author: McMahon:

text:
    Garden Homes Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42635, 46035.
    Promulgated June 15, 1932.

      Maxwell H. Rerriott, Esq., and Leo Mann, Esq., for the petitioner.

      M. M. Mahany, Esq., for the respondent.
   OPINION.

McMahon:

The petitioner contends that for the years 1923 to 1927, both inclusive, it had no income whatever subject to income and profits taxes; that payments by common stockholders were erroneously entered on the books of account in accounts which are normally income accounts; and that the taxable income for the years involved, as shown in the deficiency notices, was determined by including therein the items erroneously entered on the books of account as income.

The petitioner represents that it manufactured no product and sold no commodity other than its stock, common and preferred, and distributed only its capital assets in lieu of common stock; that its sole object was to provide homes for Milwaukee working men who, to be privileged to occupy the homes constructed by the petitioner, had to subscribe for the common stock of the petitioner equal in par value to the cost of the lot and the house to be occupied, together with an estimated amount for carrying charges; that later it was realized that not only was an expansion of the project impossible from a business standpoint, but that it was not feasible to attempt to carry on even the 105 homes pursuant to the law cooperative plan under which they were constructed; that a law (chapter 321 of the Wisconsin Laws of 1925) was passed to permit the petitioner to give deeds to the occupants of the homes upon payment of their stock in full, or to exchange land contracts for the outstanding stock, giving the occupant as credit on the land contract the amount of his equity on his stock; that some of the subscribers went to building and loan associations to raise sufficient money to pay for their stock in full and acquire deeds from the petitioner, and others exchanged their stock for land contracts, the unpaid portion of the stock subscriptions constituting the unpaid amount due on the land contract; and that the assignment attached to pass book covering lot 4 in block 9 is typical of others whereby the petitioner reacquired its common stock and the former stockholder received a land contract in lieu thereof.

Chapter 402 of the Wisconsin Laws of 1919, which created section 1771 (b). and amended section 1772(a) (9) of the Wisconsin Statutes (petitioner’s Exhibit 1), expressly granted so-called “housing corporations ” all general powers of other domestic corporations enumerated in section 1748 of the Wisconsin Statutes, except subsection (8) thereof, relating to the insurance of officers, and in addition thereto authorized corporations organized thereunder, among other things, to acquire and plat land, to erect dwellings on land owned by it and to otherwise improve and develop said land, except that no single dwelling should be erected at a cost to exceed $5,000, and to lease for indefinite periods parcels of land together with the improvements thereon, at terms fixed by the corporation. Subsection (3) thereof provided that no land should be sold except land not necessary or desirable and that nothing thereon should be construed as preventing the sale of land in proceedings to wind up the corporation or in foreclosure of mortgages or other liens thereon. Subsection (4) provided that no lease of any land or buildings thereon should be made except to a stockholder of the corporation and no tenant should hold stock beyond the value of the premises occupied by him. Subsection (6) provided that no stock should be issued except in consideration of money or labor or property estimated at its true money value equal to the par value thereof. It provided that no dividends should be declared on any stock until a fund should have been created equal to 2 per cent of the authorized capital, that no dividends should ever be declared which would impair the capital or such surplus fund, and that no dividends should be paid in any year to a stockholder not a tenant exceeding 5 per cent of the par value of stock held by him. Such subsection also provided that in each and every year in which a profit was made, 10 per cent of such profits should be set aside for the pxirpose of retiring preferred stock. Subsection (8) provided that each share of stock, either preferred or common, should be entitled to one vote. Subsection (9) provided that the directors should receive no compensation until the surplus fund of 2 per cent of the capital had been set aside and until dividends on preferred stock had been paid and that at no time should the compensation of directors exceed $500 per annum.

In the articles of organization (petitioner’s Exhibit 2) we find that the business of the petitioner shall be “ to acquire ” land, “ to erect dwellings,” to improve and develop ” land and “ to lease and sell ” land.' The capital stock consisted of 2,500 shares of preferred stock and 2,500 shares of common stock, both of the par value of $100 a share. The preferred stock was entitled to receive cumulative dividends of 5 per cent “ when and as declared from the surplus or net profits of the corporation,” but no dividends were to be paid on preferred stock until a fund equal to 2 per cent of the authorized capital stock had been created, nor were any dividends ever to be declared which would impair the capital or such surplus. Ten per cent of “ profits ” were to be set aside each year for the retirement of preferred stock and all profits remaining after payment of dividends of 5 per cent per annum on both 'preferred and common stock, were to be added to such fund until all preferred stock had been retired.

It is obvious from the language of section lTTlb, supra, and the articles of organization that it was contemplated that the operations of the petitioner would yield a profit and that the holders of preferred and common stock were not entitled to any return on the stock unless and until a profit had resulted from the operations of petitioner. Neither its capital nor the fund of 2 per cent of its authorized capital was to be impaired by payment of dividends. There is no evidence from, which we can determine whether such fund or the fund to retire preferred stock was ever created. Nor is there any evidence to show out of which funds the dividends paid to preferred stockholders were taken. However, we must assume that the petitioner paid such dividends pursuant to law and its articles out of its profits and without impairment of capital.

The mayor of Milwaukee who_ initiated the organization of the petitioner testified at length with respect to the purposes and intentions of himself and others in organizing the petitioner. He testified further as follows:

At this stage of the game, [after receiving the report of the Commission] oral conversations took place between the Commission and myself. A statute of some kind was authorized to be drafted and they told mo what they wanted was a cooperative housing plan, something that I had not studied and knew very little about. I believe M. Schuchardt was most instrumental in influencing the Commission to adopt this plan, because Mr. Fred Vogel personally wanted the city to advance all the money and build the houses. He said, “We need money, and we need it cheaply, and that is the way to get it”; * * *

He testified at some length as to his conversations with prospective stockholders and the explanations and inducements made to secure subscriptions. He attended but one or two meetings of the board of directors, feeling that it was not proper for the mayor to take part in tlie business management of the petitioner, but he had frequent conferences with directors and received reports at frequent intervals. He testified that “ it was our intent ” to work out a plan of building homes at cost; to build homes of smaller type, so that those who could not afford to own a home could at least have the ownership of the stock in the enterprise, and:

Next, that all the benefit that could be achieved outside of the five per cent to pay on this preferred stock belonged to the common stockholders, or the owners of the homes, the owners of the enterprise, that there should be no such thing as a profit, and there could not be, under the law, unless, as a matter of law, it is deemed a profit but in the minds of the incorporators it was impossible to have any such thing as a profit.

And again:

* * * I am not positive in my testimony on that point, as to whom the money was to be paid back to, but it was to be either to the occupants at a certain time of those houses, so that no one could ever receive any profit out of this enterprise, because I know that the Superintendent who did the work and the Secretary who did the work for months and months, did so without salary. The architects’ times were supplied by Mr. Schuehardt. The Building Inspector did his work without charge, and the Health Commissioner. I never had expected any compensation. It was a semi-public enterprise, to demonstrate in a whole-hearted way that we could prove that anywhere on this continent, if they wished to do as we had done, employers and employees could come together and build homes, without any speculation, without any profit, and receive all the benefit from wholesale production.
That was substantially the theory all the way through, and that was the spirit that enthused everybody to make this a success, and it has attracted attention all over this country.

However mucli we may be impressed with the original intentions and purposes of those who were instrumental in organizing the petitioner, we find as a result of their efforts an existing law, articles of organization, conduct under them and books of account which we can not disregard.

After its organization the petitioner sold preferred stock to obtain money for the purchase of land and the construction and erection of homes thereon. The money thus secured not being sufficient for such purpose, the petitioner borrowed money from a bank or banks. It sold its common stock to prospective tenants. These stockholder-tenants were required to execute an agreement in the form of a lease and subscription to common stock (petitioner’s Exhibit 5). Under these agreements an initial payment and a monthly payment were prescribed, the initial payment being applied as a payment on the subscription for stock.

The fifth paragraph in the agreement providing for the monthly payment does not in express terms designate the monthly payments as rent. In such paragraph, however, the party agreeing to pav such monthly payment is named as lessee and the payments are to continue for the duration of the lease. It does not provide that such payments are to be applied on the stock purchased nor that the monthly payments were to cease when the payments aggregated the total par value of stock subscribed. The seventh paragraph of this agreement provides that “ to secure the payment of all rental payments accruing hereunder, and all debts and liabilities arising because of the relationship created by this instrument ” the lessee grants and gives to the petitioner a lien on all shares of the petitioner in his name on the books of the petitioner for the amount of such indebtedness or liability as may arise hereafter because of the lessee’s failure to comply with the rules, regulations and conditions and covenants set forth in the agreement. The “ rental ” mentioned in the seventh paragraph must therefore refer to the monthly payments provided in the fifth paragraph of the agreement.

