author: Smith:

text:
    Kellogg Commission Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3945.
    Promulgated April 7, 1927.
    A consolidated income and profits-tax return for 1918 was filed on behalf of the petitioner and associated companies on or before June 15, 1919. The Commissioner was barred by the statute of limitations, section 277(a)(2) of the Revenue Act of 1924, from further assessment of taxes after the expiration of five years from such date.

      ■ J. A. Councilor, C. P. A., and II. Stanley Hvnrichs, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    Respondent proposes to assess against the petitioner, which claims to be one of a group of affiliated companies, additional income and profits tax for the year 1918 in the amount of $24,154.45. The petitioner has abandoned the issue in respect of affiliation raised in the pleadings and relies solely upon the statute of limitations as a bar to the proposed additional assessment.
    FINDINGS OK FACT.
    The petitioner is a Minnesota corporation with its principal office at Minneapolis. On or before March 15, 1919, it filed a return or returns in the office of the collector of internal revenue, St. Paul, Minn., on behalf of the George C. Bagley Elevator Co., the Royal Elevator Co., the Kellogg Commission Co., and the Atlantic Elevator Co., all of 54 Chamber of Commerce Building, Minneapolis, Minn. At the same time it sent to the collector four checks in payment of the taxes of these comp an '.es in the aggregate amount of $8,394. On or before June 15, 1919. it filed a consolidated return in the office of the collector at St. Paul for these four companies, which showed a total tax liability of $32,838.83, and forwarded to the collector the four checks in payment of the second installment due on June 15, 1919, of $8,025.42. The aggregate of the amounts paid in March and of the amounts paid in June is $16,419.42, or one-half of the amount of tax due shown by the consolidated return filed.
    On August 13, 1921, a letter from the Commissioner at Washington, D. C., was received at the office of the collector at St. Paul, which reads in part as follows:
    There has been received in this office consolidated income and profits tax returns filed by the Atlantic Elevator Company, 54 Chamber oí Commerce, Minneapolis, Minnesota, for the calendar year 1918, which includes the net income and the invested capital of the George C. Bagley Elevator Company, Royal Elevator Company, Kellogg Commission Company and Atlantic Elevator Company all of 54 Chamber of Commerce, Minneapolis, Minnesota.
    An examination of the returns discloses that the companies are not consolidated within the purview of the law and regulations. You are therefore requested to procure separate returns from the above-mentioned companies, prepared on Form 1120, and forward direct to this office without listing.
    Please give this matter your prompt attention as the returns are required for action, and in reply reference should be made to the initials appearing above.
    Amended returns were subsequently filed by the petitioner in compliance with departmental instructions.
    On January 14, 1925, a so-called “ 30-day letter ” signed by J. Gr. Bright, Deputy Commissioner, was mailed to the petitioner, stating that an additional tax was due for the year 1918 in the amount of $24,154.45. The said 30-day letter reads in part as follows:
    The additional tax for 1918 is assessable on the basis of the amended return filed by you September 24, 1921.
    It has been ruled by the Department that your company was not affiliated with the Atlantic Elevator Company during 1918 and 1919.
    If you protest against the determination of the deficiency, the Bureau desires Vo proceed in the regular manner to the consideration of any information submitted by you. However, the period within which the Commissioner may assess additional taxes for the years 1918 and 1919 will expire in the near future, and is. order to avoid the necessity of making immediate assessment prior to such consideration, it is requested that you sign and return to this office the enclosed form of waiver.
    The deficiency letter in this proceeding was mailed to the petitioner under date of March 6, 1925. The petition was filed with the Board on May 4, 1925.
   OPINION.

Smith:

It is the contention of the respondent that the statute of limitations on the assessment of any additional tax for the year 1918 started to run on September 25, 1921, tbe day after the filing of an amended return for that year, and that he had five years from that date in which to make the additional assessment. The petitioner contends, on the other hand, that the statute of limitations started to run on the date of the filing of the consolidated return and that the assessment and collection of any additional tax for 1918 was barred on June 16, 1924.

