of interring or depositing therein any dead body until a trust fund shall have been established and set apart, in accordance with the laws regulating trust funds in this State, amounting- to not less than ten per centum of the total cost of the structure; the interest, and that only, to be used for the perpetuation of said building ? but this clause shall not apply to private mausoleums or temporary receiving vaults. [Ohap. 233, Laws of New Jersey, 1916.]

Petitioner claims that this statute, coupled with the terms of the sales of space in the building, imposed a trust upon its assets in an amount equal to 10 per cent of the additions made to the mausoleum from 1921 to 1924, inclusive, and following Evergreen Cemetery Association of Chicago, 21 B. T. A. 1194, such percentage of the construction costs each year is excludable from gross income or sales. It is contended, in the alternative, that the amount of $10,000 paid in 1924 on the loan of $15,000 made in 1921 is deductible from gross income in the taxable year.

In the Evergreen Cemetery Association case, supra, there was a state statute providing for setting aside as a trust fund a portion of the money received from the sale of the lots.” In Troost Avenue Cemetery Association, 4 B. T. A. 1169; 21 Fed. (2d) 194, the taxpayer entered into a trust agreement under which it deposited with a trustee a percentage “ of the gross amount of money received from the sale of all lands.” In Portland Cremation Association, 31 Fed. (2d) 843, the taxpayer set aside as a maintenance fund a percentage of “ all receipts from the sale of'niches, urns and vaults.” In all of these cases the maintenance or perpetual care funds were taken out of receipts from sales, and the amount that went into the trust funds so created was held not to be a part of income, on the theory that it was not subject to the taxpayer’s unfettered use, but was received and administered for the benefit of the purchaser. In this group of cases the trust fund bore a direct relation to the taxpayer’s sales. A portion of the sale price became impressed with a trust simultaneously with its receipt, and by reason thereof never was income to the taxpayers.

In the present case there was no requirement, either statutory or contractual, that any part of the receipts from sales was to go into a trust fund. If the taxpayer never made any sales it would still be required by the state statute to have on hand a trust fund before the property could be used. The cost of the mausoleum up to the years here involved was something over $200,000, and under the requirements of the law there should have been a trust fund in existence in excess of $20,000. How could this in any way reduce income in subsequent years? The statement in the sales agreement to the effect that the purchase price would provide a perpetual care fund did not obligate petitioner to set aside any ascertainable sum which a purchaser could require to be administered as a trust. As a matter of fact the petitioner never treated any part of the receipts from sales as having been received by it as a trustee. The record is entirely bare of evidence that petitioner created a trust fund with the $15,000 it borrowed in 1921 and left on deposit with the bank as a “ special interest fund.” Even conceding that the borrowed money could somehow be regarded as a trust fund, it does not appear that there was any relation between that sum and petitioner’s income for the year 1921. It is obvious, we think, that the existence of a trust fund does not necessarily affect income one way or another. Such a fund may be created out of donations, surplus, or capital, with no effect whatever on current income. It is only in cases where sums that would otherwise be reflected in income are diverted from the use of the taxpayer, as in the cases above cited, that income is affected. When in 1924 the taxpayer paid off $10,000 of the loan it was merely liquidating a liability, which plainly could not serve to reduce income.

Inasmuch as the state law applicable to petitioner’s operations required the maintenance of a trust fund based on cost, and no connection ‘whatever is shown between cost and sales, we are of the opinion that petitioner is not entitled to reduce income from sales by reason of its so-called trust fund. It may be pointed out that during the years 1922 to 1924 petitioner did not in fact either create a trust fund or pay any sums into the special account carried by it at the bank. The petitioner concedes that the book entries made in the years 1921 to 1924, inclusive, purporting to set aside a sum equal to 10 per cent of the additions and betterments during those years did not alter the income or surplus accounts and were altogether ineffective to accomplish any purpose. It follows that the deductions allowed by respondent based on the cost of additions in the years 1922, 1923, and 1924 were erroneously allowed and should be restored to income.

The pleadings in this case, and the facts developed, make a narrow issue, and we have no occasion to pass upon the question of whether a trust fund actually created pursuant to the New Jersey statute may be recovered as a part of the cost of sales, or through any other method of capital recovery recognized under the Federal taxing acts.

