author: ARTjndell:

text:
    Appeal of S. L. Fowler.
    Docket No. 5814.
    Promulgated February 19, 1927.
    1. Evidence held insufficient to establish gifts by the taxpayer of interests in a joint venture.
    2. Olaimed loss on sale of stock disallowed in view of lack of evidence to show sales price.
    3. Commissioner’s application of provisions of section 211(b) of Revenue Act of 1918 approved, Appeal of M. Fowler, 1 B. T. A. 1212; Fowler v. United States, 11 Fed. (2d) 895; 16 Fed. (2d) 925.
    4. The evidence does not sustain the allegations of the Commissioner in his answer that the deficiency should be increased over the amount of which he notified the taxpayer in the sixty-day statutory notice.

      Harry O. Weelcs, Esq., for the petitioner.

      George G. Witter, Esq., for. the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1918 in the amount of $58,417.45, of which only a part is in controversy. The issues are: (1) The amount of interest owned by the taxpayer in a joint venture and exchanged for capital stock of a corporation; (2) the amount of gain or loss on the sale of 20 shares of capital stock; and (3) the correct method of applying the surtax provisions of section 211(b) of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Fort Worth, Tex.
    In 1918 he was engaged in the business of farming and stock raising. He owned, and resided on, a farm of 500 acres north of the town of Burkburnett, Tex. In the spring of 1918 he purchased an additional 200 acres and secured oil and gas leases on 100 acres of land adjacent to his farm. These purchases were made and the leases secured for the purpose of drilling for oil.

      On June 30, 1918, a number of persons, including the taxpayer, signed an agreement whereby they agreed to pay various sums aggregating $12,000 to J. A. Staley, Trustee, for the purpose of drilling an oil well on the 300 acres above mentioned, of which the taxpayer owned a part and held leases on the balance. The taxpayer agreed to lease to Staley that part of the 300- acres he owned and to transfer to Staley the leases on the remainder. It was further agreed that the subscribers were to have interests in the 300 acres and in the corporation which was to be formed in the event oil and gas were found in paying quantities, in amounts proportionate to their subscriptions. The taxpayer’s subscription to this fund was $1,000. The enterprise was designated in the agreement as the Fowler Farm Oil Co.
    The taxpayer took the contract for drilling the well for $12,000 and sublet it to the Burk Drilling Co. for the same amount, but agreeing in addition to furnish water and fuel oil. The well, which proved to be very productive, was drilled on land owned by the taxpayer and was completed on July 27, 1918.
    On August 8, 1918, a number of the owners of interests in the enterprise known as the Fowler Farm Oil Co. subscribed for stock in a company to be incorporated for the purpose of taking over the property of the unincorporated enterprise. In August, 1918, the taxpayer and two other persons executed a certificate incorporating the Fowler Farm Oil Co. with a capital stock of $12,000, divided into 1,200 shares of the par value of $10 each. To the certificate was attached a list of the subscribers to the capital stock of the corporation with the amount subscribed by each, in which the taxpayer is listed as having subscribed and paid $950. The certificate of incorporation was indorsed by the Secretary of State as filed in his office on August 12, 1918.
    Prior to the organization of the corporation the taxpayer purchased from each of two others their $100 interest in the joint venture. He also disposed of a one hundred and twentieth interest to each of his two sons-in-law.
    On September 9, 1918, certificates of stock of the corporation were issued in exchange for the interests at one time owned by the taxpayer in the joint venture as follows:

    Prior to incorporation of the company and before executing a lease to the company on his land, the taxpayer stated to J. A. Staley, the trustee under the joint venture agreement, that he had given three one hundred and twentieth interests to his daughter and her husband and to his minor sons.
    In 1919, at or about the time of dissolution of the corporation, the stock issued to the taxpayer’s children and his sons-in-law was transferred to the name of the taxpayer who, upon the sale of the company’s properties in the spring of 1919, collected the amount represented by the stock in his name. He later turned over to his sons-in-law and his children the amount he had collected on the 50 shares of stock issued to them upon organization of the corporation.
    At the time of incorporation of the Fowler Farm Oil Co. the properties had a value of $2,000,000, or $1,612.92 per share of stock.
    On December 30, 1918, the taxpayer sold 20 shares of stock of the Fowler Farm Oil Co.
    In computing the deficiency here involved the Commissioner applied the 20 per cent surtax provision of section 211(b)* of the Revenue Act of 1918.
   OPINION.

ARTjndell:

The principal question involved in this appeal is the amount of the interest owned by the taxpayer in the unincorporated enterprise known as the Fowler Farm Oil Co. at the time of the organization of a corporation of the same name which issued its stock for interests of the individuals in the enterprise. The taxpayer originally subscribed $1,000 to the enterprise, while in the list of subscribers for the corporate stock his subscription is given as $950. A revenue agent’s report in evidence shows the taxpayer as entitled to 110 shares of stock of a total par value of $1,100. The latter figure is the one used by the taxpayer as the basis of his computation, and includes 20 shares purchased shortly before the organization of the corporation. The difference between the several figures above is not explained in the record, but as both parties agree upon the amount of 110 shares as a basic figure we will accept it is being correct for the purpose of deciding the case.

It appears that in computing the deficiency the Commissioner did not question the disposition by the taxpayer to Hammond and Gilehrest of interests for which 20 shares of stock of the corporation was issued. Of the remaining nine one hundred and twentieth interests the taxpayer claims that prior to incorporation of the company he had given one one hundred and twentieth interest to his daughter, Mrs. Fenner, and her husband, and one one hundred and twentieth interest to each of his minor sons, John and Conde Fowler. The Commissioner denies that the taxpayer gave these three one hundred and twentieth interests to his children and his son-in-law Fenner, basing his denial of the alleged gifts on the lack of delivery.

It is a well recognized rule that one of the elements necessary to establish a valid gift inter vivos is delivery of the property. This rule has been amply supported by the courts. In Bowen v. Kutzner, 167 Fed. 281, 296, it is said,

Gifts inter vivos of personal property, to be effective, must be accompanied by tbe delivery of tlie possession, the donor parting with all present 'and future dominion over it; the donor must be divested of, and the donee invested with, the right of property in the subject of the gift; it must be absolute, irrevocable, without any reference to its talcing effect at some future time; and without such jjroof, clear and explicit, the gift fails. No mere promise or declaration of intention to give will suffice, however clearly the same may be established. Nothing short of a complete and unconditional delivery is sufficient to constitute a valid gift, and, until delivery, the gift is inchoate and revocable.

The decision in that case is cited with approval in Mahan v. Plank, 289 Fed. 722, 726, and, as far as we can find, it has never been overruled. In Lust v. Miller, 4 Fed. (2d) 293, 295, it is held:

There is no principle better established in the law than that, in a gift, delivery and acceptance are necessary to pass title. Until there is delivery and acceptance, the donor parts with neither equitable nor legal title, and the power of absolute revocation rests with him, with no intervening right in favor of the donee.

To the same effect is Lee v. Lee, 55 App. D. C. 344; 5 Fed. (2d) 767, holding that:

It is settled law that before a gift can be regarded as complete and passing absolute title to the property, there must be an unqualified delivery of possession.

The opinion in the latter case quotes from Allen-West Commission Co. v. Grumbles, 63 C. C. A. 401, 404; 129 Fed. 287, 290, as follows:

Among the indispensable conditions of a valid gift are the intention of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift in praesenti at the very time he undertakes to make the gift; * * * the irrevocable transfer of the present title, dominion, and control of the thing given to the donee, so that the donor can exercise no further act of dominion or control over it (Basket v. Hassell, 107 U. S. 602, 614, 615, 2 Sup. Ct. 415, 27 L. Ed. 500) ; * * * and the delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it.

The taxpayer has cited a number of Texas cases holding that actual manual delivery of the subject-matter is not essential to effect a valid gift. These cases deal for the most part with transactions wherein the donor of the gift either made an assignment in writing or took some positive step designed to be a delivery and which the court held to be a constructive or symbolic delivery.

The taxpayer says that in the present case there was nothing capable of actual delivery. It is undoubtedly true that the property itself could not be manually delivered, but it does not follow that some evidence of ownership could not be delivered had there been an intent to pass title in praesenU. On the whole the evidence is insufficient to support the taxpayer’s claim that he disposed of three one hundred and twentieth interests by gift prior to incorporation of the Fowler Farm Oil Co.