We have heretofore decided the identical and sole question here at issue in the Appeal of F. A. Hall Co., 3 B. T. A. 1172. In that appeal we held that a consolidated income and profits-tax return for the year 1918 made on behalf of a group of associated corporations, said return being neither false nor fraudulent, was the return of each of said corporations required by the then existing law, and that the statute of limitations, section 277 (a) (2) of the Revenue Act of 1924 began to run on the day following the filing of such return. See also Appeal of National Tank & Export Co., 3 B. T. A. 1217, and United States v. Whyel, 19 Fed. (2d) 260.

Respondent was unable to produce the original consolidated return filed on behalf of the petitioner and others, but a copy of such return retained by the petitioner was introduced in evidence. The evidence is conclusive that the return was regular in form and complied substantially with the statutory requirements contained in section 239 of the Revenue Act of 1918. The statute, therefore, began to run in favor of the petitioner on the day following the filing of such return, to wit, not later than June 16, 1919. It follows that on' March 6, 1925, the date on which the deficiency letter was mailed to the petitioner, the Commissioner was barred from further assessment of taxes for the year 1918.

Judgment will be entered for the petitioner.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Olinger Mortuary Association, Crown Hill Cemetery Association, Denver & Crown Hill Railway Co., Highlands Casket Manufacturing Co., and Olinger Highlanders, Inc., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 118, 532.
    Promulgated April 11, 1927.
    1. Under tbe evidence in these cases, held,, petitioner corporations were entitled to affiliation.
    2. Kates of depreciation determined.

      James Grafton Rogers, Esq., and Richard M. Grane, G. P. A., for the petitioners.

      A. George Bouchard, Esq., for the respondent.

      The issues presented in these appeals and the facts from which they arise are the same in each. Accordingly, they were heard and are considered together. Docket No. 532 is the appeal of all the petitioners from the determination by the Commissioner of a deficiency of $812.12 in income and profits taxes for the calendar year 1919. Docket No. 118 comprises two distinct appeals. The major appeal thereunder is by all the petitioners from the determination by the Commissioner of a deficiency of $39,960.56 in income and profits taxes for the calendar year 1918. The minor appeal is by two of the petitioners from the determination by the Commissioner of deficiencies in inome taxes for the calendar years 1918 and 1919 in the respective amounts of $1,175.91 and $1,932.37.
    The deficiencies result ,in part from the refusal of the Commissioner to permit all the petitioners to make consolidated returns of income as affiliated corporations. The Commissioner denied to the ■ petitioners' affiliation as one group and held them to be affiliated, three corporations in one group and two in another. Petitioners also allege that Commissioner erred in that the depreciation allowed was insufficient.
    FINDINGS OF FACT.
    The petitioners are Colorado corporations witlf principal offices in the City of Denver. The , Olinger Mortuary Association (hereafter sometimes referred to as the Mortuary), incorporated in the year 1918, was and is engaged in the business of selling services and merchandise connected with the burial of deceased persons. The Highlands Casket Manufacturing Co. (hereafter sometimes referred to as the Casket Factory) incorporated in the year 1918, was and is engaged in the manufacture of caskets and shipping boxes. The Crown Hill Cemetery Association (hereafter sometimes referred to as the Cemetery) incorporated jn the year 1908, was and is engaged in the sale of burial lots or plots, the maintenance of cemetery grounds, and the sale of property and services incident to the burial of deceased persons. The Denver & Crown Hill Railway Co. (hereafter sometimes referred to as the Railway) incorporated some time prior to 1918, was and is engaged jn the operation of an electric street railway between the northern boundary line of the City of Denver and the grounds of the Cemetery. The Olinger Highlanders, Inc., (hereafter sometimes referred to as the Highlanders), incorporated in the year 1919, was and is engaged in the operation of a boys’ training corps.
    Upon the death of his father in 1901, George W. Olinger became the owner of the Mortuary business, which had been conducted by his father in the City of Denver since 1890. Thereafter, Olinger conducted the business as an individual enterprise until it was incorporated in July of 1918. In 1908, Olinger, convinced that Denver would support an additional burial park and that such a business would “ interlace ” with the Mortuary’s business, organized and incorporated the Cemetery, which he caused to acquire a tract of land iy2 miles outside the city limits on the north side and about four miles distant from the location of the Mortuary, which was on the north side of the city proper. Shortly thereafter Olinger, for the purpose of providing means of transportation to and from the city and the grounds of the Cemetery, organized and incorporated the Kailway, which he caused to construct and operate an electric street railway, connecting with the city’s street railway, whose lines terminated at the city limits, to and from the Cemetery’s park. Thereafter, but prior to 1918, Olinger organized the Casket Fatory, locating it on the north side of the city about three blocks from the Mortuary, for the purpose of supplying the Mortuary with caskets, shipping-boxes, and other merchandise incident to its business, and operated the factory as an individual enterprise until its incorporation in July, 1918.
    On January 1 of the years 1918, 1919, and 1920 the capital stock of the Cemetery was owned and held as follows:

    During the years 1918, 1919, and 1920 all the outstanding capital stock of the railway was owned by the Cemetery. . .
    Prior to July, 1918, the Mortuary and the Casket Factory were owned by Olinger and operated by him as an individual. In July, 1918, before going to France in war service, he incorporated both businesses as a means of protection to his family in the event anything should happen to him. One-half of the stock of the Mortuary (125,000 shares) was issued to Olinger’s mother, one share thereof to his wife, and the balance (124,999 shares), to Olinger. The stock issued to the mother was endorsed in blank and delivered to Olinger, who placed it in his safe, with the stock standing in his own name, where it remained during his absence- Early in 1919, after his return from France, all of the mother’s stock, except one share, was transferred to Olinger, so that thereafter he owned in his own name 249,998 shares and there stood in the names of his mother and wife one share each. The stock of the Casket Factory was issued, one-third (16,667 shares) to Olinger, one-third (16,667 shares) to his mother, and one-third (16,666 shares) to his wife. All the stock of both the Mortuary and the Casket Factory has been at all times in fact owned by Olinger, those shares standing in the names of his mother and wife being issued to them merely for purposes of organization, and for personal reasons. The Mortuary and the Casket Factory elected, pursuant to the statute, to be treated as corporations for the entire year 1918, and made returns as such.
    The capital stock of the Highlanders, incorporated in the year 1919, was issued, one-third (16,667 shares) to Olinger, one-third (16,667 shares) to his mother, and one-third (16,666 shares) to his wife. Olinger was the d& facto owner of the stock issued to his mother and his wife and he was entirely and exclusively in control of the activities of the Highlanders.
    George W. Olinger has been the president of all the petitioners from the respective dates of their organization, and during the taxable years was in active control of them. His control of all the petitioners was absolute. He determined their policies and directed their activities. He selected the directors for each of them, the directors in all corporations being practically the same persons, and their qualifying shares were his stock, properly endorsed. Every employee of each corporation was engaged only on Olinger’s approval and every pay check paid to any employee of each of the petitioners was drawn by him personally, except during his absence from the city, when such checks were signed by his nominee. Ho exercised entire supervision, financial and otherwise, over all the corporations, dictated every detail of their activities, and operated the businesses as he saw fit. No funds were withdrawn from any of the corporations for any purpose except upon his order. His mother exercised no authority in the management of the businesses and had no duties to perform in connection therewith, her activities consisting in maintaining the general atmosphere of the business, supervising the care of the ladies and children, giving general support to Olinger in his work, and acting in the general capacity of “ housekeeper.” Olinger’s wife took no part in the conduct of the businesses and received no funds therefrom. Olinger’s mother received no salary or specific compensation, but was permitted to draw from the businesses such sums, at such times, as she required for her needs. Olinger drew no fixed salary but drew from the businesses such sums as he desired.
    Each of the petitioners was considered as merely a part or division of a single unit, and they were operated as one enterprise. Funds were constantly withdrawn by Olinger from one, in most cases the Mortuary, and devoted to the needs of the others, without interest and often without reimbursement. Funerals were conducted by the Mortuary and interments made by the Cemetery free of all charges in deserving cases upon the order of Olinger. The employees and equipment were constantly interchanged between them without charge at the direction and in the discretion of Olinger. The offices of all were lodged in one building, that of the Mortuary, and the books of all were kept by a single auditor, who received no compensation except from the Mortuary. The telephone service of all was supplied through one switchboard maintained by the Mortuary. The Casket Factory supplied merchandise to the Mortuary at cost, no profit to the Casket Factory being contemplated.