Rule A in the agreement provides that all “ rental payments ” must be paid within five days from due date and, if not paid within such time, such payments are to be increased as therein provided. The only payment provided for in the agreement which is to be paid on a dajr certain is the monthly payment provided for in the fifth paragraioh.

The sixth paragraph of the agreement contains the subscription agreement and expressly states the total amount to be paid for the stated number of shares of the common stock of the petitioner subscribed for by the tenant-stockholder, and the amount of the initial payment thereon, and also provides how the balance thereof is to be paid, i. e.:

* * * and the balance thereof from time to time by the application thereon of all dividends declared and paid on any of the said shares of stock provided always that the lessees may make other and additional payments on such subscription, for stock upon such terms and conditions as may be hereafter adopted in that behalf by the company.

Rule E in the agreement provides that resident stockholders coming within the rule “ will have credited to them stock remitted to them during the month of January one per cent of all the monthly payments made during the previous year.” A column on the distribution page or sheet of the pass book has a heading of “ Credit to Upkeep of Property,” which, no doubt, refers to the credit provided for in Rule E. This is followed by four columns with the following headings:

Monthly Payments Applied to Stock
Dividends Paid Up on Stock •
Direct Payments to Stock
Total Credit to Stock

We are unable to find any provision in the agreement itself from which it may be inferred that any part of the monthly payments were to be applied on stock subscriptions except as may be implied from the heading “Monthly Payments Applied to Stock.” The credit of 1 per cent, whether taken out of the monthly payments or out of earnings or profits of the petitioner, was in the nature of a retroactive reduction of rental, or a bonus to the tenant-stockholder who kept the premises in neat condition throughout the year and who made repairs due to causes other than natural deterioration at his own expense.

David M. Harper, bookkeeper and clerk of the petitioner from February 1, 1922, to July 31, 1925, testified that the entries in the pass book presented in evidence and entries made in a tenant-stockholder’s account in the books of account shown to him at the hearing were in his handwriting and that the monthly payments of each and every individual common stockholder were handled in the pass book and on the corresponding account in the books of account of petitioner in the same manner. From his testimony that such entries were in his handwriting and that the entries in the account of a tenant-stockholder in the books of the petitioner and the entries in his pass book were handled in the same manner, we can not assume that the bookkeeper made such entries in the pass books or in the books of account of petitioner arbitrarily or in error or without authority or instructions.

The petitioner in its brief states that “ There was no charge for the use or occupancy of the premises ”; that “ the pass book clearly discloses that no rents were receivable but that a specified amount was payable per month by the subscriber on his common stock liability,” and that “ the petitioner was required ” under section TTTlb (4), upon termination of a lease and cancellation of stock “ to refund to such stockholder c the amount paid thereon (petitioner’s common stock) less any lawful claims of the corporation against said stockholders ’; and that the provisions of this section and refund of the total amount paid in on the stock conclusively rebuts any claim that the payments were or could be rent.”

That rent was to be paid by tenant-stockholders and that the organizers of the petitioner had such payments in mind at the outset, as they were instrumental in drafting the statute and procuring its enactment, is disclosed by section lYYlb (10), supra, which provides that the directors shall fix the value of lots to be used for residential purposes and that thereafter in computing the price to be paid for the rental thereof, a valuation of the lot not exceeding that placed thereon shall be used, and by section lTTlb (2) (c), which empowers the petitioner to lease its property at terms fixed by it,

There is no evidence as to the amounts actually refunded by the petitioner to tenant-stockholders on the termination of leases. There is no evidence that the petitioner refunded all monthly payments to stockholders, together with the initial payment on stock, dividends, the credit of 1 per cent provided for in Bule E, and other payments. The only evidence in the record in this regard is that contained in the assignment to petitioner of 45 shares, which assignment is attached to the inside front cover of the pass book, covering lot 4 in block 9 (petitioner’s Exhibit 5). This pass book discloses that cash payments in the total sum of $1,580, including initial payment of $500 on stock subscription and 24 monthly payments of $45 each, were made to the petitioner. The assignment was executed October 16, 1925, and states a consideration of $829.58 as in hand paid to the tenant-stockholder by the petitioner. The petitioner, therefore, retained $750.42 out of cash payments made by this tenant-stockholder. This does not take into consideration any dividends or other credits to which the tenant-stockholder may have been entitled at that time. There is no evidence as to what disposition was made of the money thus retained by the petitioner, or how this transaction was recorded in its boobs of account.

Section 1771b (4) (chapter 402, supra) provides that the petitioner shall be liable to the stockholder for the amount paid for stock at the termination of his lease. However, under this section, the lawful claims of the corporation against the stockholder could be offset against the amount paid in for stock. Surely a lawful claim against a stockholder would accrue to petitioner if the tenant-stockholder failed to pay rental, to secure the payment of which it was granted a lien upon the stock subscribed.

Dividends" paid to its preferred stockholders were not interest payments on loans as contended by the petitioner. Mobile & Ohio R. R. v. Tennessee, 103 U. S. 486; Fruit Growers Supply Co., 21 B. T. A. 315; Finance & Investment Corporation, 19 B. T. A. 643 aff'd., 57 Fed. (2d) 444; Riverdale Co-operative Creamery Association, 18 B. T. A. 1159; aff'd., 48 Fed. (2d) 711.

Section 202 (a) of the Revenue Act of 1921, and section 204 (a) of the Revenue Acts of 1924 and 1926 provide that the basis for determining gain or loss from the sale or disposition of property acquired after February 28, 1913, shall be the cost of such property. No evidence was presented from which we can determine the cost of the land purchased, the cost of the dwellings erected, taxes or other items capitalized, or any other costs, depreciation, sale price or other items to be considered in computing loss or gain on the sale of property for cash or on land contract. There is no evidence that lot 4 in block 5, together with dwelling thereon, was sold to the tenant-stockholder for $4,500, the amount of the total par value of stock subscribed, or that such amount represented cost of lot and house and estimated carrying charges. We do not know how the monthly payments or amount of stock to be subscribed by tenants were determined. However, in the petition, in Docket Ho. 42635 it is alleged that “ The price fixed for the common stock was equal to that portion of the total cost allocated as the cost of the dwelling desired to be acquired,” and in section 1771b (10), supra, it is provided that in computing the rental a valuation of the lot not exceeding that fixed by the directors shall be used.

From the evidence in the record we are unable to determine the taxable income of the petitioner, except as it appears from the statement of analysis of income per books of the petitioner. There is no evidence from which we can determine the total number of shares of common stock subscribed and the total amounts paid thereon, nor was evidence presented which authorized any assessment upon stock above its par value, or that such assessments were in fact made and paid. In fact, there is no evidence in the record to aid us to determine amounts properly distributable to capital, gross income and deductions except as can be gleaned from the statements of analysis of income per boons (petitioner’s Exhibit 8) and of preferred stock dividends paid (petitioner’s Exhibit 11), the income shown on such statement of analysis of income per books being receipts of petitioner allocated by it on its books of account to income accounts.

Section 213 (a) of the Revenue Acts of 1921, 1924, and 1926 provides that gross income shall include “ gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal growing out of the ownership, or use of or interest in such property; also from interest, rent, * * * or gains or profits and income derived from any source whatever.”

All the income of the petitioner shown on the statement of analysis of income allocated to rents, profit on real estate sales, fines (delinquent rentals), interest earned and discount earned, are within section 213 (a), supra. The item of “Refund of Service to Curb Charge ” was treated as income by the petitioner on its books of account and there is no evidence from which we can determine that this was an error on its part or that it was not in fact income.

The resolutions adopted by the board of directors of petitioner on December 14,1928, and October 30,1930, provide for the distribution to home owners of certain funds designated therein as “ any surplus in the nature of a marginal overcharge, or otherwise,” “ undivided overcharge,” net overcharge,” etc. These resolutions were not adopted in any of the years herein involved but in later years. However, the determination of receipts as income for the purpose of income and profits tax depends upon the manner and circumstances surrounding the receiving thereof and not in the disbursement or distribution or use thereof. Standard Slag Co., 20 B. T. A. 503.

No evidence was presented with respect to real estate taxes or real estate commissions alleged to have been erroneously set up on the books as capital charges and disallowed by respondent as deductions.

Chapter 321, supra ’(section 180.04 (11), Wisconsin Statutes), made provision for the dissolution of housing corporations by resolution of at least a majority vote of all stock, common and preferred, after which vote the affairs of the corporation were to be placed in the hands of a trustee elected by the directors. There is no evidence that petitioner was so dissolved or that any steps were taken to this end except that it sold its realty.

We can not treat the corporation as a mere medium or agent through which the tenant-stockholders transacted business, the agent merely being reimbursed for its expense and the tenant-stockholders, as principals, receiving all profits, which in turn were not profits to them, but a mere reduction of cost. That a corporation is separate and distinct from its stockholders has been recognized by the United States Supreme Court. Eisner v. Macomber, 252 U. S. 189.