The petition alleges that the Commissioner erroneously treated the sale of 20 shares of stock in the Fowler Farm Oil Co., a corporation, as occurring prior to incorporation. The Commissioner, in his answer, admits error in this respect and further admits, as alleged in the petition, that the stock was sold on December 30, 1918. The Commissioner denies, however, that the taxpayer received only $9,803.50 for the stock, upon which figure the taxpayer bases his claim for a loss realized on the sale. No proof was offered as to the sales price of the stock, and we are accordingly unable to find that the taxpayer' sustained the loss claimed.

In computing the tax in this case the Commissioner applied the surtax provisions of section 211(b) of the Revenue Act of 1918 according to the method set forth in article 13 of Regulations 45. This method has been approved by the Board in Appeal of M. Fowler, 1 B. T. A. 1212, and by the United States District Court for the Northern District of Texas in Fowler v. United States, 11 Fed. (2d) 895; 5 Am. Fed. Tax Rep. 5920.

On January 11, 1921, the Circuit Court of Appeals for the Fifth Circuit affirmed the decision of the District Court (16 Fed. (2d) 925) saying in part:

We deem the provisions of the statute too plain to require either interpretation or construction. The method of calculation adopted by the Treasury 33epartment is simple and reasonable and fully conforms to both the spirit and letter of the law.

A great deal of the taxpayer’s brief is devoted to an attempt to show that the transfer of interests in the unincorporated organization to the corporation was not a taxable transaction. The assignment of errors in the petition contains no allegation of error on the part of the Commissioner in holding the transfer to be taxable, and, this question not being placed in issue by the pleadings or any amendments thereto, we deem it unnecessary to pass upon it.

The Commissioner, by incorporating in his answer a copy of a letter dated earlier than the date of the notice to the taxpayer of the deficiency, seeks to set up a greater amount as a deficiency than the amount shown as a deficiency in the letter from which this appeal is taken. This amounts to an attempt by the Commissioner to find an additional deficiency, which is prohibited by section 214(f) of the Revenue Act of 1926. The Board, under section 274(e) may redetermine a deficiency in an amount greater than that asserted by the Commissioner, but such a redetermination would need the support of facts. Here the Commissioner made no attempt to prove that the greater amount of tax referred to in the letter of earlier date is the correct amount rather than the amount shown by his .letter of final determination, and the findings set forth in the earlier letter do not have in their favor the presumption of correctness as have those in the notice of final determination. We, accordingly, can not find that the deficiency is greater than the amount set forth in the Commissioner’s letter of June 20, 1925, from which the appeal is taken.

Judgment will 5e entered on 15 days’ notice, under Bule 50.


source: Caselaw Access Project

author: Phillips:

license: Public Domain

text:
    Appeal of Spencer Borden, Jr., Executor, Estate of Spencer Borden.
    Docket No. 5909.
    Promulgated February 19, 1927.
    Trust created by decedent prior to his death hel$ not to have been made In contemplation of death.

      Douglas G. Lam, Esq., and Bichard K. Hawes, Esq., for the petitioner.

      B. E. Copes, Esq., and E. G. Smith, Esq., for the Commissioner.
    This is an appeal from the determination by the Commissioner of a deficiency in estate tax of $37,658.12. This deficiency arises in part from an increase in value of the gross estate by including therein $525,000, representing the value of 5,000 shares of the common stock of the Fall River Bloachery, which weré transferred and delivered by the decedent on May 20, 1921, to trustees in trust for his wife and four children.
    FINDINGS OF FACT.
    The petitioner is the regularly appointed, qualified, and acting executor of the estate of Spencer Borden, who died October 17, 1921, at the age of seventy-one, a resident of Fall River, Mass.
    On May 20,1921, the decedent transferred, irrevocably, 5,000 shares of common stock in the Fall River Bleachery of the value of $525,-000 to trustees, in trust with direction to pay the net income to his wife, his two sons and his two daughters, in equal shares, during the lifetime of the wife, and upon her death to distribute “the principal of said trust and all accumulations of income, free and discharged from all trusts hereunder, in equal shares, to the said Spencer Borden, Jr., Alfred Borden, Leonora Borden Traiford, and Florence Borden Darrach * * * the descendants of any of said children deceased prior to the distribution of said principal, as herein authorized, to take the ancestors’ share by right of representation.”
    Prior to this transfer, Spencer Borden owned the entire common stock in the Fall River Bleachery and the 5,000 shares transferred represented one-half his holdings in that company.
    The Fall River Bleachery had been organized and developed by the decedent and his income was derived principally from dividends and salary from that company.
    At the time of the transfer and for many years prior thereto Spencer Borden, Jr., a son .of the decedent, was treasurer of the company and in that position had control of the finances and supervision of the books of the company. He also prepared the income-tax returns of his father for the years 1916 to 1920, inclusive, and paid the tax from the treasury of the company, charging his father’s account with the amount of the tax.
    In 1919, Spencer Borden, Jr., became concerned over the increasing size of his father’s Federal income taxes and discussed the matter with his father and their attorney, with a view to finding some plan whereby they might be lowered. It was decided to reduce his father’s salary for the year 1920 and to pay whatever income he might receive from the Bleachery in dividends rather than salary, thus avoiding the Federal normal tax. The comparative result of this plan was as follows:

    The decedent, his son, and their attorney continued over a period of several months to discuss methods of handling the decedent’s affairs in such a way as further to reduce taxes. For some years decedent had made annual allowances of $12,000 to his wife and $6,000 to two of his children, and it was finally determined that the establishment of the trust in question provided the best means of lowering the taxes. The purpose of the trust was expressed in a letter of April 9, 1921, by the son to the father, who was then in Augusta, Ga., reading in part:
    In a nut-shell the plan is to put a certain amount of your Bleachery common stock into a trust. As you know there is a certain amount of your income you never get anyway, that which goes to Mother, Alfred and Florence. My idea was that there is no need of your reporting that income as yours but by putting the property in trust, during the life-time of Mother and having it go direct to the parties who get it anyway it cuts that much of the income, Of course it adds to the income of the recipients but the rates are very much less. This is very rough but when the papers are drawn I will send them to you for criticism with explanations.
    It is perfectly possible, however, to let the thing wait until you come home. I will have it all in completed form by that time.
    Spencer Borden, Sr., returned home from Augusta, Ga., some time in the latter part of April, 1921. After his return there were further discussions of the trust plan between the decedent, his son, and their attorney. Both told their attorney that they wanted the trust established because it would reduce the Federal income tax. The trust agreement was drawn and revised until satisfactory to the decedent and was finally executed and the 5,000 shares of Bleachery stock transferred to the trustees on May 20, 1921.
    At the time of the transfer and prior thereto the decedent was an active, energetic man, who rode horseback and played golf. When in Fall River he visited his ofiice regularly and attended to business. He made frequent trips to two stock farms which he operated, and each year spent a part of the winter at his place in Augusta, Ga.
    For some years before the transfer, and at that time, he had heart trouble, which evidenced itself to him in irregular beating at times and in shortness of breath upon extraordinary exertion. He did not take his heart trouble seriously and disregarded his physician’s advice to slow down a little in his work. During the discussion of the trust with his attorney, Borden did not indicate in any way that he was in other than good health or that he had any apprehension concerning death.
    In April, 1920, while at his farm at Woodstock, Vt., he consulted a local physician. The physician found that he was suffering from circulatory impairment, with moderate angina pectoris, due in the main to myocarditis. The physician gave him advice concerning his activities, which he seemed inclined to disregard.
    On May 7, 1920, decedent visited his physician at Fall River. He asked him to listen to his heart; said that it was irregular and had been irregular for a good many years. The doctor examined him and found his heart action was irregular, that his heart was somewhat enlarged, and there was a slight systolic murmur. The decedent did not appear to regard his condition as serious and declined to permit a general examination, saying there was nothing else the matter with him, and that he felt fine. The doctor prescribed no medicine but advised Borden to slow down a little.
    He again consulted the physician on December 8, 1920, complaining of a little shortness of breath. The doctor examined him, found his pulse a little more rapid, but no enlargement of the heart since his examination in May, 1920. The doctor prescribed a heart stimulant. The decedent spent a portion of the early months of 1921 in Augusta, Ga., as was his custom. He continued to ride his horse and to play golf.
    He died of myocarditis, or weakening of the muscles.of the heart, October 17,1921.
    In computing the deficiency the Commissioner included as a part of the estate of the decedent the 5,000 shares transferred to the trustees, which he valued at $525,000.
   OPINION.