Decision will be entered wvder Rule 50.


author: Aeundell:

text:
    Leighton M. Ford, Administrator of the Estate of Albert E. Ford, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54497.
    Promulgated May 19, 1932.

      John M. Hemphill, Esq., for the petitioner.

      G. G. Holmes, Esq., for the respondent.
   opinion.

Aeundell:

The respondent disallowed a part of a deduction claimed for administration expenses, and computed a profit on the sale of stock rights, and thereby determined a deficiency in income tax for the year 1928 in the amount of $920.18. At the hearing counsel for petitioner waived the allegation of error as to the dis-allowance of the deduction claimed.

On the remaining issue a stipulation of facts was filed, which we incorporate herein by reference. For the purposes of this report a brief summary of the facts will suffice.

Petitioner’s decedent, Albert E. Ford, died a resident of Philadelphia, on March 22, 1928, owning 2,128 shares of stock of the Franklin Trust Company. Because of a will contest, letters of administration pendente lite were granted on April 19,1928.

On July 31, 1928, an issue of 10,000 additional shares of stock of the Franklin Trust Company was authorized, and on the same date the directors of the company adopted a resolution giving stockholders the right to subscribe for the additional stock at the price of $400 for each share, and at the rate of one-half for each share then held. The right to subscribe was to expire on September 15, 1928.

As a result of its stockholdings, the estate of the decedent had the right to subscribe to 1,064 shares of the additional stock of the trust company at the rate of $400 per share on or before September 15, 1928. On August 14, 1928, the administrators pendente lite petitioned the Orphans’ Court for leave “ to subscribe for as many new shares of common stock of the Franklin Trust Company as could be taken up with funds realized from the sale of the balance of the rights to subscribe to such new shares to which the estate is entitled.” A decree was entered granting the leave prayed for, and the administrators thereupon sold 1,548 half rights for $116,046, which at the rate of $400 per new share enabled them to subscribe to the balance of 290 new shares using 580 half rights for that purpose.

The will contest was subsequently decided by the Supreme Court of Pennsylvania in favor of Leighton M. Ford, heir at law, and thereafter the administrators pendente lite were discharged and Leighton M. Ford was appointed administrator.

The parties are agreed that if, under the facts above outlined, the sale of rights gave rise to gain or loss, the amount of the profit has been correctly computed by respondent to be $7,376.40. Petitioner contends, however, that there was no taxable gain, the sale having been merely a mechanical detail carried out under court order for the sole purpose of maintaining the assets of the estate in status quo.

We think there can be no question but that ordinarily gain or loss may result from the sale of stock rights. Miles v. Safe Deposit & Trust Co., 259 U. S. 247. In that case it was pointed out that stock rights are essentially analogous to stock dividends and that a gain on the sale of dividend stock is taxable as income the same as a gain on the sale of the original shares would be, whether sold “ by a dealer or trader, or casually by a non-trader, as by a trustee in the course of changing investments,” citing Merchants’ Loan & Trust Co. v. Smietanka 255 U. S. 509. We have then in this case a realization of a gain which is income within the meaning of the Sixteenth Amendment and the Eevenue Act. Section 161 of the Revenue Act of 1928 specifically taxes “ the income of estates or of any kind of property held in trust.” Cf. Merchants’ Loan & Trust Co. v. Smietanka, supra, involving similar provisions of the Revenue Acts of 1916 and 1917. We know of no provision of the taxing statute that would exempt petitioner from being subject to tax on the income realized. The claim is made that the sole duty of an administrator pendente lite — as distinguished from other fiduciaries — is to preserve the estate pending the settlement of a contest as to who is entitled to administer. Granting that this is so, it is not shown that the scope of his duties would preclude him from realizing a profit for the benefit of the estate if it occurred in the ordinary course of his administration of the property.

We accordingly' affirm the determination of the respondent.

Decision will be entered for the respondent.


author: Goodrich:

text:
    Hartford-Empire Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 29958, 41736, 53600.
    Promulgated May 20, 1932.