The Supreme Court of Wisconsin is of the same view and in In re Gerlach's Estate, 177 Wis. 251; 188 N. W. 94, it states in its opinion therein that it is fundamental that until profits of a corporation are distributed in the form of a dividend or otherwise the stockholder obtains no right or title thereto; that such profits belong exclusively to the corporation and may be retained by the corporation and added to corpus.

The foregoing covers assignments of error (a), (b), (c) and (d) in Docket No. 42635 and assignment of error (a) in Docket No. 46035. Since the burden of proof rests upon the petitioner and since it lias failed to produce sufficient evidence from which we can determine that the respondent erred in his determination of deficiencies in the years 1923 to 1927, inclusive, we must approve such determination.

The petitioner alleged in assignment of error (e) in Docket No. 42635 that the respondent erred in not exempting the petitioner from taxation for the reason that it is a “municipal enterprise.”

Counsel for petitioner, in his opening statement at the hearing in this proceeding, stated that the petitioner was exempt as (1) a domestic building and loan association, (2) a cooperative association and (3) a civic enterprise, and that “ Obviously, it is not a municipal corporation. It may be questioned whether it is a municipal agency, but it is a civic enterprise.”

However, in its brief at the end of its argument with respect to its exemption from taxation as a building and loan association, petitioner refers to the public character of the petitioner and that the provision in the statute (section 1771b (7), supra) authorizing municipalities to subscribe for the preferred stock stamped the entire project as one of a public nature, since municipalities have no power, and none could be delegated to them by the legislature, to use taxes except for public purposes, citing Attorney General v. City of Eau Claire, 37 Wis. 400; and Wisconsin Keeley Institute Co. v. Milwaukee County, 95 Wis. 153; 70 N. W. 68. Though the court in its opinion in the first named case states that the legislature can delegate the power to tax to municipal corporations for public purposes only, it also 'states that the court can not hesitate in holding that, if the-statute under consideration grant power to the city to construct and maintain a dam, for the purpose of leasing the water power for manufacturing purposes, it is a power for a private and not a public use, and can not be upheld.

In Wisconsin Keeley Institute Co. v. Milwaukee County, supra, a law providing for the treatment of habitual drunkards in private institutions at the expense of the county in which they reside was held unconstitutional, the court stating:

* * * We are clearly of the opinion that the act in question is not an exercise of the police power as above defined. On the contrary, it is for private purposes, and to benefit private parties. The plaintiff is a private corporation, organized under the general laws of the state, and conducted for private gain. The mere fact that it is subject to visitation and inspection by public officials does not make it a public institution. * * *

The petitioner herein is a private corporation organized in 1921 under chapter 86 of the Wisconsin Statutes, general incorporation laws of the State of Wisconsin, and under chapter 402, Laws of Wisconsin of 1919, a part of chapter 86, Wisconsin Statutes, 1921, and was engaged in a business of a kind ordinarily carried on for profit. The petitioner was given no authority to levy a tax and the city was not authorized to levy a tax for the use of petitioner. That the city and county were authorized under chapter 402, supra, to subscribe for its preferred stock did not change the character of the petitioner. The fact that persons who were officers and employees of the City of Milwaukee assisted in its promotion and organization, rendered services without receiving compensation therefor from the petitioner, and were directors or officers of the petitioner does not change its character. There is no evidence that certain of these officers • and employees were not required to, and did not render, without charge therefor, the same or similar services to other persons or corporations in the same or similar lines of activity or business. That the officers and employees rendered more or greater services without charge to the petitioner than they would to other private corporations and persons erecting and constructing dwellings is readily understandable from all the facts. Although the city officials and employees, as well as certain citizens who purchased the petitioner’s preferred stock, were interested in the enterprise and regarded it as a civic organization of a public or quasi-public character and the city purchased its preferred stock, is not decisive as to the character of the petitioner. Here, as in Wisconsin Keeley Institute Co. v. Milwaukee County, supra, we have a private corporation organized for private purposes and for the benefit of private parties. See New State Ice Co. v. Ernest A. Liebmann, 285 U. S. 262; also, Uniform Printing da Supply Co., 9 B. T. A. 251; affirmed in Uniform Printing & Supply Co. v. Commissioner, 33 Fed. (2d) 445.

The petitioner, therefore, is not exempt from taxation as a “ municipal enterprise.”

The petitioner contends that it is exempt from income and profits taxes as a domestic building and loan association.

Section 231(4) of the Revenue Acts of 1921, 1924 and 1926 does not define a building and loan association. However in United States v. Cambridge Loan & Building Co., 278 U. S. 55, the Supreme Court of the United States in its opinion states:

* * * The statutes speak of “ domestic ” associations, that is, associations sanctioned by the several States. They must be taken to accept with the qualifications expressly stated what the States are content to recognize, unless there is a gross misuse of the name. * * *

Section 2009 of the Wisconsin Statutes, 1921, a part of chapter 93 captioned “ Mutual Loan and Building Association,” provided that the words “ building and loan association ” should form a part of the name of every local ’association thereafter organized and that no corporation not organized under the statutes applicable to such associations should be entitled to use a name embodying such words. Section 2010, Wisconsin Statutes, 1921, provided that the articles of incorporation, amendments thereof and all papers relating thereto should be filed with the commissioner of banking, who might issue the certificate of incorporation, and fixed the fee therefor at $10, which was later increased to $25. Section 2011 which stated the powers of such associations provided in subsection (3) thereof as follows:

To acquire, by purchase or otherwise, only such real estate as may be necessary for the protection of its securities and the collection of any claims or debts due to it; and all the same shall be sold within ten years from acquiring title thereto.

Sections 2014^-12,13 and 14, provided that such associations should be under the control of the commissioner of banking. The commissioner of banking was required to cause the affairs of such associations to be examined, and such associations were required to keep their books and accounts in such manner as to enable the commissioner to readily ascertain the true condition of their affairs. These statutes as amended from time to time are now incorporated in chapter 215, Wisconsin Statutes, 1929, under the caption “ Building and Loan Associations,” and the provisions above referred to were retained in substance.

The petitioner was organized in 1921 under chapter 86 of the Wisconsin Statutes and in particular chapter 402, Laws of Wisconsin, 1919, section 1771b of chapter 86. There is no evidence that the petitioner was organized as a building and loan association, that it complied with the laws of the State of Wisconsin relating thereto, or that it was recognized or sanctioned as such by the State of Wisconsin.

In United States v. Cambridge Loan & Building Co., supra, the court further states:

The rudimentary form of such associations is supposed to be a society raising by subscription of its members a fund for making advances to members in order to enable them .to build or buy houses of their own. A member is entitled to borrow on sufficient security an amount equal to his subscription for shares and when the shares are paid up by the installment payments required and the profits of the company his indebtedness is cancelled. * * *

Petitioner contends that the use of the words “housing corporation ” in the statute is equivalent to denomiating petitioner a building and loan association. We do not concur in that view, but are of the opinion that, if the Legislature of Wisconsin had intended such corporation to be classed as a building and loan corporation, it would have so stated or made chapter 402, Wisconsin Laws of 1919, a part of chapter 93, Wisconsin Statutes, 1921, relating to building and loan associations.

That such was not the intention of the Wisconsin Legislature is shown not only by the inclusion of section 1771b in chapter 86 of the Wisconsin Statutes, but also by the amendment of section 1772 (a) (9) by chapter 402, Laws of Wisconsin of 1919. This section, prior to such amendment, provided that no filing fee was required to be paid by corporations organized without capital stock or exclusively for educational, benevolent, charitable and reformatory purposes, the articles of which provided that no dividends or pecuniary profits be declared or paid to the members thereof. The amendment added to the above list of corporations housing corporations formed under section 1771b, supra.

If, as contended by the petitioner in its brief, the Wisconsin Legislature, in thus amending section 1772 (a) (9), placed housing corporations in the same class with educational, benevolent, charitable and reformatory corporations, such amendment, in our view, tends further to show an intention on the part of the legislature not to class housing corporations with building and loan associations. That building and loan associations and educational, benevolent, charitable and reformatory corporations, the members of which are not to receive any dividends or pecuniary profit, are within two different and distinct classifications, is obvious.

We are of the opinion that the petitioner is not a building and loan association and that the determination of the respondent in this respect must be approved.

The petitioner further contends that it is exempt from taxation as a civic league.

Section 231 (8) of the Revenue Acts of 1921, 1924 and 1926 provides that civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare, are exempt from taxation under such acts.

Two conditions, therefore, must exist to entitle a civic league to exemption from taxation. Although such organization may be operated exclusively for the promotion of social welfare, yet, if it be organized for profit, it is not exempt from taxation.

Since we have held that the petitioner was organized for profit, it does not come within the above exemption, even though it may have been operated exclusively for the promotion of social welfare, which we do not determine.