Phillips:

In determining the deficiency the Commissioner has included as a part of the taxable estate of the decedent the value of 5,000 shares of the capital stock of the Fall River Bleachery, set aside by the decedent in a trust fund some five months prior to his death. This has been done pursuant to the provisions of section 402 of the Revenue Act of 1918, which 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 tlie 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 fide 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.

It is undisputed that the trust was not intended to take effect in possession or enjoyment at or after the death of the decedent and the sole question is whether the trust was established by the decedent in contemplation of death.

In Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549, the District Court of Appeals, Third District, California, in a well considered opinion, said with reference to the words “in contemplation of death ”:

The language referred to was not intended to include that general expectation of death which is the essential concomitant of the inherent knowledge of the inevitable termination of all life, and which is in the young and physically robust as well as in the aged and the infirm. No similar statute has been so construed. A reasonable and just view of the law in question is that it is only where the transfer of property by gift is immediately and directly prompted by the expectation of death that the property so transferred becomes amenable to the burden; or, as counsel for the respondent with singular aptness states the proposition:
“It is only when contemplation of death is the motive without which the conveyance would not be made that a transfer may be subjected to the tax.”

This statement of the law is abundantly borne out by the authorities. Shwab v. Doyle, 269 Fed. 321; Rea v. Heiner, 6 Fed. (2d) 389; Vaughan v. Riordan, 280 Fed. 742; Rosenthal v. People, 211 Ill. 306; 71 N. E. 1121; Commonwealth v. Fenley, 189 Ky. 480; 225 S. W. 154.

The evidence convinces us that in the present instance the trust was not established by the decedent in contemplation of his death. The evidence shows the decedent in 1921 to have been an active man, taking an interest in the conduct of his business; giving attention to two stock farms which he operated more as a hobby than a business, playing golf and riding horseback. He was conscious of a shortness of breath after exertion and a “ skipping ” of his heart. This condition does not appear to have concerned him other than as it interfered to some extent with the things which he desired to do. While at his farm at Woodstock in April, 1920, he consulted a local physician. This physician found signs of heart trouble but no serious condition and advised the decedent to lead a less strenuous life. A month later he consulted his regular physician who gave him much the same advice. The decedent refused to permit a general examination, stating that he felt all right except for shortness of breath, and failed to follow the advice given him. Some seven months later he again consulted his physician regarding the same condition. The physician found that the condition had progressed slightly and prescribed a heart stimulant. The physician again desired to make a thorough examination which the decedent refused to permit. The decedent apparently did not regard his condition as serious nor did the physician, provided the patient would take reasonable care of himself. The testimony of the physician is that he found the condition of the decedent better than that of the average man of his age and that there was no reason why, with proper care, the decedent should not have lived several years.

In the early winter months of 1921 the decedent went to his place at Augusta, Ga., as was his custom, and there followed his usual active pursuits, playing golf and riding. At no time does it appear that he considered his condition as sufficiently serious to follow the advice given him by his physician. The whole record in the case convinces us that the decedent did not at the time of the execution of the trust consider his condition serious or look forward to an early demise.

When we come to examine the circumstances under which the trust was created, we find that it was not a hasty act brought on by the realization of impending death but the culmination of many months of effort to work out some plan whereby his income taxes might be reduced. The first step was taken in 1919 when his salary from the Bleachery was materially reduced. The saving effected by this step could not have been large and some other means of reducing taxes was sought. The evidence shows that various plans were suggested and discussed, and it was not until after several months of consideration that the plan finally followed was adopted. Even after this plan had been adopted several weeks were spent in drafting and redrafting the declaration of trust to meet the requirements of the testator.. The plan was adapted to the purpose of saving income taxes by providing a capital fund from which would be paid the amounts theretofore paid directly by the decedent to his wife and children, and all the surrounding circumstances lend support to the uncontradicted testimony that the purpose of the trust was to reduce the income taxes.

To our mind the record is convincing that the trust had a purpose other than the saving of estate taxes and was not made by the decedent in contemplation of his death.

Decision will be entered on 15 da/ys’ notice, under Bule 50.


author: Littleton:

text:
    Cuba Grapefruit Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7954, 15828, 16487.
    Promulgated February 19, 1927.
    Cash value of property paid in to petitioner in September, 1914, for stock determined for invested capital purposes.

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

      L. G. Mitchell, Esq., for the respondent.
    In proceeding Docket No. 1954 the Commissioner determined deficiencies in income and profits taxes of $18,657.90 and $972.22 for the fiscal years ending June 30, 1918 and 1919, respectively; in proceeding Docket No. 15828 he determined a deficiency of $5,576.83 for the fiscal year ending June 30, 1920; and in proceeding Docket No. 16487 he determined deficiencies of $113.26 and $2,106.05 for the fiscal years ending June 30, 1921 and 1922, respectively.
    The question involved concerns the actual cash value of about 930 acres of land at Cabellos, Cuba, together with buildings, machinery and equipment, when paid in to a New York corporation for stock on November 16, 1914. The Commissioner fixed the value for all the properties at $52,500. The petitioner claims that the properties had an actual cash value of $708,375.

      FINDINGS OF FACT.
    Petitioner is a New York corporation engaged in business of growing and selling citrous fruit. For several years prior to 1914 the Fisk Fruit Co. and the Development Co. of Cuba, corporations, owned together about 930 acres of land at Cabellos, Cuba, on 800 acres of which there was an orange and grapefruit orchard and 30 acres in lemons. There were about 100 acres of bare land. The orchards were planted in 1902 and 1905. The Development Co. of Cuba managed and operated the entire property. The Fisk Fruit Co. and the Development Co. of Cuba also owned, in connection with the orange and grapefruit grove, a packing house and packing machinery and equipment, a four-room office building, a manager’s residence, 24 laborers’ houses, tractors and farm implements, stables, 58 mules, blacksmith shops, storehouses, pump houses, watering system, and a 900 foot railroad sidetrack. These buildings and the machinery and equipment were constructed and acquired in 1910 and were in good condition in 1914. In November, 1914, petitioner' was organized and the entire properties of the two corporations mentioned were paid in to petitioner in exchange for 3,500 no par value shares of its stock, since which time petitioner has owned, operated, and managed the properties. Petitioner’s operation of the properties has been profitable from the start.
    The trees on this property had reached full-bearing maturity in November, 1914, and the orchards were the largest in the Republic of Cuba. There were a number of smaller orchards in and near Cabellos and at other points in Cuba. Petitioner’s property was located between 250 and 300 miles from Havana. A railroad which connects with the Cuba Railroad a short distance from Cabellos runs through this property. From this railroad the predecessor companies had constructed a switch line for use in loading and shipping its fruit. Two-thirds of the 800 acres of land contained orange trees and one-third grapefruit trees.
    In 1914, 513 acres of the orange and grapefruit orchards contained 153,900 exceptionally fine, well-developed, and healthy trees. The remaining 287 acres contained mature-bearing trees, but due to lack of proper care and cultivation these trees were not as fully developed and therefore were not as productive as trees of the better grade orchards, and a few trees were missing from this tract. However, with proper care and treatment the trees on this acreage were capable of soon being brought to full productivity and this was done by the petitioner. There always has been and still is a ready and profitable market in tlie Eepublic of Cuba for all oranges produced there. Some of the grapefruit was sold in Cuba. In 1914 and subsequent years petitioner sold and shipped grapefruit into the United States at a profit, notwithstanding the high tariff. Thirty acres of the property acquired by the petitioner produced French lemons for which the market in Cuba was not as good as for oranges and grapefruit, due to the preference of the inhabitants of the Eepublic for limes.
    Shortly after the property was acquired petitioner abandoned the lemon orchard. The original cost of the 800 acres of land containing the better grade of orange and grapefruit trees, the expense of clearing and preparing the same and of planting and caring for the trees thereon to maturity, of seven years, was not less than $822,110. In addition, there were included in the property acquired by petitioner 100 acres of uncultivated pasture land which had theretofore a cost of $100 an acre. This does not include the cost of machinery and equipment, or any of the other items of the property mentioned, which was not less than $45,000.
    The sales price of other small orchards, ranging from 10 to 90 acres, in the vicinity of petitioner’s property which compared favorably to the best orchards owned by petitioner prior to and subsequent to 1914 was $1,200 an acre. The sales price of orchards which might be compared to the 287 acres of petitioner’s property on which the trees were not as well cared for ranged from $250 to $600 an acre.
    The actual cash value of all the property paid in to petitioner for its stock on November 16, 1914, was $708,375.
   OPINION.