    The Mortuary was the foundation and Support of all the other petitioners. It was the principal money-earner, in fact the only money-earner except the Cemetery, the earnings of which were negligible, and was the one upon which all the other petitioners relied for financial support. By the year 1918 the Mortuary had grown to be one of the five largest mortuaries in the United States, and during the taxable years, which were the years of the “flu” epidemic, it was caring for approximately 50 per cent of Denver’s deaths. Approximately 95 per cent of the cases cared for by the Mortuary were interred in the Cemetery’s park and approximately 90 per cent of the interments in the Cemetery’s park were cases cared for by the Mortuary. The Casket Factory was established solely to supply the needs of the Mortuary. It maintained no sales organization, and more than 90 per cent of the goods manufactured were supplied to and taken by the Mortuary. The Bailway was simply a “ feeder ” for the Cemetery, a connecting link in the transportation facilities between the City of Denver and the Cemetery’s grounds.
    During the taxable years the Mortuary conducted between five and eight funerals a day, at each of which from fifty to seventy-five persons attended, so that approximately 100,000 persons were accommodated during each year. This large volume of business, with so many people passing in and out of the Mortuary, subjected the equipment and facilities to heavy use. The depreciable assets of the Mortuary, as alleged in the petitions, were: (1) buildings, (2) equipment, (3) automobiles, (4) machinery, and (5) furniture. The “ equipment ” consisted of “ furniture and fixtures, reception-room furniture, office furniture, desks, office chairs and files, rugs, draperies, curtains, organ, piano, clocks, pictures and paintings, beds, linen, mattresses, slumber-room equipment, embalming paraphernalia and surgical instruments, casket trucks (small carriers used inside the building), folding chairs, janitors’ equipment, floor and ornamental lamps, vases, cots, doorpiece equipment, and bookcases.” The cost of these articles was $21,000, their average life ten years, and their salvage value was negligible. The “ automobiles ” consisted of two Cunningham hearses, one Winton limousine, one Cunningham carrier, one Willys-Knight touring car, one Packard limousine, a Ford roadster, and a Ford delivery truck. The cost of these automobiles was $42,052.24, their average life was three years, and they had an average salvage value of 25 per cent of the cost.
    The depreciable assets of the Cemetery, as alleged in the petitions, were: (1) greenhouse buildings, (2) caretaker’s house, (3) furniture, (4) auto trucks, (5) water system, (6) sundry equipment, and (7) tools and implements. The “ greenhouses,” built in 1912, were constructed of glass with wooden frames, and upon brick foundations, with cement walks inside. The “ auto trucks ” were used to pull out boxes, for carrying tents, chairs, lowering devises, and cement vaults, and for hauling out logs. The “ water system ” consisted of a pump at a lake, a wooden tank, and distributing pipe lines. The piping was of the cheapest grade of black pipe and the frequent leaks that developed necessitated constant repairs and replacement with galvanized pipe. The Cemetery’s park, consisting of 490 acres, was opened in 1908. The cost, or depreciable value, of the “ greenhouses,” in the year 1918, was $18,981.74, and in the year 1919 was $20,806.51, and they had a total useful life of fifteen years. The cost, or depre-ciable value, of the “ auto trucks ” in the year 1918 was $3,649.85 and in the year 1919 was $3,085.37, and they had a total useful life of three years. The cost of the water system was $18,041.58.
   OPINION.