      Herbert Knox Smith, Esq., Arthur T. Safford, Esq., and Norman E. Webster, G. P. A., for the petitioner.

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

Goodrich:

In these proceedings, which were consolidated for hearing, petitioner contests deficiencies asserted by respondent as follows:

1923__ $13, 619.44
1924_ 4,480. 87
1925_ 4, 367.22
1926_ 8,401. 52
1927_ 22,561. 90
1928_ 18, 688. 27

A lengthy stipulation of facts was filed, which is incorporated herein by reference as our findings of fact, but for the purpose of reporting our decision a brief summary of the stipulated facts will suffice.

Save for minor mathematical errors relating to respondent’s computations of the deficiencies, called to our attention by affirmative allegations in his pleadings and which will be disposed of upon settlement in accordance with our decision, there are but two issues raised herein which, reduced to their simplest terms, are as follows:

1. Whether in computing the allowance to petitioner for exhaustion of certain patents and applications for patents, acquired by petitioner from a predecessor corporation, the basis to be used is the cost of such assets or the value thereof as of March 1, 1913; and
2. Whether petitioner may deduct from its income the amount of a net loss sustained by said predecessor Corporation.

Petitioner is a corporation, organized under the laws of the State of Delaware in 1922. As of January 1, 1923, it took over the assets and business and assumed all the liabilities of the Hartford-Fairmont Company, a corporation organized in 1912 under the laws of the State of New York and engaged in the business of acquiring, developing and licensing mechanical devices relating to the feeding of molten glass. On March 1, 1913, the Hartford-Fairmont Company owned •certain patents and patent applications, the value of which as of that date was determined by the Board in a ¡aroceeding before it instituted by that company and reported in 12 B. T. A. 102, to be $2,000,000, apportioned $1,300,000 to domestic rights and $700,-000 to foreign rights. It is conceded that the transaction by which petitioner, on January 1, 1923, took over the assets was such that, under the statute, the basis for depreciation thereon in the hands of Hartford-Fairmont Company would be carried over to its successor, this petitioner. The opening entries on petitioner’s books of account with respect to the Hartford-Fairmont assets and liabilities on January 1, 1923, were identical with the closing entries as of December 31, 1922, on the books of Hartford-Fairmont Company. Although it ceased its operations on December 31, 1922, the Hartford-Fairmont Company continued in existence until January 7, 1929, but filed no income-tax returns during that period. It sustained a net loss from its operation in the year 1922, which petitioner now seeks to apply against its own income for the years 1923 and 1924. On or about January 1, 1923, also, petitioner acquired, in exchange for a certain amount of its capital stock, from the Empire Machine Company, a corporation organized under the laws of the State of Maine, certain assets including patents covering mechanical devices relating to the forming of molten glass. Thereafter, petitioner has engaged in the business of owning, developing and licensing of machines made in accordance with its patents, relating to various processes in the manufacture of glass and glass products. Its income-tax returns filed for the years 1923 to 1928, inclusive, were not consolidated returns.

Respondent opposes petitioner’s claim to an allowance for exhaustion of assets acquired from Hartford-Fairmont Company based on the value thereof as of March 1,1913, as determined by this Board in the proceedings above referred to, reported at 12 B. T. A. 102, not on the ground that the value determined is erroneous, nor that petitioner is not entitled to use the same basis for exhaustion allowance as was the corporation from which it acquired the assets, but on the ground that the patent applications were not property, susceptible of a valuation as of March 1, 1913, which would serve as a basis for an allowance for the exhaustion of the patents subsequently issued.

This contention has been decided adversely to him. Individual Towel Co., 5 B. T. A. 158; Hartford-Fairmont Co., 12 B. T. A. 98; Hershey Manufacturing Co., 14 B. T. A. 867; Stephens-Adamson Mfg. Co., 16 B. T. A. 41 (aff'd., 51 Fed. (2d) 681); Empire Machine Co., 16 B. T. A. 1099; John Douglas Co., 23 B. T. A. 1307; Berenice Brown, 25 B. T. A. 814. Respondent erred in refusing to allow as deductions from petitioner’s income, during the years here involved, exhaustion allowances based upon the value as of March 1, 1913, which we previously determined, of the patents and patent applications acquired by petitioner from the Hartford-Fairmont Company.