The petitioner contends that it is exempt from taxation under section 231(11) of the Revenue Act of 1924 and section 231(12) of the Revenue Act of 1926, as an association within the meaning of such sections organized and operated on a cooperative basis for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to them at actual cost, plus necessary expenses.

The above sections exempt “ farmers’, fruit growers’ or like associations ” from taxation under certain specified conditions, and to be exempt thereunder the petitioner must not only come within the classification of associations enumerated, but must also meet the conditions prescribed in the statute. It is a well recognized rule of construction, known as the doctrine of ejusdem generis,” that where general words follow particular words or enumeration of particular classes of persons or things, the former must be construed as applicable to the things or persons particularly mentioned. Prussian v. United States, 282 U. S. 675 ;36 Cyc. 1119-1120, and cases cited.

It seems to us that by the inclusion of the word “ like ” it was intended that such rule of construction should be applied, thus limiting the associations exempt from taxation under such section to farmers’, fruit growers’ and other associations of “ like ” kind, nature or character.

The petitioner relies particularly on section 231(12) of the Revenue Act of 1926 and emphasizes the fact that chapter 402 of the Wisconsin Laws of 1919 provides that “ no dividend shall be paid in any year to a stockholder not a tenant of the corporation exceeding 5 per cent of the par value of the stock held by him.” Section 231(12), supra, provides that exemption shall not be denied because the association has capital stock if the dividend rate does not exceed 8 per cent per annum. However, there is added to such provision in the conjunctive the following:

* * * and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; * * *

Although chapter 402, supra, did not limit or restrict the leasing of homes constructed and owned by the petitioner, to its common stockholders, the record discloses that the homes were leased only to subscribers to the common stock. The preferred stock was sold first to acquire capital with which to purchase land and to commence operations. The authorized capital consisted of 2,500 shares of preferred stock and 2,500 shares of common stock. The holders of preferred stock were entitled to a vote for each share of stock held by them, under chapter 402, supra. All the preferred stock was issued and outstanding, but we have no information as to the total number of shares of common stock paid for and outstanding or the total number subscribed for. In any event the authorized preferred shares were equal in number to the authorized common shares. At the outset the preferred stock had voting control of the petitioner and from what appears in the record it may be inferred that voting control remained in the preferred stock throughout. Mayor Hoan testified that “ the preferred stock was to have a vote and manage the corporation, and the common stock, as it was paid for, was to have votes/ so that ultimately the common stock would become the owners of the enterprise.” This expectation was not realized, as it was found necessary to recall and cancel all common stock.

Assuming that the common stockholders were “ producers ” within the meaning of section 231(12), supra, which they were not under the facts in this proceeding, it can not be maintained under the proof in this proceeding that substantially all of the capital stock was owned by producers who purchased their supplies or equipment from the petitioner. A “ producer ” is “ one who produces,” “ one who grows agricultural products, or manufactures crude materials into articles of use.” Webster’s New International Dictionary, 1929. We do not believe that any one would seriously contend that the stockholders of petitioner, either preferred or common, were producers as used in section 231(12), supra.

In its brief the petitioner states that “ It is true it did not purchase supplies and equipment .in the strict sense, but it did purchase and construct homes for the use of members and turned over the same to them at actual cost plus necessary expense.” Suffice it to say that statutes granting exemption from taxation are strictly construed and the burden is upon the petitioner to show that it comes within their provisions. Northwestern Drug Co., 14 B. T. A. 222; Farmers Co-operative Milk Co., 9 B. T. A. 696.

In our opinion the petitioner is not an association exempt from taxation within the purview of section 231(11) of the Revenue Act of 1924 or section 231 (12) of the Revenue Act of 1926.

In the deficiency letter mailed December 11, 1928, a penalty for delinquency in filing the return was asserted for 1925 and 1926, since no return was filed for those years, and in the deficiency letter mailed August II, 1929, a like penalty is asserted, since the return for the calendar year 1921 was filed on January 18, 1929, instead of on or before March 15, 1928.

No error in this resjiect was assigned by the petitioner in its petition in either Docket No. 42635 or Docket No. 46035. No evidence was produced showing the imposition of such penalty to be improper. The action of the respondent in asserting penalties for the years 1925, 1926 and 1927 must, therefore, be approved. 112 West 59th St. Corporation, 23 B. T. A. 767; C. C. Humphries et al., 17 B. T. A. 811; Hammond L. Kington, 8 B. T. A. 981.

Reviewed by the Board.

Judgment will ~be entered for the respondent.

Matthews concurs in the result.

Lansdon and Goodeich dissent.


source: Caselaw Access Project

author: Aüundell:

license: Public Domain

text:
    Washburn Wire Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21710.
    Promulgated June 17, 1932.

      Albert R. Palmer, Esq., and Harry W. Stelle, Esq., for the petitioner.

      Bruoe A. Low, Esq., and Frcmeis S. Gettle, Esq., for the respondent.
   OPINION.

Aüundell:

Petitioner’s claim for additional depreciation allowances is confined to machinery of the American Electrical Works on hand January 1, 1912. As to this item petitioner contends that, having taken but 76 per cent of the cost thereof prior to 1921 — 5 per cent in each of the years 1912 and 1913, 6 per. cent in 1914, and 10 per cent each year thereafter to and including 1920 — it is entitled to a rate of 10 per cent in 1921 and 1922 and the remaining 4 per cent in 1923, based upon cost of $652,245.21 at January 1,1912. The respondent allowed depreciation at the rate of 10 per cent for half of 1921 and declined to make further allowances, on the ground that the useful life of the assets expired not later than 1921.

Petitioner’s theory may be sound, but it is not supported by facts. The evidence does not show the time of acquisition, the March 1, 1913, value of the machinery acquired before that date, the useful life, or the machinery on hand in the taxable years. Such evidence as the record contains on this question is very unsatisfactory. The witness on this issue testified that some of the machinery in respect of which depreciation is now claimed might have been in use as long as ten years prior to January 1,1912. As to such machinery, its ten-3>ear life, which petitioner says is a proper average, was exhausted long before the taxable years. The witness further testified that the policy of the company was to record discards of machinery “ valued in the thousands.” Shortly thereafter he was asked whether the policy was to record “ large discards of, say, roughly, $1,000,” and in answer to this he said, “ I could not definitely state what the policy would have been in those years.” There is no evidence at all of the quantity of machinery discarded prior to the taxable years, and so even if the so-called cost at January 1, 1912, could be accepted as a starting point, we are still without a basis for computing depreciation in the taxable years. The witness above referred to is assistant treasurer and comptroller of petitioner; he has been connected with petitioner or its predecessors since 1900'; and since 1915 the records of the American Electrical Works have been made under his direction. In this situation it seems to us that a more satisfactory account of the machinery on which depreciation is claimed might easily have been produced. On the record made we do not feel warranted in disturbing the respondent’s determination as to depreciation on the American Electrical Works machinery.

In an amended answer respondent concedes that his allowance for depreciation on tenement houses of the American Electrical Works should be increased $1,398.65 for each of the years 1922 and 1923. Except for these adjustments, the respondent’s determination of depreciation will not be disturbed.

In addition to the depreciation allowances, the consolidated net loss in 1921 and net income in 1922 is affected by the proper disposition to be made of the pa3>ments made to petitioner in each of those years by the New York and Rhode Island corporations out of gross income under the 1916 and 1919 contracts.

The consolidated returns filed by the affiliated group for 1921 and 1922 treat these items as income of petitioner and deductions of the paying corporations. The respondent made no alterations in the returns in respect to the manner in which petitioner treated the payments. The petitioner is now contending that the items are not business expenses of the New York and Rhode Island corporations, but dividends, and, as such, should be disallowed as deductions to the paying corporations and deducted from the gross income of petitioner under the provisions of section 234(a) (6) of the taxing act. The respondent, on the other hand, asks that we affirm his action in not disturbing the items as returned, on the ground that they represent payments of royalty, and, as such, business expenses in accordance with Kentucky Electric Lamp Co., 14 B. T. A. 603.

We are not aware of the designation given the payments in the returns or how respondent labeled them in his computation of the tax liability''. The conclusion of respondent that they should be characterized as royalty payments is not discussed in his brief, he apparently having accepted it as a fact in view of the manner in which the amounts were termed in the agreements. From the showing made here it is evident that the sums were in reality distributions of profits.

Under the agreements there was an outright sale of the sellers’ assets in the respective states, including the right to use the corporate name, trade-marks, trade names, and good will built up in the states, for all of the capital stock of the buyers, and in the case of the New York corporation, all of its 6 per cent bonds in the amount of $1,500,000. Each buyer also agreed to pay to the sellers for the exercise of the rights conveyed sums termed royalties and based upon a percentage of gross income computed in a specified manner. All of the property, tangible and intangible, was unconditionally conveyed. Manifestly, the purpose of the agreements was to transfer the business of the sellers in the respective states-in exchange for all of the stock of the buyers. The only rights acquired not actually transferred were agreements on the part of the sellers to make advances to the buyers from time to time for use as working capital.