Van Fossan :

At the hearing of these appeals counsel for respondent waived the jurisdictional questions raised by the answers and admitted the jurisdiction of this Board. There remain for our consideration only two issues: (1) The right of the petitioners to affiliation in one group, and (2) the correct amount of depreciation allowable as a deduction.

The separate appeal of two of the petitioners, which is the minor ■ appeal under Docket No. 118, arises solely by virtue of the respondent’s denial of the right of all petitioners to affiliation. In the light of our conclusions upon the affiliation question, we deem it unnecessary to decide the issues raised by the separate appeal. Likewise, the issue relating to invested capital, raised by the pleadings, is disposed of by our decision of the affiliation issue, and need not be further considered.

The facts present a clear case of a group of corporations joined together for the more efficient conduct of a single business, each corporation being merely a unit in a greater whole, and all under the control and direction of a single head. The entire system is merely an expansion or enlargement of the one business, the Mortuary, which has, at all times, been owned and controlled by George W. Olinger, who was responsible for the creation of all the units in this system. • Substantially all of the stock of all the petitioners has at all times been owned or controlled by Olinger and he has dictated every policy and even the details in the operation of each of them. The petitioners fully meet the requirements of section 240(b) (2) of the Revenue Act of 1918.

The Mortuary, the Casket Factory, the Cemetery and the Railway are, therefore, deemed to have been affiliated corporations in 1918, and all five of the petitioners are deemed to have been affiliated corporations in 1919, within the meaning of the Act. It follows, therefore, that they are entitled, under section 240(a), to file consolidated returns for the respective years for income-tax purposes. See Appeal of Wright Cake Co., 2 B. T. A. 58; Appeal of Monroe Furniture Co., 2 B. T. A. 743; Appeal of Brannum Lumber Co., 2 B. T. A. 821; Appeal of Tri County Light & Power Co., 2 B. T. A. 1165; Appeal of Peru Chair Works, 3 B. T. A. 29; Appeal of West 28th Street Corporation, 4 B. T. A. 147; Appeal of Kolynos Co., 4 B. T. A. 520; Appeal of Star Porcelain Co., 4 B. T. A. 989.

The fact that two of the petitioners, the Cemetery and the Railway, might be entitled to affiliation as between themselves under section 240(b) (1) is not sufficient reason to deny them affiliation with the other petitioners when the requirements of section 240(b)(2) are, satisfied.

There are listed in the petitions certain assets of the Mortuary and the Cemetery on which it is alleged respondent has not allowed, sufficient depreciation. The method of computation employed by the respondent or the exact amounts allowed do not appear. The petitions state only the total amount allowed. Of all the assets as to which petitioners seek an additional allowance for depreciation, evidence was submitted only as to four items. These items are the “equipment” and the “automobiles” of the Mortuary and the “ greenhouses ” and “ auto trucks ” of the Cemetery.

The record being silent on the point, we do not know whether the respondent used a composite rate of depreciation or made a definite computation as to each item, or group of items. If the latter, then the depreciation on the four items as to which proof was introduced should be recomputed in accordance with the findings of fact. If, however, a composite rate was used, or a lump sum allowed, there being evidence as to only part of the assets, it will be necessary to rule against the petitioners on this issue.

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


author: Van Fossan:

text:
    Advocate Publishing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9711.
    Promulgated April 11, 1927.