Upon the theory that the actual continuity of the predecessor’s business should be the guide, rather than the test of legal continuity of corporate form and identity, petitioner contends that it is “ the taxpayer ” as the term is used in section 204 (b) of the Revenue Act of 1921 and section 206 (b) of the Bevenue Act of 1924, and as such, entitled to apply against its income for the years 1923 and 1924 the net loss sustained from its operations by the Hartford-Fairmont Company in 1922. We have carefully considered the argument advanced by counsel for petitioner upon brief, but we are unable to distinguish the issue in the iiroceeding now at bar from that raised in the several cases heretofore decided to the contrary and, therefore, for the reasons set forth more fully in those cases, determine this issue in favor of respondent. Marr v. United Stales, 268 U. S. 536; Maytag Co., 17 B. T. A. 182; Plumber's Supply Co., 20 B. T. A. 459; Standard Silica Co., 22 B. T. A. 97; Athol Manufacturing Co., 22 B. T. A. 105 (aff'd., 54 Fed. (2d) 230); Industrial Cotton Mills Co., 22 B. T. A. 648; Clark Dredging Co., 23 B. T. A. 503; Overbrook National Bank, 23 B. T. A. 1389.

Judgment will be entered under Rule 50.


author: Smith:

text:
    Josephine K. Laflin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43499, 43500, 48402.
    Promulgated May 24, 1932.

      Galvin F. Selfridge, Esq., and William, B. Hale, Esq., for the petitioner.,

      B. N. McMillan, Esq., and Wilfórd H. Payne., Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for the years 1924 to 1927, inclusive, as follows:

The point in issue is whether the petitioner, a beneficiary of a trust established under the will of the late Louis E. Laflin, is liable to income tax in respect of a depreciation reserve set aside by the trustee, the petitioner herein, to provide for depreciation upon a certain building constituting a part of the corpus of the trust.

Louis E. Laflin died September 2, 1922, a resident of Lake Forest, Lake County, Illinois, leaving a last will and testament, which was duly admitted to probate in the Probate Court of Lake County. The petitioner herein is the widow of the decedent and is the sole life beneficiary and likewise the sole trustee of a trust estate created by the will of her deceased husband. She was born February 27, 1862.

At the time of his death Louis E. Laflin owned a certain piece of real estate in Chicago, Illinois, known as 521-525 South Wabash Avenue. Since his death it has been continuously owned in fee simple by the trustee under his will. Said real estate is improved with a seven-story and basement brick building of loft-type construction. It was used for commercial purposes during the taxable years involved herein. The petitioner, as trustee of the trust estate, in each of the years 1924, 1925, 1926, and 1927 reserved out of the gross income of the trust estate $4,164.17 as a reserve for depreciation and obsolescence on the building above referred to.

The $4,164.17 so reserved in each of the years 1924, 1925, 1926, and 1927 was invested by the trustee and is now a part of the capital of the trust estate. No part of this reserve has ever been distributed by the petitioner, as trustee, to herself as life beneficiary of the trust. She has continuously construed the will of her deceased husband to require the creation and maintenance of such a depreciation reserve.

The sound value of the building on or about September 2,1922, was $177,625 and a reasonable allowance for depreciation and obsolescence of the building belonging to the trust estate during each of the taxable years involved is $4,164.17.

The last will and testament of Louis E. Laflin, after providing in paragraph first for the payment of various expenses and debts of the estate, provides in paragraph second as follows:

Paeagbaph Sbcokd : All of the rest, residue and remainder oí my estate, real and personal, of any and every kind and description whatsoever and wheresoever situated, I give, devise and bequeath to my wife, Josephine Knowland Laflin, as Trustee, upon and subject to the following trusts; that is to say:
In trust to hold, manage, administer and control the trust estate until the termination of all the trusts hereby created and in so doing my said Trustee shall have full power and authority to do all and the same acts and to exercise all and the same discretion and to execute and deliver all and the same instruments which she might do, exercise and execute if she were the actual beneficial owner of the property held by her at any time in trust under the provisions of this my Will; and in trust to collect all the income, rents and profits of the trust estate and out of the same to pay all taxes and special assessments and all water rates and all other public charges of every kind and description whatsoever on all the property belonging to the trust estate, and also all cost of insurance and all necessary and proper costs, charges and expenses of any and every kind and description whatsoever connected with or growing out of the management of the trust estate or the exercise of any of the powers conferred by this my Will on my said Trustee.
Subject to the provisions of this my Will, the trust estate shall be-held in trust by my said trustee upon and subject to the following trusts;
My said wife shall be entitled to receive and retain as her own absolute property all the net income of the trust estate as long as she shall live.
I further declare that the provisions made in this my Will are in lieu of dower and all other interests in my estate.

Tbe petitioner as life beneficiary did not include in her taxable income for the years 1924 to 1927, inclusive, the amounts retained by her as trustee of the trust estate as depreciation and obsolescence upon the building at 521-525 South Wabash Avenue. The respondent has amended the petitioner’s income-tax returns for the years in question by adding thereto the amounts reserved by the trustee to provide for depreciation and obsolescence of the building.

Section 219 (b) (2) of the Revenue Acts of 1924 and 1926 provides for the deduction from the gross income of the estate or trust in the determination of the net income, among other items, the following:

(2) There sliall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *

The question for our determination in these proceedings is whether there is to be included in the net income of the petitioner as life beneficiary the amounts reserved by the petitioner as trustee to take care of depreciation and obsolescence upon the building forming a part of the assets of the trust estate. The will of the decedent directs that the life beneficiary “ shall be entitled to receive and retain as her own absolute property all the net income of the trust estate as long as she shall live.” What constitutes the “ net income ” of the trust estate during the taxable years under review? There is no provision in. the trust instrument directing or empowering a trustee to provide a sinking fund to rebuild or restore any trust corpus which might become valueless through depreciation. The nearest approach to this power on the part of-the trustee is that part of the instrument which provides that the trustee shall pay “ all cost of insurance and all necessary and proper costs, charges and expenses of any and every kind and description whatsoever connected with or growing out of the management of the trust estate.”

It is a widely established rule that a beneficiary entitled to the income from an estate for life is entitled to receive the full income without regarding depreciation, and that the remainderman is entitled only to the portion of the original estate which is left. Milner v. Brockhausen, 153 Ia. 560, 565; Whitcomb v. Blair, 25 Fed. (2d) 528, 529; Baltzell v. Mitchell, 3 Fed. (2d) 428, 430; certiorari denied, 268 U. S. 390.

In F. C. Hubbell, 14 B. T. A. 1040, this Board, in sustaining the Commissioner, held that where the trust instrument did not by express provision require the trustee to set up out of income a reserve or sinking fund to oifset depreciation, the amount so withheld from distribution by the trustee can not be omitted from the net income taxable to the beneficiary. The United States Circuit Court of Appeals for .the Eighth Circuit, in affirming the decision of the Board (Hubbell v. Burnet, 46 Fed. (2d) 446; certiorari denied, 283 U. S. 840), in its decision stated :

* * * The trust instrument contains in itself a complete code of rules concerning what may be done for the maintenance and improvement of the property intended during the trust period. By implication it negatives any idea of the creation of a sinking fund for replacements, and that is what the setting aside of these sums as a charge for depreciation amounts to. Undoubtedly the settlors might have provided for such a deduction from the net income accruing to the beneficiaries, if such was their desire. It is equally beyond doubt that no such provision was made. It would follow, therefore, that the sums set aside for depreciation were distributable to the beneficiaries in the trust convention, and, as such, were subject to tax, as found. This result accords with the great weight of authority applicable to the situation presented. * * *
It conclusively appears, therefore, that these amounts, reserved by the trustees as a charge for depreciation, are distributable to the beneficiaries, and are taxable as such, whether actually distributed or not, in accordance with the provisions of the statute. There is in the trust instrument no authority for the creation of a sinking fund to meet depreciation of the corpus. As has been said, that instrument was prepared with great care and attention to details. If the trustors had had in mind a proceeding of this nature, vitally affecting the income of the beneficiaries, unquestionably they would have covered it by explicit statement. * * *

The setting up of a reserve for depreciation in the present proceedings by the trustee is similar to the situation considered by this Board in Estate of Virginia I. Stern, 7 B. T. A. 853, in which we said:

The fact that the trustees for family reasons desired to provide this sinking fund has no effect on the taxability of these amounts to petitioners. These amounts were distributable under the will of Isaac Stern and are taxable to them “ whether distributed or not.”