Littleton:

In the opinion of the Board, the evidence submitted fully justifies a cash value of $708,375 claimed by petitioner for the properties paid in to it for stock in November, 1914. The evidence consists of testimony of three witnesses who were thoroughly familiar with these properties and were experienced in the operation of orange and grapefruit orchards in Cuba. They were fully qualified to express their opinion of the cash value of the properties. One of the witnesses has been engaged in managing and caring for the properties involved since' 1908. Another witness is and has been for a number of years the owner of an orchard near that of petitioner and is familiar with the values of such properties. The third witness is the vice president and a director of the petitioner and has been engaged in buying and selling citrous fruit produced in Cuba for twenty-six years. During this time he has spent a great deal of his time in Cuba, and is thoroughly familiar with this industry and with the value of citrous fruit properties in that Eepublic. He has been especially familiar with petitioner’s properties for several years. These witnesses explained in detail the facts and circumstances upon which they based their opinions.

In addition to the facts stated, it is shown that the orange and grapefruit orchards on this property were capable of producing at the date of purchase, and in fact subsequently did produce, net earnings of at least $90 per acre per year.

These witnesses placed a conservative cash value in November, 1914, upon the properties acquired by petitioner, as follows:

613 acres first-class grove, $1,200 an acre-$616,600
287 acres slightly deficient grove, $250 an acre- 96, 750
100 acres Of bare land, and 30 acres of lemon trees, $100 an acre-!- 13,000
58 mules, $250 eacli_ 14, 500
Packing house- 10,000
Machinery and equipment- 3,000
Manager's house_ 6, 000
24 laborers' houses- 5,000
Field equipment, tools, £te_ 7,000
Railroad- 3,000
Total_ 773, 850

Petitioner claims a cash value of only $108,375, and we are of opinion from consideration of all the evidence that the facts fully sustain the cash value claimed by the petitioner for the properties on November 16, 1914.

The amount of $708,375 should therefore be used as the basis for computing the petitioner’s invested capital for the taxable years.

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


text:
    Keener’s Oil, Natural Gas & Fuel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7862.
    Promulgated February 19, 1927.
    1. The cash value of certain property paid in to petitioner in 1900 for stock and the cost of subsequent additions and improvements for the purpose of invested capital, and the fair market price or value of depreciable assets on March 1, 1913, for the purpose of the allowance for exhaustion, wear and tear for the years 1919, 1920, and 1921, determined.
    2. The evidence is insufficient to show that the rate of 3 per cent used by the Commissioner in computing the annual allowance for exhaustion, wear and tear was improper.

      J. V. Blair, Jr., Esq., for the petitioner.

      Harold Mien, Esq., for the respondent.

      The Commissioner determined deficiencies in income and profits tax in the amount of $618.83 for 1919, $3,333.15 for 1920, and $1,276.58 for 1921. Petitioner claims that the Commissioner erred in determining the value of certain property for invested capital and depreciation purposes and in using a rate of 3 per cent in computing the allowance for exhaustion, wear and tear for each of the taxable years.
    FINDINGS OP PACT.
    Petitioner is a West Virginia corporation organized in 1900 to engage in the business of supplying natural gas, with principal office at Weston. In 1897, George I. Keener purchased the entire capital stock of the Western Natural Gas & Fuel Co. for $21,492.63. He dissolved this corporation and in 1900 incorporated the business under the name of Keener’s Oil, Natural Gas & Fuel Co. He paid in to this corporation for stock the property of the former corporation, consisting of plant and equipment for supplying natural gas to the inhabitants of Weston and surrounding vicinity, which property had. at that time, an actual cash value of $21,492.63.
    Between 1900 and May, 1912, petitioner made additions and improvements of a capital nature costing $82,709.16, making a total investment to that date of $104,201.79. Petitioner did not produce gas but purchased its supply from other producing companies. About 1912 a corporation known as the Weston Fuel & Light Co. was organized by certain competing interests to supply gas to the inhabitants of Weston. In May, 1912, the Weston Fuel & Light Co. proposed to sell its plant and equipment to petitioner for $75,000 in cash or to pay petitioner $125,000 in cash for its plant. Petitioner declined to sell for the price offered but made a counter offer to sell its plant for $175,000. After some negotiations petitioner purchased the Weston Fuel & Light Co. for $75,000 in cash; making its total investment to that date $179,201.79.
    Between May, 1912, and August, 1915, petitioner expended $19,710, being the cost of gas meters, street curb boxes and shut-off devices, and the cost of installing same. In the fall of 1912, it expended $7,000 in laying 5,000 feet of 5-inch gas mains. As a result of these expenditures petitioner’s investment in 1915 totaled $205,911.79.
    In August, 1915, Keener, who held the entire capital stock of the petitioner with the exception of four qualifying shares, sold the entire stock to certain other individuals for $161,000, which was paid in cash during that year and the two years following. The corporation continued as before.

      The fair market price or value of petitioner’s depreciable assets on March 1, 1913, was $150,000. In 1911 petitioner purchased the plant and equipment of a competitor organized shortly prior thereto for $60,000. During the year 1919 petitioner made additions to its plant costing $33,688.98 and sold one of its pipe lines in that rear for $26,152.66.
   OPINION.

Littleton:

This proceeding presents only issues of fact concerning the cash value of property paid in to the petitioner and the cost of subsequent additions or improvements for invested capital purposes, and the fair market price and value of its depreciable assets on March 1, 1913, for the purpose of the annual allowance for exhaustion, wear and tear. The evidence submitted has been carefully examined and from a consideration thereof the Board has found the cash value of the property paid in by Keener in 1900 for stock and the cost of subsequent additions and improvements made by the corporation. This value and these costs should therefore be taken into consideration in computing petitioner’s invested capital for the taxable years 1919, 1920, and 1921. The Board is further of the opinion, from a consideration of all the evidence, that the fair market price or value of the depreciable property owned by petitioner on March 1, 1913, was $150,000, and this value and the cost of subsequent additions and improvements should be used as the basis for the computation of the allowance for exhaustion, wear and tear for the taxable years.

Petitioner claims that the Commissioner erred in computing the allowance for exhaustion, wear and tear at. the rate of 3 per cent per annum and that this allowance should have been computed at the rate of 5 per cent. An examination of the evidence on this point does not convince the Board that the Commissioner’s determination of a rate of 3 per cent per annum was improper and his conclusion in this regard is approved.

Judgment will be entered'on 15 days’ notice, u/nder Rule 50.


author: Milliken:

text:
    T. T. Rudolph and E. L. Rudolph, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4570, 4571.
    Promulgated February 19, 1927.
    Where the assets of a corporation were distributed to tbe stockholders as partners, gain or loss resulted to the stockholders under the Revenue Act of 191S, though the liquidation was effected while article 1566(e), Regulations 45, construing such distribution not to result in gain or loss to stockholders, was in force. The fair market value of the corporate assets distributed determined. "

      M. A. Matlock, Esq., for the petitioners.

      Thomas P. Dudley Jr., Esq., for the respondent.
    These proceedings result from the determination by the respondent of deficiencies for 1919 and 1920 in income taxes of T. T. Budolph, in the amounts of $1,487.30 and $28.99, respectively; and of deficiencies in income taxes of E. L. Budolph in the amounts of $1,221.57 for 1919 and $4.36 for 1920. Only the deficiencies for the year 1919 are involved in these proceedings and they are based upon gains which respondent determined to have resulted from the liquidation of a corporation in which the petitioners were the principal stockholders. The appeals were consolidated for hearing and decision. The petitioners contend that, as the liquidation was a distribution in kind to the principal stockholders as copartners, there was no gain or loss to them under article 1566 (c) of Begulations 45, which was in force at the liquidation date. Petitioners also contend that, if the gain or loss be recognized, the book value used by the respondent in computing gain does not represent the fair market value of the assets distributed.
    FINDINGS OF FACT.
    The petitioners are individuals, residing at Arkadelphia, Ark. Prior to May 31, 1919, T. T. Budolph owned 78 shares and E. L. Budolph owned 68 shares of an Arkansas corporation known as the Arkadelphia Hardware Co., which had been engaged in carrying on a retail hardware business at that place since its organization in 1907. Their total stock holdings represented all the outstanding stock of 150 shares, par value of $100 per share, except 4 shares held by I. P. Budolph to qualify the latter as an officer. On May 31,1919, the corporate charter was surrendered and the assets of the corporation were transferred to T. T. Budolph and E. L. Budolph, as copartners, their partnership interests being eight-fifteenths and seven-fifteenths, respectively. The partnership assumed the obligations of the corporation and continued to carry on the business as a partnership under the same name. The partnership books were kept in the same way as were those of the corporate predecessor. No changes were made in the books at the time of the reorganization.
    The merchandise carried in the business was not inventoried at the date of the reorganization. The last inventory made prior to that date was the closing inventory taken at cost as of December 31, 1918. The balance sheet as of the close of the year 1918, follows:

    On May 31, 1919, the date of the liquidation in question, the books were not formally closed, but a balance sheet as of that date states the condition of the business to be as follows-:

    The stock of goods, as shown by the above inventories, was considerably in excess of the stock usually carried.. The unusual stock was due largely to the prompt shipment, after the close of the war, of advance orders placed during the war period for more merchandise than was needed, in the hope of securing delivery of the amounts desired. The unexpected prompt shipment of stock ordered resulted in an oversupply of stock, especially as concerned farm implements. It was the consistent practice to inventory at cost, irrespective of shelf-worn or obsolete stock. A substantial amount of merchandise was of the latter kind, due to the accumulation over a number of years. The fair market value of the merchandise on May 31, 1919, was 75 per cent of the cost of such merchandise as fixed by the inventory taken by petitioner as of that date.
    The accounts and notes receivable in the amounts of $32,934.17 and $12,946.54, respectively, represented an accumulation over a number of years. The notes were secured only by a vendor’s lien upon the goods sold. Accounts and notes were charged off the books as worthless by the corporation only when all possible hope of recovery had passed. The amounts charged off from 1914 to 1918, inclusive, were $2,900 in 1914, none in 1915 and 1916, $962 in 1917, and $2,097 in 1918. At the time of the liquidation, the petitioners realized that many of the obligations on the books were outlawed and a large percentage was uncollectible. Five thousand eight hundred and ninety-nine dollars and ten cents of the accounts receivable and $8,275.18 of the notes receivable, transferred from the corporation to the petitioners, have never been collected. The fair market value of the notes and accounts receivable was 60 per cent of their book value at the date of liquidation.
    The only dividend paid by the corporation, from 1914 to 1919, inclusive, was a $6,000 dividend paid in 1916. During those years, T. T. Rudolph devoted all his time to the corporation’s business and drew a salary varying in amount from $1,500 in the years 1914 to 1916, to $2,775 in 1918. The salary paid E. L. Rudolph for part-time services increased from $1,200 in the years 1914 to 1917, to $1,875 in 1918. The corporation had insufficient credit to obtain loans in amounts necessary to finance its operations. Petitioners were at times required to use their personal credit and secure outside in-dorsements to obtain needed loans and to offer as collateral their stock in the corporation having a par value greatly in excess of the amount of the loans requested.
    In computing the gain or loss resulting to petitioners from the liquidation of the corporation on May 31, 1919, the respondent used the book value of the assets as shown on the books of the corporation, as representing the fair market value of the assets distributed to the petitioners in exchange for their stock.
   OPINION.

Milliken:

We are here concerned with the gain resulting from the admitted liquidation of a corporation, and the controversy in the computation of the gain relates only to the fair market value of the assets received by petitioners in exchange for their stock in the corporation.

Counsel for the petitioners contend that, inasmuch as the liquidation was effected by exchanging stock of the petitioners for the assets of the corporation, there resulted a nontaxable distribution pursuant to the provisions of article 1566(c) of Regulations 45, promulgated April 17, 1919, by the respondent, and, inasmuch as the liquidation in question occurred at the time when the regulations of the respondent classified the distribution as nontaxable, the petitioners should not and can not be taxed pursuant to a changed interpretation as reflected in Treasury Decision No. 2924, September 26, 1919, wherein the provisions of article 1566(c) of Regulations 45, promulgated April 17, 1919, were revoked. The contention does not merit extended discussion. The Commissioner can not make or change the law by regulations and a regulation at variance with the import of the statute is of no effect. Appeal of William E. Scripps, 1 B. T. A. 491.

We have heretofore considered the status of a distribution such as is represented in the case at bar, and held that the exchange resulted in the realization of gain or loss and is governed by the provisions of section 201(c) of the Revenue Act of 1918. Appeal of E. C. Huffman, 1 B. T. A. 52; Appeal of F. D. Keim, 4 B. T. A. 1240.

The petitioners aver that the respondent erred in using the book value of the assets of the corporation as evidencing the fair market value of such assets received by them. Error is alleged as concerns the value of the inventory accounts and accounts receivable- on May 31, 1919. The evidence adduced at the trial of these cases convinces us that the fair market value of the inventory was only 75 per cent of the book value thereof on May 31, 1919, and the fair market value of the accounts and notes receivable was 60 per cent of their book value as of the date of dissolution, and the deficiencies in question will be recomputed accordingly.

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


author: Milliken :

text:
    Wray-Dickinson Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8914.
    Promulgated February 19, 1927.
    1. The fair market value of purchase money second mortgage notes received on sale of Ford automobiles, determined.
    2. Where additions to reserve, or $3,672.05, for losses, were not shown to be insufficient to cover anticipated losses on such notes, • the respondent’s inclusion of the notes in income at face value approved.

      Yandell Boatner, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This proceeding results from the determination by the Commissioner of deficiencies in income and profits tax for the calendar year 1921, in the amount of $4,445.38, of which $4,410.65 is in controversy. That part of the deficiency contested by petitioner results from the Commissioner’s action in including, at their face value, in petitioner’s income, promissory notes in the amount of $12,267.70. Petitioner avers that such notes had no fair market value and the addition to income is erroneous. The Commissioner denies that the notes had no fair market value, and also contends that the reserve for bad debts deducted was sufficient to cover losses resulting from inability to collect on the notes.
    RINDINGS OK PACT.
    Petitioner is a Louisiana corporation with its principal office at 306 Market Street, Shreveport. It was, during the year in question, engaged in the selling of Ford automobiles and accessories and rendering service to automobile owners. The commission derived from the sale of cars was 17% per cent of the list price fixed by the Ford Motor Co. During 1921 the gross profit from the sale of a touring-car and a roadster was $78.75 and $63.00, respectively.
    During 1921, and prior thereto, petitioner had established the practice .of selling Ford cars upon a deferred payment plan. A prospective purchaser made out a statement indicating his financial condition, upon which petitioner based its investigation as to his credit standing. In such sales, petitioner’s practice was to require a down payment of $208 on touring cars and $196 on roadsters, the balance of the purchase price being represented by a series of 12 notes falling due qver a period of 12 months, beginning with the first of the month following the date of sale. The notes were equal in amount; included charges for handling, service, brokerage and insurance; bore interest from the date of maturity; and were secured by a first mortgage on the car sold, which was subject to foreclosure upon default in payment of any one of the notes.
    At that time petitioner was selling the notes, when they were sold, to the Meyer-Keyser Corporation, of Indianapolis, Ind., a finance corporation. Under the arrangement with the latter corporation, the notes were indorsed without recourse and placed with the First National Bank of Shreveport for collection. Petitioner would then draw a draft on the Meyer-Keyser Corporation for the balance due on the car, which gave it the cash just as if the sale had been made for cash.