The petitioner was in control of the transactions at all times. Everything points to the fact that the New York and Rhode Island corporations were organized by the parent for the express purpose of taking over the business being conducted in such states, and the evidence is that the directors of petitioner fixed the amount to be paid by the New York corporation. Thus it appears that the agreements did not result from negotiations conducted at arm’s length, but were dictated altogether by the parent corporation.

In our interpretation of the agreements we are aided by the testimony of J. E. Hayward, petitioner’s assistant treasurer and comptroller, who took part in the discussions at the time the agreements were made and was a member of the board of directors of the Maine corporation that authorized the first contract. His uncontradicted testimony is that the purpose of inserting the so-called royalty provisions in the agreements was to obtain the larger part of the earnings of the subsidiaries without a declaration of dividends.

It does not appear that the parent corporation was performing any service for the subsidiaries to form a basis for the payments other than the purchase of material required to produce their goods, and the charges were not imposed for the use of property belonging to the parent corporation, as the assets covered by the agreements were unconditionally transferred. Certainly no corporation exercising independent action would have undertaken the obligation to pay the sums paid for the mere right to receive advances for working capital when needed and to have another act as its purchasing agent for material. The agreements, construed in the light of surrounding facts, are contrary to such a conclusion. In our opinion the payments should be regarded as distributions of profits, and accordingly eliminated as deductions from gross income of the paying corporations and excluded from the net income of the petitioner by treating them as dividends under section 234 (a) (6) of the act.

For 1921 the respondent determined that each of the subsidiaries sustained a net loss, the total of the losses being $41,870.56 in excess of his determination of net income of the petitioner. For 1922 he found that the American Electrical Works and petitioner had net income and that the other subsidiary corporations had net losses. From the resulting consolidated net income of $417,989.65 he deducted the whole of the 1921 consolidated net loss. He now claims such action to be error and asks that the amount be limited to the proportion that the net losses sustained by the corporations having net income in 1922 bears to the whole net losses, in accordance with the rule announced in Swift & Co. v. United States, 38 Fed. (2d) 365. If tlie adjustments to be made in 1921 and 1922 in conformity with this opinion, including the recomputation of the consolidated net loss in 1921 by eliminating the dividend payments, result in a consolidated net loss, the same should be applied against any 1922 net income in accordance with the /Swift case. Kaiwiki Sugar Co., Ltd., 21 B. T. A. 997; Gulf, Mobile & Northern Railroad Co., 22 B. T. A. 233.

The consolidated return filed for 1922 was accompanied by information returns executed by each subsidiary stating that none of the tax should be assessed against it. The consolidated return was signed by Frank C. Weidenmiller as vice president and Frank N. Phillips, as treasurer. Phillips was also president of petitioner in 1922. The returns of the Rhode Island and. New York corporations were executed by the same persons in the same capacities. O'f the other subsidiary corporations, only the American Electrical Works had net income and its return was signed by Phillips as president, ‘and J. E. Hayward as treasurer. The tax of $24,780.32 shown to be due on the consolidated return was paid by the petitioner in 1923 in quarterly installments.

The respondent has found petitioner to be liable for the tax of the affiliated group for 1922, and this determination, in addition to being presumptively correct, is supported by the information returns filed by the several companies. The burden of proving the existence or nonexistence of an agreement for allocation of the tax is on the petitioner. Morganite Brush Co., 24 B. T. A. 776; Centrad Market Street Co., 25 B. T. A. 499. This burden it has not met. J. E. Hayward, vice president and comptroller of petitioner, testified that there was no written agreement among the companies requiring petitioner to pay all taxes. Whatever force his testimony might have in other circumstances is overcome by the information returns-filed by the several companies. We accordingly hold that petitioner is liable for any deficiency in tax for 1922. Cf. Bermont Oil Co., 22 B. T. A. 182; Woodside Cotton Mills Co., 13 B. T. A. 266.

For the year 1923 a different situation exists. The parties agreed that for that year the subsidiary corporations filed information returns and it appears from the statement attached to the deficiency notice that the respondent examined such returns in determining the deficiency asserted. Those returns, however, were not placed in evidence and we have no knowledge of their contents. From the respondent’s conduct in sending deficiency notices both to the petitioner and to two of the subsidiaries the fair inference is that there was no agreement that petitioner was to bear the tax of all. Certainly in these circumstances there can be no presumption that respondent acted rightly in asserting the whole deficiency against the petitioner. As to the year 1923 there is nothing to contradict Hayward’s testimony that no written agreement existed. We- are accordingly of the opinion that for 1923 the tax should be apportioned to the several companies on the basis of the net income properly assignable to each. Section 240(a), Revenue Act of 1921. Cf. Aragon Mills, 17 B. T. A. 257.

Holding as we do that for 1923 petitioner is liable only for the portion of the deficiency which is attributable to its own net income, there is no occasion for considering the question of whether the deficiency asserted by respondent should be reduced by the deficiencies asserted against and paid by the subsidiaries based on their net income.

Decision will be entered xrnder Rule 50.


author: GoodRich:

text:
    The Pictorial Review Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43995.
    Promulgated June 17, 1932.

      Nelson T. Hartson, Esq., and James G. Rogers, Esq., for the petitioner.

      T. G. Hision, Esq., and T. M. Leinenkugel,Esq., for the respondent.
   OPINION.

GoodRich:

That the filing of a separate return by a taxpayer corporation constitutes a binding election under section 240, Revenue Act of 1924, and that, in event of the filing of a separate return by one of a group of affiliated corporations, the liability of each member of the group must be determined upon a separate basis, is so firmly established by decisions of this Board and of the courts as to make citations here unnecessary. The election, once made, must be adhered to until permission to change the basis is requested and received of the Commissioner.

Petitioner contends that the filing of the separate return by The Excella Corporation for the year 1924 did not constitute an election — the exercise of the option permitted by the statute — for the reason that, in view of the construction placed upon the statute by the Commissioner as published in his regulations and rulings of his bureau, there existed grave doubt as to whether these corporations were affiliated and, therefore, it had no choice in the matter, but was forced to exclude from the consolidated return of the affiliated group the income of The Excella Corporation and to report it upon a separate return; citing Dexter Sulphite Pulp & Paper Co., 23 B. T. A. 227; Torrington Co. of Connecticut, 21 B. T. A. 1431, and Duplex Envelope Co., 21 B. T. A. 692.

Respondent, although forced to repudiate his interpretation of the statute (T. D. 4100, C.B. VI-2, p. 129; G. C. M. 8982, C.B. X-l, p. 250) which was the sole cause for the filing of the separate return by The Excella Corporation, and now admitting that The Excella Corporation and petitioner ivere affiliated, nevertheless maintains that an election was made by. the filing of that return, and, having been made, it is binding, and petitioner can not now include the income of The Excella Corporation for the year 1924 with its own since it has neither requested nor received permission to change the basis.

The cases relied upon by petitioner may be distinguished from the case at bar. In Duplex Envelope Co., supra, it was held that, because the company lay dormant during the year in controversy and filed no return, it was not faced with the necessity of making an election with respect to the basis upon which it should report its income until the succeeding year, when it chose to file upon the consolidated basis. In the Torrington case it was held that the return filed was a consolidated return. The facts concerning ownership of the several corporations were in doubt in Dexter Sulphite Pulp & Paper Co., supra, and for that reason it was held that the filing of a separate return by one of the companies did not constitute an election for the group, since it was impossible at that time to determine the ownership of the companies, and, in turn, thus impossible to determine their affiliated status.

In the instant case, the facts concerning ownership were not in doubt. They were established and the only doubt which existed concerned the proper interpretation of the statute. Petitioner’s argument that this doubt was sufficient to bar it exercising a free choice and prevent the filing of the separate return by The Excella Corporation from constituting an election under the statute, is fully answered in tire decision in Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718; affirming 16 B. T. A. 610, a case arising under similar provisions of the Eevenue Act of 1921, wherein the court said:

When appellant came to make out and file its return for the year 1922, it was entitled, if affiliated with the Times-Record Company, to file, either a separate o'r consolidated return. The ruling of the Commissioner upon the Questionnaire in the prior year did not prevent or impair the free exercise of that right. Such a ruling does not have the force of law, nor are the courts bound by it. United States v. Hurst, 2 F. (2d) 73. The status of appellant and the Times-Record Company was to be finally determined by the courts, and not by the commissioner. Fidelity Nat. Bank v. Commissioner, 39 F. (2d) 58, 61. Accordingly it was the right of appellant if affiliated to file a consolidated return if it so elected, and to appeal to the Board of Tax Appeals and to the courts for a judicial determination of its rights. * * *
The courts have uniformly held that the right of choice or election to file one or another sort of return is exercised by filing’ the return. Lucas v. Nat. Baseball Club, 42 F. (2d) 984; Alameda Inv. Co. v. McLaughlin, 33 F. (2d) 120; Levi Strauss Realty Co. v. United States, 41 F. (2d) 55.
*******
Moreover, it is held in Alameda Inv. Co. v. McLaughlin, supra, a case bearing-some analogies with this, that a refusal of the Commissioner of Internal Revenue to permit corporations to file a consolidated return of income under Revenue Act of 1921, sec. 240 (a), 42 Stat. 260, for an income year in which separate returns had theretofore been filed, is not a breach of a legal obligation and not subject to review, irrespective of the right of such corporations to have filed a consolidated return in the first instance. This conclusion, based upon the terms of section 240 (a), supra, is manifestly correct, and is conclusive in this case.