To the same effect are the decisions of the Board in Mary P. Eno Steffanson, 1 B. T. A. 979; C. D. Woodard, 2 B. T. A. 432; Helene R. McConnell, 3 B. T. A. 260; Arthur H. Fleming, 6 B. T. A. 900; Louise P. V. Whitcomb, 4 B. T. A. 80; Sophia G. Coxe, 5 B. T. A. 261; George D. Widener, 8 B. T. A. 651; Catharine A. Codman, 20 B. T. A. 880; aff'd., 50 Fed. (2d) 763; Abell v. Tait, 30 Fed. (2d) 54; certiorari denied, 279 U. S. 849.

The petitioner in her brief relies upon the decisions of the Board in E. L. E. Brennemam et al., 10 B. T. A. 544, and Marguerite T. Whitcomb et al., 22 B. T. A. 118. In the first mentioned case the Board held that the trustees properly deducted amounts for depreciation and depletion of an oil-producing property comprising part of the trust, and that the amounts so deducted were not taxable to the beneficiaries. In the last named case the Board held that amounts deducted for exhaustion, wear and tear of trust property were not income to the petitioner. The decision was rested upon a judgment of the Superior Court of the State of California which determined and held that the trustee should have deducted from the gross income of the trust and retained in his possession amounts adequate to offset the depreciation of the trust property.

Since it does not appear that the depreciation deduction here was required either by the terms of the trust instrument or by the law of the State of Illinois, the amounts were distributable to the petitioner in each of the years involved and are therefore taxable to her as the beneficiary.

Judgment will be entered for the respondent.


author: MaRquette :

text:
    Louis Werner Saw Mill Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30064, 42923.
    Promulgated May 24, 1932.

      Ghase Morsey, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

MaRquette :

The first question is whether the Panola Block timber transaction should be treated as an installment sale. The contract made in 1918 provided for a cash payment of $175,000 and for further payments of $55,000 each six months thereafter for a period of nine years.

The total sale price of the tract was $1,215,000, which produced a net profit of $160,390.32. No part of that profit was reported as income by the petitioner in its income-tax returns, but for the years 1918 to 1921, inclusive, respondent asserted deficiencies based in part, upon proportionate profits, computed upon an installment sale basis. Petitioner paid the deficiencies without protest or claim for refund, except for the year 1920. In its claim for refund for that year petitioner contended that its proportionate profit from the timber sale, when computed upon the proper basis, amounted to $14,520.93. That amount was determined upon the installment plan.

Section 212 (d) of the Revenue Act of 1926 provides that:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bear's to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

The same act, in section 1208, gives retroactive effect to section 212 (d) and makes it applicable to all the years here involved.

As the initial payment for the timber tract did not exceed one-fourth the purchase price the transaction was one which, under the statute, might be treated as an installment sale. Petitioner had the option of returning the profits from the sale as an entirety, accruing in 1918 with the execution of the contract, or upon the installment basis. Neither plan was used. The simple expedient was adopted of not reporting the sale at- all, of making no return of the profits derived. Hence, petitioner says, it has exercised no choice in the matter and it is not within respondent’s province to make such choice for a taxpayer. Petitioner further contends that whatever profit resulted from the timber sale accrued in 1918; and is taxable only in that year.