      During tbe latter part of 1921, the petitioner was required by the Ford Motor Co. to purchase more automobiles than it believed could be sold. To escape the cost of storage and the payment of interest on the oversupply, petitioner conceived and carried out a sales plan to attract purchasers. It advertised and sold the Ford cars, both touring and roadster, on a deferred plan requiring a down payment of $125; a series of 12 first mortgage notes for amounts equal to the amount represented by the notes, which it had been accustomed to receive and sell to the Meyer-Keyser Corporation under its former plan; and a second series of 12 notes secured by a second mortgage on the car sold, for the balance of the purchase price, or approximately $90.41 and $77.00 on the touring-cars and roadsters, respectively. The balance represented by the second mortgage notes was somewhat in excess of the petitioner’s commission. These notes were similar to the first mortgage notes, except that interest was included in the face of the notes. The new sales plan was put in operation about November 23, 1921, and continued until the close of the year. The due dates of the notes received, both first and second mortgage series, dated from January 1, 1922, and one of each series fell due on the first of each month in 1922. The first mortgage notes were sold on the same terms as formerly to the Meyer-Keyser Corporation. The second mortgage series were held by the petitioner. The holders of either the first or the second mortgage notes could foreclose upon default in payment of any one note. The same statement, as to financial condition, was required of the purchaser under the new sales plan as had been required under the old, but very little investigation of credit standing was made by petitioner.
    The petitioner also handled used and repossessed cars and accessories and rendered service to car owners. Credit was extended in all of these departments, as well as on the sale of new cars. The credit extended was represented by both open accounts and notes receivable. The amount of open accounts standing on petitioner’s books as of December 31, 1921, is not shown. The total of notes receivable of $58,030.03, as of that date, includes notes received on the sale of used and repossessed cars as well as new cars. The face value of second mortgage notes received in the sale of new cars under the new credit plan carried out during November and December of 1921, was $12,267.70. Petitioner collected $10,149.00 of this latter amount during the year 1922 and additional sums in subsequent years. The fair market value of the second mortgage notes of the face amount of $12,267.70 was $8,750, which is $3,517.70 less than their face value.
    Petitioner kept its books on an accrual basis and made its returns on the calendar year basis. When a car was sold, under the new sales plan, the customer was charged with the selling price, including accessories. He was then credited with the cash payment, the amount of the draft drawn on the Meyer-Keyser Corporation and the amount of the second mortgage notes, less interest, to balance the account. The second mortgage notes received were entered into the notes receivable account but were credited to unearned profits as a closing entry for the year, thereby creating a reserve of $12,267.70, which was deducted from profits.
    Petitioner also carried a reserve for losses. Additions to such reserves on account of bad debts, in the amount of $7,820.86, were claimed and allowed as deductions for 1921. Of this $7,820.86, all but $3,672.05 was shown to be applicable to open accounts and notes receivable, other than the second mortgage notes. The item of $3,-672.05 was to cover losses on notes outstanding in the amount of $18,279, the balance due on 147 cars sold. 'Whether these 147 cars sold and the notes received therefor include the cars sold under the emergency plan and the second mortgage notes of $12,267.70, was not established.
    The Commissioner added the amount of $12,267.70 to petitioner’s income for 1921, for the reason that it appeared that the bad debt reserve was considered sufficient to take care of any losses resulting from default in the payment of the second mortgage notes.
   OPINION.

Milliken :

The petitioner contests that part of the deficiency due to the Commissioner’s action in adding the $12,267.70 in second mortgage notes to its income for the year in question. It is not disputed that petitioner was on an accrual basis and that such notes were received in 1921 and were income to it to the extent of the fair market value thereof. Petitioner’s contention is that the notes had no fair market value when received, and, accordingly, should be entirely eliminated in the computation of income for 1921.

The testimony shows that it was generally considered unsafe to sell a Ford automobile on a deferred payment plan for less than 331/3 per cent cash, where the only security for the balance was a mortgage on the car sold. It was also shown that the sales plan carried out by petitioner, to dispose of an oversupply of cars, by requiring a cash payment of from 20 to 25 per cent, had not been theretofore tried by retail automobile dealers. The second mortgage notes taken by petitioner were certainly not sufficiently secured to make the notes worth face value.

On the other hand, it is admitted by petitioner that they had some value. Petitioner did not sell or offer to sell any of such notes. Three bankers of the locality in which the business of petitioner is located and who bad experience in passing on automobile paper, were of the opinion that the notes were not commercial paper unless indorsed by a responsible dealer, and, if such paper was offered in lots in the usual way, their banking firms would not even consider the lots worth investigating. One of them stated that the actual worth of the notes would depend upon the maker, though responsible persons did not usually purchase cars on terms requiring a first and second mortgage. We do not think the fact that such notes would not have been accepted by a bank as commercial paper without investigating the individual maker establishes the absence of any fair market value in the notes. . The fact that nearly 83 per cent of the face value of the notes, or $10,149.00, was collected in 1922, the year in which they were due, was brought out by questioning of the principal witness by the Board. Although that fact was not available in determining the fair market value of the notes when they were received, we think it, when properly discounted in the light of the other evidence, tends to afford some criterion concerning the fair market value of the notes in question. After a careful consideration of all the evidence, we are of the opinion that the fair market value of the second mortgage notes, when they were received, was $8,750, and should have been reflected in computation of gross income in that amount. The difference between the face value and the fair market value of such notes is $3,517.70.

However, the deficiency in controversy is not based solely upon the determination that the notes were worth their face value. It appears, from the evidence of record that the Commissioner considered that the reserve for bad debts maintained by petitioner was sufficient to cover losses upon the second mortgage notes in question and to grant any further allowance would be to allow a double deduction. The facts of record do not rebut the presumption. We have found as a fact that there is a bad debt item of $3,672.05, which is not shown by petitioner to have been deducted on account of obligations other than the notes in controversy. Since this item, not accounted for, is greater than the difference between the face value and the fair market value of the notes in question, or $3,517.70, we are unable to determine that the Commissioner committed error in the determination of the deficiency. Petitioner was specifically put on notice as to the proof required, not only by the statement attached to the deficiency letter, but by the evidence adduced at the hearing of this proceeding by counsel for the Commissioner.

Judgment will be entered for the respondent.


author: Smith:

text:
    Best Steel Castings Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8326.
    Promulgated February 19, 1927.

      W. W. Spalding, Esq., for the petitioner.

      Geo. G. Witter, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $15,311.53. The petitioner alleges error on the part of the Commissioner (1) in computing invested capital for the taxable year 1919 by reason of the fact that he reduced the current earnings available for the payment of dividends by $48,397.07, representing the tentative tax liability for 1919, as computed by the Commissioner, and that, as a result of this computation, the invested capital has been reduced by $28,283.24 on account of the dividend paid on April 21, 1919, in excess of the alleged current earnings to that date, and (2) by reason of the fact that the Commissioner in computing the petitioner’s invested capital erroneously deducted from invested capital at the beginning of the taxable year $117,795.77 on account of income and profits taxes of the preceding year, thereby erroneously reducing its profits-tax credit and erroneously increasing its tax liability for such taxable year in the approximate amount of $7,500.
    FINDINGS OP PACT.
    The petitioner is a California corporation with its principal office in San Francisco.
    The available earnings of the petitioner for the year 1919 as computed by the Commissioner were $153,068.38. Out of these earnings a dividend of $72,000 was paid on April 21, 1919. In computing what portion of the net earnings of $153,068.38 was available for the payment of the dividend of $72,000 on April 21, 1919, the Commissioner deducted from the net earnings of $153,068.38 the amount of $48,397.09, which the Commissioner alleged was the tentative tax liability for the year 1919, and used the balance, or $104,671.29, as the amount of earnings available for the payment of dividends. The excess of the dividend over the amount of available earnings up to April 21, 1919, as computed by the Commissioner, was then prorated and the prorated amount of $28,263.24 was deducted from invested capital.
    In computing the petitioner’s invested capital for the year 1919 the Commissioner deducted from invested capital at the beginning of the taxable year $117,795.77 on account of income and profits taxes ’
      of a preceding year prorated from the dates the payments became due, thus reducing its profits-tax credit and increasing its tax liability for the taxable year in the approximate amount of $7,500.
   OPINION.

Smith:

It must be held that the Commissioner was in error in reducing the amount of earnings available for the payment of the dividend on April 21, 1919, by the amount of a tentative tax payable for the year 1919. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

The second point raised by the petitioner based upon the decision of the Board in the Appeal of Guarantee Construction Co., 2 B. T. A. 1145, is now ruled adversely to the petitioner by section 1207 of the Revenue Act of 1926. See Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

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


author: Smith :

text:
    Herbert Ide Keen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8423.
    Promulgated February 19, 1927.

      John Wdttawa, Esq., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
   Smith :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $369.78, only a part of which is in controversy. The petitioner alleges error on the part of the respondent in refusing to consider the tax paid by the petitioner to the French Government, under the French income tax laws, •upon an amount fixed at seven times the rental value of the residence of the petitioner, as such a tax as may be credited against the taxpayer’s Federal income tax under the provisions of section 222 of the Revenue Act of 1921. The findings are based on the admitted allegations in the petition and answer.

FINDINGS OF FACT.

The petitioner is an American citizen representing in Europe the Allis-Chalmers Manufacturing Co., of Milwaukee, Wis., and as such European representative he resided in France and was liable in 1922 to the taxation laws of France.

He paid for the year 1922 to the French Government, under its income tax laws, as income tax, a sum amounting to $342.62, calculated upon an amount fixed at seven times the rental value of his residence.

In submitting his Federal income-tax return for 1922, the petitioner claimed a credit against his Federal income tax of $342.62 paid for that year to the French Government as indicated above. The Commissioner has disallowed the credit on the ground that the tax paid to the French Government was not an income tax within the purview of section 222 of the Revenue Act of 1921.