The inequities of this case are apparent, but in applying the taxing statutes we can not always do equity, and we are constrained to hold that respondent did not err in refusing to determine petitioner’s liability for the year 1924 upon a basis of consolidation, affiliating petitioner with The Excella Corporation.

‘With respect to the second issue, we have previously held that where bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated over the life of the bonds in determining net income. Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 988; Kansas City, Southern Ry. Co., 16 B. T. A. 665; Terminal Ry. Association of St. Louis, 17 B. T. A. 1135. In accordance therewith the amount of $17,062.52, being the proper proportion of said discount applicable to the year 1924, should be deducted from petitioner’s income for that year. We sustain respondent’s action in disallowing as a deduction the sum of $464.13 which was charged off in excess of $17,062.52. Beyond the statement that this difference represents bond premiums of some sort, the record is silent with respect thereto.

We hold petitioner entitled to a total deduction from income for the year 1924 in the amount of $4,158 on account of Federal capital-stock tax accrued for the period ended June 30, 1925. That tax is a special excise tax, levied by section 700 (a) (1) of the Revenue Act of 1924. Special taxes are payable in advance (see section 3173, TI. S. R. S.) and so accrue, become due and are payable as of the first day of the taxable period — in this case July 1, 1924. The fact that the exact amount of petitioner’s liability therefor was not determined until after the close of the taxable period is not controlling. The full amount of such liability is a proper deduction for the year 1924, petitioner keeping its accounts and making its returns on the accrual basis. See Borden Mfg. Co., 6 B. T. A. 276; Kossar & Co., 16 B. T. A. 952; Brooklyn Union Gas Co., 22 B. T. A. 507.

Judgment will be entered under Rule 50.


author: Smith :

text:
    George N. Crouse, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43446, 51419.
    Promulgated June 20, 1932.

      Francisco Penberthy, Esq., for the petitioner.

      Garl R. Perkins, Esq., for the respondent.
   OPINION.

Smith :

The evidence refutes the respondent’s reasons for disallowing the claimed deductions for losses upon the sales of stock in the taxable years before us. The sales were made “ with good faith; without fraud or deceit.” Cf. Corrado & Galiardi, Inc., 22 B. T. A. 847. Thereafter, the petitioner had no interest in or control over the stock sold. Likewise, the stock had not become worthless prior to 1926 or in the years under consideration; the Crouse Grocery Company was actively engaged in business and there had been no liquidation of its affairs. The stock may have depreciated considerably in value, but the petitioner could not, under the statute, take a loss unrealized by a sale or other disposition of the stock. As we said in James 8. McGandless, 5 B. T. A. 1, 5:

* * * It is perfectly legal and proper for a taxpayer to sell such assets at a price representing their reduced value and thus to sustain a deductible loss which is allowed him by the statute. United States v. Isham, 17 Wall. 496; Appeal of The Pennsylvania Co., etc., 2 B. T. A. 48; Appeal of Benjamin T. Britt, 2 B. T. A. 53; Appeal of Harold B. Clark, 2 B. T. A. 555.

In computing the deductions allowable under the statute (section 214 (a) (5) of the Revenue Acts of 1924 and 1926), the basis to be used for the stock acquired before March 1, 1918, is its cost or fair market value on that date, whichever is greater (section 204 (b) of the Revenue Acts of 1924 and 1926), and the basis to be used for the stock acquired by purchase after that date is its cost (section 204 (a), Revenue Acts of 1924 and 1926). The petitioner has established only the cost, thereby waiving any benefit that might result from proving a March 1,1913, value in excess of the cost of the stock acquired prior to that date. Petitioner has not identified the one share of common stock purchased in 1920 for $80 as being in any particular lot sold; because of his failure to so identify this share, it will be allocated to the lot upon the sale of which he is claiming the greatest loss, thus bearing “ down heavily upon the petitioner whose duty it was to prove ” the larger loss, if larger loss there was. Cf. American Cigar Co., 21 B. T. A. 464, 490. This allocation will be in accord with the “ first in, first out ” rule, since petitioner sold 848 shares of this stock and we have evidence as to the time of purchase of only 601 shares of this stock. Cf. ’William P. Jenks, 22 B. T. A. 910. The basis for computing the loss upon the sale in 1928 of the preferred stock which had been acquired by petitioner under the will of his uncle is its value “ at the time of the distribution to the taxpayer” (section 113 (a) (5), Revenue Act of 1928). This value has been found to be $80 per share. The deductible losses should be allowed accordingly. Cf. J. Harvey Ladew, 22 B. T. A. 443; Shepard Co., 22 B. T. A. 1368; A. J. Wallace, 23 B. T. A. 858; Deeds v. Commissioner, 47 Fed. (2d) 695.

From the record we can not determine that the respondent erred in disallowing the deduction of $5,465.45 claimed as a bad debt in 1925. The evidence tends to support the petitioner’s contention that this amount was the net balance of the judgment and account against Marlette Crouse, petitioner’s brother, who died in 1925, leaving an insolvent estate. Petitioner testified that he had advanced considerable money to his brother, frequently extricating him from social and financial difficulties. Money so advanced was repaid from trust funds payable to Marlette Crouse from time to time, but in 1918 the petitioner assigned the account against his brother to H. L. Benedict, who procured a judgment against Marlette Crouse, which was assigned to the petitioner. The earnings of Marlette Crouse were garnisheed almost up to the time of his death in partial satisfaction of the judgment. The unpaid balance on the judgment and the $5,500 (one-half of the difference between the 1910 price placed upon the West Genesee Street property and what it sold for in 1916) charged to Marlette Crouse as per the 1910 agreement, make up the amount of the alleged bad debt. There is no explanation of the hiatus between the amount claimed as a deduction for a bad debt and the $5,500 plus the undisclosed balance due on the judgment. While the record sufficiently establishes the insolvency of the estate of Marlette Crouse, it does not show that the petitioner’s claim against the estate was ever established. Furthermore, to allow the claimed deduction would in effect allow the petitioner to deduct as a bad debt the amount which he charged against Marlette Crouse upon the West Genesee Street transaction, which has not been shown to have ever been included in gross income; unless reflected in income, such accounts are not deductible as bad debts. See Searles Real Estate Trust, 25 B. T. A. 1115. In the circumstances, the respondent’s disallowance of the claimed deduction is sustained.

Judgment will J>e entered under Rule 50.


author: Van Fossan:

text:
    Everett E. Kent, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39576, 42589, 46064.
    Promulgated June 21, 1932.

      Everett E. Kent, Esq., pro se.

      O. C. Holmes, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner contends that the amount he received under the will of Herbert A. Wilder was a legacy of a specified sum and as such should be excluded from his income, as provided by section 213 (b) (3) of the Revenue Acts of 1924 and 1926, which reads as follows:

(b) The term “gross income” does not include the following items, which shall be exempt from taxation under this title.
*******
(3) The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

The petitioner asserts that the case at bar is governed by the decision of the United States Supreme Court in Burnet v. Whitehouse, 283 U. S. 148; affirming 38 Fed. (2d) 162, which in turn affirmed our decision in Ronald, De Reuter et al, 7 B. T. A. 600. In that case the will of James Gordon Bennett created twenty or more annuities, including item “ Tenth: I also give and bequeath to the said Sybil Douglas, wife of William Whitehouse, an annuity of Five thousand dollars.” It also provided that “ all annuities hereby given shall commence at the time of my death and be payable in equal parts half yearly except as hereinafter specifically mentioned ” and authorized the establishment of a memorial home as the residuary legatee. The annuity for Mrs. Whitehouse was satisfied from the corpus of the estate prior to November 14, 1920, and afterwards out of income derived therefrom. On December 30,1920, the executors permanently set aside for the memorial home a large amount of interest-bearing securities “ but subject to taxes, annuities and other charges.”

The court held that the bequest was a gift not depending upon income, but was a charge upon the whole estate during the life of the annuitant, to be satisfied like any ordinary bequest and payable at all events.