We can not agree with those contentions. The petitioner has acquiesced, without protest, in respondent’s basis of taxing the profits in question with respect to the years 1918 to 1921. The statute of limitations now precludes any revision of the tax return of 1918 so as to include therein all the accrued profits from the sale. Without complaint or protest, respondent’s installment plan of taxing those profits for the years 1918 to 1921 has been accepted by the petitioner. It has accepted the benefits flowing from such basis of taxation, and can not now repudiate that basis and escape the burden of present taxation under the same method, respecting profits from the same transaction, retaining the benefits enjoyed for earlier years. Cf. Walker v. Alamo Foods Co., 16 Fed. (2d) 694. Petitioner’s acquiescence in respondent’s determination for the years 1918 to 1921, if it did not create an estoppel strictly, at least amounted to an election to adopt the method used, or a ratification of it. In our opinion the attitude taken has foreclosed the petitioner from claiming, at this late day, the right to'choose a. different method of taxation, especially one which is now ineffective and which would render the income immune from its just tax. White Oak Coal Co. v. United States, 15 Fed. (2d) 474; McLean v. Clapp, 141 U. S. 429. The respondent’s determination respecting taxable income from the sale of the Panola Block tract will be sustained.

The next point in controversy is whether the advance payment of $50,000 to petitioner in 1922 constitutes taxable income for that year.

The amount in question was one-half the total to be paid “ as advance royalties and additional compensation” for executing an oil and gas lease. The first half of the total amount was paid to petitioner in 1921, and was included in taxable income for that year by the respondent in his determination of deficiency. Petitioner paid the amount of the deficiency without protest and no claim for refund was filed. He contends, however, that the amount paid in 1922 as advance royalty did not constitute income because of the contingent provision of its repayment and that it will constitute income only if, as, and when the oil and gas lease royalties exceed $100,000 per year. That contention misinterprets the plain facts of the agreement of May 14, 1921. There is nothing therein requiring petitioner to repay the amounts received as advance royalties. Such amounts became the property of the petitioner immediately upon their receipt. There was no condition precedent to their vesting in the petitioner. The agreement does provide that if in any year the oil and gas royalties exceed $100,000 the amount of such excess, up to $25,000, shall be retained by the lessee as a credit upon the advances paid, That is a subsequent condition which may never be fulfilled and no credits against the advance royalties may ever be earned. If not, those advances remain with petitioner, undiminished. And even if such credits should be earned and applied, petitioner’s royalty income will not be diminished; part of it, to the extent of $25,000 per year for four years, will have been paid in advance.

Petitioner further contends that, as it kept its books upon the accrual basis, if the $50,000 received in 1922 is income at all it must be considered as having accrued in 1921 upon execution of the contract providing for its payment. We can not accept that contention, in view of the circumstances disclosed by the record. It was petitioner’s duty to report the income received by virtue of the oil and gas contract in its return for 1921, but this was not done. The respondent correctly determined that the amounts received constituted income and.gave petitioner the benefit of taxing one-half in each of two years instead of accruing all as taxable income in 1921. Petitioner accepted that determination with respect to 1921 and paid the deficiency asserted upon that basis. There is no difference in principle between the transaction concerning the oil and gas lease and that concerning the Panola Block timber tract. In each the petitioner has elected to accept the benefits flowing from respondent’s determination of a method of taxation. Having so elected, petitioner can not now renounce that method and insist upon another under which taxes can not be collected because the statute of limitations has run. “ Men must turn square corners when they deal with the Government.” R. I., Ark. & La. R. R. Co. v. United States, 254 U. S. 141.

Several other questions herein raised are disposed of upon the facts. It appears that .the following adjustments should be made in computing the deficiencies here involved: Deductions allowable for depletion of the Y. S. & P. Block timber tract amount to $50,703.83 for 1922, $49,924.73 for 1923, and $42,206.94 for 1924. For depletion of gas-producing properties deductions of $8,569.70 for 1922, and $29,881.20 for 1923 should be allowed. For depletion of oil-producing property in Arkansas $8,002.41 is allowable as a deduction for 1922. For depreciation of the Lenwil Saw Mill deductions amounting to $19,429.92 for 1922, $19,441.65 for 1923, and $19,238.42 for each of the years 1924 and 1925, should be allowed. Depreciation of the Little Bear SaAv Mill is allowable in the amount of $21,858.08 for 1925. Petitioner’s income for 1923 should be increased by $11,227.17 received as oil royalty.

Decision will loe entered under Rule 50.