Judgment will he entered for the petitioner on 15 days' notice, under Rule 50.


author: Littleton :

text:
    Borden Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7397.
    Promulgated February 19, 1927.
    1. In 1918 and 1919 petitioner discontinued tbe use of certain machinery and equipment, consisting of engines, boilers, and pumps, because of the change from steam to electric power. ’ This equipment was not scrapped or offered for sale in either of the years. When an effort was made to sell the steam power equipment in 1924 no market could be found for it. Held, that petitioner may not take a deduction for 1918 and 1919 of the fair market value of the machineiy and equipment at the time its use was discontinued, there being no evidence to show the cost or the fair market price or the value of such equipment on March 1, 1913.
    2. The evidence is insufficient to show that the Commissioner’s allowance for exhaustion, wear and tear of buildings and machinery for the years 1918 to 1921, inclusive, was inadequate.
    3. Accrued local taxes for 1918 allowed as a deduction for that year.

      Albert L. Cox, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    The Commissioner determined deficiencies for the years 1918,1919, 1920, and 1921, the amounts of which are not disclosed by the record but the aggregate thereof is stated in the petition to be $11,444.65.
    The issues urged by the petitioner at the hearing were (1) that the Commissioner erred in not allowing a deduction of $23,274.50 for 1918 and $21,788.65 for 1919, representing the value in those years of certain steam power machinery and equipment the use of which was discontinued as a result of the change from steam to electric power; (2) that the Commissioner’s allowance for exhaustion, wear and tear of the buildings and machinery for each of the years 1918 to 1921, inclusive, was inadequate; and (3) that the Commissioner erred in disallowing a deduction for 1918 of $3,564.17, local taxes accrued in that year.

      FINDINGS OF FACT. ■
    Petitioner is a North Carolina corporation engaged in the manufacture of cotton goods, with principal office and place of business at Goldsboro. Although its books were crudely kept, it followed the accrual method of accounting in keeping its records and in determining its income. Petitioner had two plants known as Mill No. 1 and Mill No. 2.
    In 1900 certain machinery and equipment, consisting of one 450 H. P. engine, three boilers, and certain pumps, was installed in Mill No. 1, and in 1908 similar equipment, consisting of the same items, was installed in Mill No. 2. This class of machinery and equipment was used in Mill No. 2 until 1918 and in Mill No. 1 until 1919. During the taxable years petitioner operated its plant the usual and customary period of 60 hours a week. In 1918, while production was at its peak, the engine in Mill No. 2 became disabled as a result of the crankshaft becoming sprung. In order to continue operation without interruptions while awaiting repairs, petitioner installed in this mill electric power consisting of four large motors and other necessary equipment. As soon as a new crankshaft could be obtained it was placed in the engine in Mill No. 2, but the steam power was not thereafter used. In 1919 petitioner changed, from steam to electric power in Mill No. 1, since which time the steam power machinery and equipment has not been used in the operation of the plant. The engines, boilers, pump, and other equipment used in connection with the steam power were not dismantled or scrapped in either of the years 1918 or 1919. Subsequent to the taxable years, and in or about the year 1924, petitioner concluded to sell the steam power machinery and equipment but found that the price which it could obtain therefor would about equal the cost of dismantling and removing it. In that year it claimed before the Commissioner that it should be allowed a deduction from income for the years 1918 and 1919 as a result of the discontinuance of the use of this property.
    During the year 1918, state and local taxes, amounting to $3,-564.17, levied against the petitioner became due in September of that year. Petitioner was'allowed until the first of the following year within which to pay this tax without becoming liable for a penalty. The tax was ’ paid by petitioner early in 1919. In its return for 1918 petitioner claimed the amount of tax as an accrued item in 1918 and deducted the same from gross income for that year. The revenue agent, when investigating petitioner’s records, disallowed this deduction for the reason that the amount thereof was not entered upon the books for 1918. The Commissioner approved the agent’s action in this regard.
   OPINION.

Littleton :

The Board is unable from the evidence to determine the amount of the deduction, if any, to which petitioner is entitled for 1918 and 1919 in respect of the steam power machinery and equipment as a result of the change from steam to electric power. We have no evidence of the original cost or the fair market price or value of the equipment on March 1, 1913. Petitioner’s witnesses testified that the fair market value of the steam power machinery and equipment in each of the mills at the time electric power was substituted therefor in 1918 and 1919 was $23,274.50 and $21,788.65, respectively. In the absence of evidence of the cost or the value on March 1, 1913, the Commissioner’s determination in this regard must be approved.

It is claimed that the Commissioner’s allowance for exhaustion, wear and tear of the buildings and machinery was inadequate and that a greater allowance should be made for each of the taxable years. We have no evidence as to what allowance the Commissioner made for this purpose, nor is the evidence sufficient to enable the Board to make any determination in regard to the proper allowance.

The state and county taxes amounting to $3,564.17, which accrued during 1918, were disallowed by the Commissioner because they were paid in 1919. No entry was made upon the books for 1918 in respect thereto. Petitioner followed the accrual method of accounting and the accrued tax was a proper deduction for 1918, notwithstanding the amount thereof was not entered upon the books for that year. See Russell Milling Co., 1 B. T. A. 194, and Atlantic Coast Line R. R. Co., 2 B. T. A. 892.

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


author: Phillips :

text:
    Edith D. Green et al., Executrices, Estate of Frank J. Dupignac, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10337.
    Promulgated February 19, 1927.
    Gift held, to have been made in contemplation of death.

      Joseph G. Deane, Esg., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
    This is an appeal by the executrices of the estate of Frank J. Dupignac from the determination by the Commissioner of a deficiency in estate tax of $13,776.84, computed by including as part of decedent’s gross estate certain gifts of cash and real estate made by decedent in his lifetime to his two daughters. The appeal was submitted upon a stipulation of the facts which are incorporated into the findings.
    BINDINGS OF FACT.
    The decedent died on May 10, 1922, and there was included by the Commissioner as a part of his gross estate for the purpose of computing the deficiency tax of $13,776.84, the sum of $75,000 transferred by the decedent to his daughters, Edith D. Green and Eleanor D. Thompson, in equal shares, on or about December 9, 1920; there was also included in the gross estate for the purpose of computing said deficiency the sum of $152,000, representing the value at the time of decedent’s death of his city residence and his country residence, together with their contents, transferred by decedent to his said daughters, as tenants in common, on March 7, 1921. All of said transfers were without consideration in money or money’s worth, but took effect in said transferees at once, both as to possession and enjoyment. The total value thereof — $227,000—represented over 27 per cent of the decedent’s gross estate as determined by the Commissioner.
    In addition to the above gifts the decedent, on or about the first day of May, 1920, gave to his two said daughters $50,000, which amount, however, was not included or taxed as part of his gross estate.
    The decedent died at the age of seventy-five years, death resulting from chronic myocarditis, with arterial sclerosis as a contributory cause: During the period covered by these transfers and for years prior thereto the decedent was afflicted with organic heart disease and was aware of the fact that he had heart trouble. While this had rendered physical exertion difficult, decedent was not confined to his house, but went about freely in an automobile and entertained friends and visited them.
    Decedent was a man of unusual intellectual attainment and until practically the moment of his death his mental faculties were unimpaired. He retired from the active practice of law in 1918, leaving his city residence in May, 1921, and thereafter resided at his country residence continuously until the date of his death. The decedent executed his will on November 21, 1918, whereby he bequeathed the sum of $60,000 to his son and the balance of his estate to his two daughters equally. On December 9, 1920, decedent executed a codicil to his will wherein he revoked the bequest to his son of $60,000, giving him in lieu thereof cash and other property valued at about $25,000.

      Prior to the transfer of this real estate the decedent stated that he was confident that his son would institute a contest over his will and that one of his purposes in turning over these properties during his lifetime was to avoid any possible question after his death as to the right of his daughters to the possession and enjoyment of these properties, even if, what seemed an unlikely event, a successful contest was made over his will. Shortly after decedent’s death a contest of the will was in fact instituted by the decedent’s son and a temporary administrator was appointed to take charge of the decedent’s property pending such contest.
   OPINION.

Phillips :

Section 402(c) of the Eevenue Act of 1921 provides that there shall be included in the gross estate of a decedent the value of any property of which the decedent has made a gift in contemplation of death, and further provides that any such transfer within two years of death shall, unless shown to the contrary, be deemed to have been made in contemplation of death. The gifts here in question were made within two years of death and we are of the opinion that the facts stipulated are insufficient to establish that they were not made in contemplation of death within the meaning of the statute.