The respondent relies upon Irvin v. Gavit, 268 U. S. 161, in which the bequest to Gavit was to be paid out of income from a definite fund, and upon Beatty v. Heiner, 17 Fed. (2d) 743; aff'd., 276 U. S. 598, in which separate funds were established from which sufficient income would be produced to pay each annuitant. In both cases the funds from which the annuities were paid were ear-marked as income-producing and the annuities were payable only from income of the estate.

We agree with the contention of the petitioner. The only variation between the WMtehouse case and the case at bar is in form of language. The Wilder will provided that certain charges against the trust fund and the annuities named should be paid “ from the income and so much of the principal of the trust fund as may be needed or required from time to time.” In the WMtehouse case the source of payments was not specified. This we regard as a distinction without a difference. As held in the WMtehouse case, the fundamental factor is that the annuity was a charge upon the corpus of the trust fund, to be paid irrespective of whether the income would be sufficient to meet the charge or a part of the principal would be required to complete the annuity payments.

The provision of the testator that annuity payments should be made first from income and then from the corpus is merely an expression of the normal procedure in the administration of estates, particularly under the requirements of Massachusetts law. See Ronald De Reuter et al., supra. It has no broader significance. If he had limited the payment of the petitioner’s annuity to the income arising from a definite fund or had confined the payment thereof solely to the income from the estate or trust funds, the principle set forth in Irvin v. Gavit might be controlling. But in the WMtehouse case the Supreme Court said:

Irvin v. Gavit is not applicable. The bequest to Gavit was to be paid out of income from a definite fund. If that yielded nothing, he got nothing. This court concluded that the gift was of money to be derived from income and to be paid and received as income by the donee. Here the gift did not depend upon income but was a charge upon the whole estate during the life of the legatee to be satisfied like any ordinary bequest.
An attempt is made to strengthen the position of the Commissioner by reference to section 219, Act of 1921, which declares that the tax imposed by sections 210 and 211 shall apply to the income of estates, including “income which is to be distributed to the beneficiaries periodically . . . .” But clearly enough, we think, this section applies only to income paid as sue!) to a beneficiary. And, as above shown, the sums received by Mrs. Whitehouse were not gifts to be derived from and paid out of income, nor were they received as such by her.
The exemption in section 218 is plain and should not be destroyed by any strained construction of general language found in section 219.

In the Revenue Acts of 1924 and 1926 the corresponding phraseology is found in section 219 (a) (2), which reads as follows:

(a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including—
* * * ❖ # *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; * * *

For the purposes of the present consideration the word currently ” is similar to the word “ periodically.”

It is easily conceivable that the income from the trust fund may not at all times be adequate to pay the fixed charges against it, including the annuities. In such an event (which may have been anticipated by the testator) the corpus of the trust fund must be invaded in order that the annuities may not fail. It would not be contended that the annuities so paid would be subject to tax. Thus the fortuitous circumstance that the trustees paid to the petitioner his annuity from funds received as income by the estate is not determinative of the true nature of the bequest. “It would be an anomaly to tax the receipts for one year and exempt them for another simply because the executors paid the first from income received and the second out of the corpus.” Burnet v. Whitehouse, supra. In a case of this character the purpose and intent of the testator must control our decision. Charles P. Moorman Home for Women v. United States, 42 Fed. (2d) 257. We conclude that it was the intent of Herbert A. Wilder that the annuities should become charges upon his entire estate, including the corpus and the income arising therefrom. It follows that they are not taxable.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Van Fossan :

text:
    Boston Safe Deposit and Trust Company and Everett E. Kent, Surviving Executors of the Estate of Herbert A. Wilder, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48149, 57430.
    Promulgated June 21, 1932.

      Harris E. Gilman, Esq., for the petitioners.

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

Van Fossan :

The petitioners’ first contention is that the distribution made by the trustees of the Wilder estate to the annuitants named in the sixth item of the Wilder will constituted deductions allowable under the provisions of section 219 of the Revenue Act of 1926.

The pertinent portions of that section follow:

(a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including—
* * * * * * *
(2) Income which is- to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
* * * * * ' * *
(b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that—
*******
(2) There shall 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, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, 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. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year;
(3) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated there shall 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

It is stipulated that the funds from, which the annuities were paid were income to the petitioner. All such income is subject to taxation under section 219 (a) and its various subdivisions. It is obvious, therefore, that in order to obtain a deduction the petitioners must bring themselves strictly within the above provisions defining it— otherwise such income remains taxable. The petitioners contend that the deduction claimed in the instant case may be taken either under paragraph (b) (2) or paragraph (b) (S) of that section.

Section 219 (b) (8) establishes two conditions under which it becomes operative, (1) the income must be received by the estates of deceased persons during the period of administration or settlement of the estate or (2) the income must be either distributed to the beneficiary or accumulated, in the discretion of the fiduciary. Neither condition exists in the case at bar. The executors have paid over current income to the trustees who, under the direction of the sixth item under the will, executed the trust therein created. The fiduciaries have no discretion in the matter. After having paid the specific legacies contained in the will (and such legacies have all been paid) together with the expenses of administration and the charges against the estate (and such payments have been made), the petitioners must pay to the trustees and they to the annuitants named in paragraph (c) the sums set forth therein. Thus, neither the first nor the second condition has been met and section 219 (b) (3) is not applicable.

Paragraph (b) (2) of section 219 permits a deduction from income of the amount of the income which is to be distributed “ currently by the fiduciary to the beneficiaries.” The petitioners assert that the annuities paid under the sixth item are such distributions. In Everett E. Kent, 26 B. T. A. 482, promulgated this day, we have held that the amount of the annuities paid to him as a beneficiary under the said sixth item and representative of all other annuitants thereto, constituted a gift or bequest payable in installments and was not taxable to him as income. Paragraph (b) (2) when read in connection with paragraph (a) (2) clearly contemplates that deductions may be allowed only when they constitute income to the recipients. Julia Butterworth, 23 B. T. A. 838; Frank Pardee et al., 23 B. T. A. 846; Estate of T. S. Martin, 24 B. T. A. 862; Fidelity-Philadelphia Trust Co., 25 B. T. A. 1359. Hence, since the annuities paid to Kent and others were not income received by them as such they are not deductible under section 219 (b) (2). See Burnet v. Whitehouse, 283 U. S. 148.

The petitioners’ second contention is that all income received by them in excess of the amounts required to pay fixed charges and annuities may be taken as a deduction under the provisions of section 219 (b) (1) of the Revenue Act of 1926, which reads in part as follows:

(1) There shall be allowed as a deduction (in lieu of the deduction authorized by paragraph (10) of subdivision (a) of section 214) any part of the gross income without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214, or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit; * * *

Such part of the petitioners’ gross income, therefore, as is subject to deduction under this provision must be paid during the taxable year or permanently set aside for the uses set forth in section 214 (a) (10) or for certain charitable purposes, pursuant to the terms of the will or deed creating the trust. It was stipulated that the fourteen institutions named in item six (g) of the Wilder will are such charitable institutions as are contemplated in that section. The petitioners do not claim that any portion of their income was paid to the charitable organizations named in the will during the taxable years, but they do assert that when they retained the surplus over the amounts paid for fixed charges and to annuitants, they accumulated ” such excess for the benefit of the charities named and thus permanently set it aside “ pursuant to the terms of the will or deed creating the trust.”

It is obvious that the intention of the testator and not the acts, judgment or interpretations of the trustees must determine this issue. The Wilder will provided that after the death of the decedent’s last surviving daughter all the trust funds then remaining or existing should go to certain “ final beneficiaries.” There was no designation of the sources from which such ultimate funds should come. There was no direction that any portion of the income or corpus should be paid over or permanently set aside for any charitable purpose. The only reference to the disposition of the income was that from the income and so much of the principal of the trust fund as may be needed or required from time to time ” certain charges and the annuities should be paid.

It is clear that the testator anticipated that the income might not be sufficient to pay those charges and bequests and in recognition of the requirements of Massachusetts law specifically directed his executors and trustees to devote the corpus of his estate to such payments, if necessary. His primary desire and purpose evidently were to see that his bequests to the members of his family and his gifts to his friends should be paid completely during each year of their lives and in the indicated installments, until the death of his last surviving daughter. Then, and then only, would the charities receive what was left of his estate, if anything.

The petitioners’ counsel make the following statement in their brief: “The possibility of invasion of the original principal, or of the excess income added to principal from year to year to pay these annuities is extremely remote and in such cases it has been clearly decided that no consideration should be given to such a theoretical contingency.” We are unable to agree with this conclusion. A list of the assets of the Wilder estate was not submitted to us, but wo do know that the chief source of income was from dividends and that dui'ing 1926 and 1921 the returns were approximately 5 per cent on the value of the estate. The payment of annuities consumed $35,082.82 in 1926 and $33,862.88 in 1927. The amount paid for taxes and other fixed charges was $6,074.71 in 1926 and $6,592.67 in 1927. But in 1926 the excess over the payments under item six of the will was $18,824, while in 1927 'it was only $12,992.36. If this rate of diminution were continued the requirements under item six, paragraphs (a), (b) and (c), would soon invade the amounts previously “ permanently set aside ” for the eleemosynary and educational institutions enumerated in paragraph (g), and perhaps also the corpus of the estate would be impaired. Furthermore, we have no evidence that the petitioners did permanently set aside such excess other than their claim for its deduction in their income-tax return “ on the ground that it was executed for the benefit of charity as provided in the will.”

We are of the opinion that the testator intended that neither the prorated shares of the residuary estate bequeathed to the fourteen institutions mentioned in item six (g) of the will, nor any portions thereof derived from income, were to be definitely fixed or permanently set aside until after the death of his last surviving daughter and that, therefore, the petitioners neither could nor did so set aside for the benefit of such institutions the amount of the income received during the years in question in excess of the sums required to pay the expenses of the trust and the annuities established by the will. See Bank of America National Association, Trustee, 19 B. T. A. 1273, in which we said, “ we are of the opinion that in taxing the income of a trust, it is the intention of Congress to tax the trust for all income received by it which can not be definitely and legally paid to or permanently set aside for a definite beneficiary under the terms of the will or deed creating the trust.” See also Charles P. Moorman Home for Women v. United States, 42 Fed (2d) 257. The petitioners are not entitled to the deductions claimed by them under section 219 (b) (1) of the Revenue Act of 1926.

The petitioners further claim that, in any event, under our decision in Boston Safe Deposit & Trust Co. and Everett E. Kent, Executors, Estate of Herbert A. Wilder, 20 B. T. A. 1159, they are entitled to deduct the earnings of a fund of $345,000 which has already been determined by this Board to be the minimum deductible value for a remainder left to charity. That case, however, was an estate-tax case in which the sole issue was the amount to be deducted in determining the net estate under section 403 (a) (3) of the Revenue Act of 1921. It involved the same petitioners and the same estate that are before us now. We there held that the petitioners were entitled to deduct $345,000 representing the value of the residuary estate which would ultimately go to certain educational and charitable institutions under item six (g) of the Herbert A. Wilder will.

The appraisal of an apparently stable and liquid fund of securities for estate-tax purposes is a far different matter from that of gauging the recurring yearly return from such a fund, from the viewpoint of the income tax thereon. While we may have felt reasonably sure that in 1923 a fund of $345,000 would be free from invasion by the demands of the sixth item of the will until the death of the testator’s last surviving daughter, it does not follow that the possibility of requiring the entire current income to pay constantly increasing tax and expense charges and the definite burden of annuities was extremely remote. Decedent’s care and concern that his daughters should receive a continuous benefit from his estate under all circumstances and an added assistance in times of emergency are apparent from items five and six (d) of his will. All such needs were to be met fully before the several institutions were to receive any legacy whatever.

No specific fund amounting to $345,000 was segregated, designated or recognized as being the minimum amount which ultimately will go to charities nor was it permanently set aside for such purpose. No income, therefore, was identified as arising from securities belonging to the residuary legatees and we have no reason to assume that ultimately they will receive all or any part of such income.

Therefore, by giving to the will of Herbert A. Wilder the interpretation which we believe is clear and unmistakable, we hold that the petitioners are not entitled to the deductions claimed under section 219 of the Revenue Act of 1926 and that the deficiencies in income for the years 1926 and 1927, including the profit from the sale of securities in 1927, as determined by the respondent, should be approved.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Lansdon:

text:
    R. M. Walker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32545.
    Promulgated June 22, 1932.

      O. R. Folsom-Jones, Esq., and J. S. Y. Ivins, Esq., for the petitioner.

      Philip M. Ciarle, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner has introduced much evidence to show that at all times here material the corporation had a paid-in surplus greater than the distribution here questioned; and contends that in view of the authority granted to it by the Commissioner of Corporations of the State of California to disburse such surplus, and the action of its board of directors directing the same, it must be presumed that the payment to him was made therefrom and not from earnings accrued after the date of incorporation. In our opinion the taxability of the distribution in question is determined by the plain letter of the law. Under the provisions of the Revenue Act of 1921, which is applicable here, corporate dividends are defined as follows:

Sec. 201. (2) That the term “ dividend ” when used in this title * * * means (1) any distribution made by the corporation to its shareholders or members, whether in cash or other property, out of its earnings or profits accumulated since February 28, 1913 * * *.

Respecting distribution made by corporations, the same act provides:

Sec. 201. (b) For the purpose of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits to the extent of such earnings' or profits accumulated since February 28, 1913 * * *. [Italics supplied.]

It would seem clear from the above quoted provision of the revenue act that Congress intended to tax any distribution made by a corporation to its stockholders, though in terms from paid-in capital or surplus, to the extent that payment thereof is made from accumulated earnings retained in the treasury as earned surplus. Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982. The respondent held that the $100,000 payment to the petitioner in 1923 was made out of accumulated corporation earnings. To show error in such determination it is necessary for the petitioner to prove, not that it had paid-in surplus in an amount equal to the distribution, but that it had no earnings out of which that sum or any part of it could have been paid. This he has failed to do, and, since that negative showing is an essential element to establish error on the part of the respondent, we must hold against the contention of the petitioner in this appeal. T. Irving Sadden, Executor, 17 B. T. A. 956; Douglas v. Edwards, 298 Fed. 229.

Decision will be entered for the respondent.


author: Lansdon :

text:
    W. A. Faris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41655.
    Promulgated June 22, 1932.

      Clark A. Milliron, Esq., and E. S. Brashears, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Lansdon :

In respect to the first issue which relates to petitioner’s tax for 1923, we have held contrary to the contention here urged by him upon the identical facts in the companion case of B. M. Walker, 26 B. T. A. 494, decided this day. Consistent with that opinion we now hold against the petitioner on that issue in this case.

Kesjiecting the second issue, the petitioner argues that the basis for determining the cost to him of the 10,002 shares of stock in the Faris-Walker Corporation, which he sold in 1924, should be the value of the assets exchanged for such stock at the time the corporation was organized in 1922. Under the facts shown, the transaction is governed by the mandatory provisions of section 203 (b) (4) and 204 (a) (6) of the Revenue Act of 1924. The petitioner and his partner, Walker, together owned in equal proportion all of the partnership assets which they turned over to the corporation in exchange for its capital stock at the time of its organization in January, 1922. Immediately after this exchange these partners were in absolute control of the corporation owning its entire stock issue in exact proportion to their prior interests in the partnership. In no respect was that ownership changed or varied until the petitioner sold his interests in August, 1924. In consideration of these facts the respondent determined that the cost to the petitioner of the stock sold was $460,493.94. In the absence of any showing of a different or greater cost to petitioner of his interest in the partnership assets which he exchanged for said stock, the determination of the respondent must be sustained. D. O. James Mfg. Co., 17 B. T. A. 205; Grain King Mfg. Co., 14 B. T. A. 793; Haas Building Co., 22 B. T. A. 528; and Newman, Saunders & Co. v. United States, 281 U. S. 760.

Decision will be entered for the respondent.

       Sec. 203. (a) Upon tlie sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
      * * ***** *
      (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; bnt in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      *******
      (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e) or (f) of section 203, the basis shall be the same as in the ease of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and In part of other property, the basis provided in this paragraph shall he allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This- paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.


text:
    Sidney Ross Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37706.
    Promulgated June 22, 1932.

      Frederic E. Reeve, G. P. A., for the petitioner.

      George R. Sherriff, Esq., for the respondent.
   OPINION.

Leech: The issue presented here is, Did petitioner sustain a deductible loss in 1923 under the provisions of section 234 (a) (4) of the Revenue Act of 1921 ?

The “ advances ” claimed as the basis for the loss were commingled with the general funds of the China Ross Company from which its general operating expenses were paid in an amount exceeding $25,000 during 1921. If a definite amount of the funds so advanced was used in the purchase of capital assets or for any other purpose, which, upon proper proof would furnish a basis for the loss, the record does not disclose such fact. There is, therefore, no evidence before us of any basis upon which this deduction could be sustained as a loss, and this contention of the petitioner must fail. Cf. Charles O. Middleton, 25 B. T. A. 484.

Petitioner suggests, in the alternative, the deduction of the amount in controversy as a bad debt or an ordinary and necessary business expense. Neither position is tenable. It is stipulated the advances were made by petitioner to its own branch, the China Ross Company, and were written off by petitioner in 1923 when the business of its branch was closed out. This fact contradicts conclusively the existence of a legally enforceable debt. Luke & Fleming, Inc., 1 B. T. A. 12; J. S. Cullinan, 19 B. T. A. 930; Carnie-Goudie Mfg. Co., 24 B. T. A. 679. Under section 234 (a) (1) of the Revenue Act of 1921, if the advances were ordinary and necessary business expenses and so established by the record, their deduction should have been asserted in 1921 when paid or incurred.

Judgment will be entered for the respondent.