We have heretofore had occasion to review the authorities and discuss the meaning of the phrase “ contemplation of death.” Appeal of Philip T. Starck, 3 B. T. A. 514; Appeal of Spencer Borden, Jr., 6 B. T. A. 255. There we reached the conclusion that it did not include the general contemplation of death entertained by everyone, but did include a state of mind which looked forward to death within the reasonably near future.

At the time of the gifts here in question decedent was between seventy-two and seventy-three years old. For several years he had suffered from organic heart trouble and was aware of his condition. He had retired from business some two years previously. While he entertained friends and visited them in his automobile, it appears that his condition had reached the point where physical exertion was difficult for him. Under such circumstances, considering also that the gifts were made in anticipation of a contest of his will by his son, with no motive shown for making the gifts other than the desire to provide for his daughters after his death, we are of the opinion that there has been no showing which overcomes the presumption created by the statute that these gifts were made in contemplation of death.

Decision will be entered for the Commissioner.


text:
    The Davis Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5497.
    Promulgated February 21, 1927.
    1. Only losses sustained within the taxable year are deductible.
    2. A sale made in compliance with an insistent request by a local chamber of commerce that a new industry might acquire the desired location, does not constitute an involuntary conversion under section 234(a) (14) of the Revenue Act of 1921.

      W. D. Wall, G. P. A., for the petitioner.
    Z. 0. Mitchell, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in income and profits taxes for the year 1920 in the amount of $2,219.21, all of which is in controversy. The deficiency is due to the action of the respondent in adding to petitioner’s income the amount of $1,055.35, received as a rental charge for the use of milk cans and placed in a reserve maintained by it to cover the loss on milk cans; and amounts of $4,663.43 and $4,763.63, representing profits on property sold and on insurance proceeds from property destroyed by fire, respectively, both of which amounts petitioner contends were proceeds from involuntary conversions and were deductible under section 234(a) (14) of the Revenue Act of 1921,. as they were immediately expended in the acquisition of similar property.
    FINDINGS OP PACT.
    The petitioner is an Ohio corporation, engaged in the creamery business, with its principal oifice at Newark. A large number of milk cans were essential to its business. It was necessary for it to supply the farmer producers with cans to bring milk to the receiving stations and assemblage plants. Cans in large numbers were also used to ship its product in fluid form to consumers located at other points. The petitioner was continually burdened with a loss through failure to return the cans or by reason of repairs required because of damage to them. This loss was common to both the receiving and sales ends of the petitioner’s operations. The cans were not inventoried with the other assets as, due to the number out at all times, it was impossible to make a complete inventory without closing down the business.
    Prior to the year in question, the petitioner established the practice of charging for the use of cans furnished to producers but not for those sent to consumers. This charge was in the nature of a deduction of so much per month from the producers’ pay check for the use of the cans. The amounts thus collected were considered by petitioner as reimbursement, in part at least, for the cost of repairs and replacements and were not included in income but were placed in a reserve fund to cover the losses on those items.- The amount of such charges collected and placed in reserve during 1920 was $1,055.35. The extent of the loss for the year in question, from fail-lire to return cans, and the cost of repairs, was not established.
    The petitioner maintained an assemblage plant at Lexington, Ohio, for the purpose of receiving and processing the milk of the producers in that community, preparatory to shipment to the common plant. This property consisted of about two and one-half acres, on which there was a group of buildings which were about 25 feet in width and had a total length of about 200 feet. The buildings paralleled a railroad track which furnished shipping facilities. The chamber of commerce or board of trade of that locality endeavored to interest the Kennedy Foundry & Manufacturing Co., of Mansfield, Ohio, in establishing a neiv foundry there. One of the points entering into the negotiations for the new enterprise was the ability to secure for it a desirable location. The question narrowed doAvn to whether the property of the petitioner’s plant could be acquired for the purpose. The chamber of commerce or board of trade requested that the petitioner make the new enterprise possible by selling its property to the foundry company. The petitioner, fearing that refusal to comply with the request would cause it to lose the, good will of the community to the advantage of its competitors, sold the property as requested. The sale was made on or about May 24,1920, and payment of the purchase price was completed by the giving of the balance-in notes during the next month. The selling price exceeded the cost or other basis of the property sold by $4,663.49, which amount is admitted by the petitioner to be the taxable profit on the transaction if the sale was not an involuntary conversion. On May 6, 1920, petitioner purchased another site and proceeded without delay to erect a new building for its use. This building was completed on July 1, 1924, at a total cost of $6,454.41, which amount was in excess of the selling price of the old plant. The petitioner was not required to vacate the old plant until the new building Avas completed.
    Another assemblage plant was maintained at Alexandria, Ohio, in a rented building. The equipment installed therein Avas oAvned by petitioner and was covered by insurance. The building occupied, together with most of the equipment, was destroyed by fire on August 1, 1920. The petitioner during 1920 received $8,892 as proceeds from fife insurance policies on the equipment destroyed. The depreciated cost of the equipment destroyed, after salvage value was taken into consideration, was $4,128. It appearing that the owner of the building was unable or unwilling to replace the building, the petitioner purchased the site and on August 31, 1920, began the erection of a new building which was completed during February of 1921. New equipment was purchased and, together with such equipment as was salvaged from the fire, installed on or before the completion date. The cost of the new equipment, the repairs on the equipment salvaged from the fire, and the installation, was $4,492. The new equipment had a slightly larger capacity than that of the old.
    The petitioner keeps its books upon the accrual basis. The amount of the reserve for losses and repairs to milk cans, the profits from the alleged forced sale of the Lexington plant, and the excess of the fire insurance proceeds from the Alexandria plant over the cost or other basis of such equipment, were all added by the respondent to the petitioner’s income for 1920.
   OPINION.

Milliken :

The first issue questions the correctness of the respondent’s action in adding the reserve for losses and repairs to milk cans to petitioner’s income. The record shows only that such losses were substantial over a period of years and that the amount collected in 1920 for the use of cans was not included in income but was set up as a reserve to cover the losses. Only losses sustained within the taxable year are deductible. Appeal of Hanff-Metzger, Inc., 4 B. T. A. 1214, and cases there cited. As we are unadvised as to the extent of such losses sustained within the taxable year in question, we must sustain that portion of the deficiency resulting from the addition of the amount of the reserve to taxable income for the year.

The two remaining points concerning the proper treatment to be accorded the proceeds from the alleged forced sale and from fire insurance policies on property destroyed, present questions requiring an interpretation of section 234(a) (14) of the Revenue Act of 1921, which provides as follows:

(14) If property is compulsorily, or involuntarily converted into casli or its equivalent as a result of (A) its destruction in wliole or in part, (B) theft or seizure, or (0) an' exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Oommissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion o£ property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

An involuntary conversion under the statute may result only from the three specified causes. The contention that the alleged forced sale was such a conversion can only look to the cause last enumerated for support. Can it be said that a sale, made at the request of the local chamber of commerce, results from the exercise of power of requisition or condemnation or the threat to exercise such power? No doubt, the appeal made by the local body was a most earnest and urgent one. Sufficient pressure was brought to bear to lead petitioner to the conclusion that it must comply or suffer the diminution of the good will it had built up in the community. The petitioner knew that it could not be coerced by legal means into making the sale, as the power of requisition or condemnation did not exist. However, the exercise of such power, or the imminence thereof, is essential to an involuntary conversion, due to the cause under discussion. The sale was made because it was deemed to be good business policy. We are unable to see that the sale was made by reason of the exercise of the power of requisition or condemnation or the imminence thereof within the contemplation of tlje statute.

We come, then, to a consideration of the proceeds from the fire insurance policies on the equipment destroyed in August of 1920. The respondent contends that there was no involuntary conversion within the meaning of the statute, for the new equipment was not acquired immediately, the acquisition being delayed until after the building had been completed in 1921. Under the facts in the instant case we think the contention without merit. After the fire the petitioner was without suitable quarters to house its plant, and the evidence is all to the effect that the construction of the new building was begun and completed without delay. The new equipment was purchased and installed as soon as possible.

The respondent also urges that the new equipment had a capacity in excess of the capacity of the equipment destroyed. In the Appeal of Cotton Concentration Co., 4 B. T. A. 121, we considered the effect of a slightly increased capacity in similar property acquired. We held in that case that a slight variance in capacity was not fatal to the deduction allowable under the involuntary conversion provision. We think that decision disposes of the respondent’s contention in the case at bar. The deduction is such part of the profits — $4,764— as the part of the proceeds expended — $4,492—bears to the net proceeds — $8,892.

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