      Raymond L. Sauter, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This appeal is for the redetermination of deficiencies in income taxes for the calendar years 1919, 1920, 1921, and 1922, in the respective amounts of $163, $1,084, $298.47, and $44.72. The errors assigned are (1) that the Commissioner failed to allow the actual value of assets as the base for computing depreciation, and (2) that the Commissioner restored to income an item of $600 paid out in dividends by petitioner. At the hearing petitioner waived the second assignment of error.
    FINDINGS OF FACT.
    Petitioner is a Colorado corporation with its principal office in Sterling, Logan County, Colo., and is engaged in the printing business. It was organized in the year 1911.
    Prior to the year 1923 petitioner maintained no complete system of books and had no inventory of its property, its records consisting of a cash book and a ledger. Its property consisted of printing equipment for the publication of a daily and weekly newspaper and for commercial job printing. In its return for 1918 petitioner claimed a value of $25,000 for physical property. It had no cost records and the value claimed was determined by a survey and listing of the assets and an estimate of their worth. After the respondent brought up the question of its tax liability, petitioner in 1923 attempted to inventory its assets as of 1918 and from catalogues of manufacturers obtained the prices at which the assets could be replaced. In this manner petitioner in 1923 determined the value of its assets as of 1918 to be $35,908.
   OPINION.

Van Fossan:

The sole question in this case is the value in 1918 for depreciation purposes of certain property used in the printing business. No evidence was offered as to the date of acquisition or the cost of the property. Replacement value is not a proper basis for determining depreciation. Greenabaum Bros., Inc., v. Commissioner, 6 B. T. A. 86.

Judgment will be entered for the respondent.


author: Trussell:

text:
    B. F. Perkins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5152.
    Promulgated April 11, 1927.
    Loss on sale of corporate stock allowed.

      8outh Trimble, Jr., Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    The Commissioner’s letter which is the basis of this proceeding asserts deficiencies in income tax for the year 1918 in the amount of $1,177.05, and for the year 1919 in the amount of $2,981.89. The petitioner complains that the Commissioner has (1) erroneously disallowed a deduction from gross income for the year 1918 of a loss upon the sale of corporate stocks, and (2) that apparent errors appear in the computation of tax liability for each of said years.
    FINDINGS OF FACT.
    For upwards of 20 years prior to 1918 the petitioner had been a resident of Sheridan, Wyo., where he was engaged in the business of banking. On or ab.out January 3, 1911, in association with R. A. Keenan and others, the group purchased one-half of the outstanding stock of the Sheridan Brewing Co. The number of shares allotted to the petitioner was 100, for which he paid $10,000 on or about January 3,1911.
    During the year 1911, the petitioner received dividends upon this stock in an aggregate of $3,000, or 30 per cent. In 1912, he received dividends aggregating $2,000, or 20 per cent, and in 1913 he received dividends aggregating $2,000, or 20 per cent.
    The March 1, 1913, value of this stock was $200 per share.
    During the years 1914 to 1918, inclusive, the petitioner received further dividends upon this stock in the aggregate amount of $15,000.
    Early in 1918 the gathering clouds of prohibition enveloped the State of Wyoming, and this petitioner, with a view of escaping the impending crisis, sold his brewery stock for $5,000.
   OPINION.

Trussell:

The selling price of petitioner’s brewery stock being ' less than the March 1, 1913, value, and less than its cost, which was also less than the 1913 value, the loss sustained is the difference between the cost and the selling price, namely, $5,000. McCaughn v. Ludington, 268 U. S. 106; 45 Sup. Ct. 423; 5 Am. Fed. Tax Rep. 5376.

Mathematical errors of computation, if they exist, will be corrected in the final settlement.

The deficiencies may be redetermined in accordance with the foregoing findings of fact and conclusions of law, upon 15 days' notice, pursuant to Rule 50, and judgment will be entered in due course.


text:
    O. Ben Haley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6466.
    Promulgated April 11, 1927.
    A beneficiary under a will is not entitled to deduct from his personal income-tax return a proportionate part of an alleged operating loss of the estate;

      B. M. Webster, Esg., for the petitioner.

      A. EL. Fast, Esq., for the respondent.
    The petitioner appeals from the determination of a deficiency in income taxes for the year 1921 in the sum of $1,232.34. It is alleged that the Commissioner erred in refusing to permit petitioner, a beneficary under a will, to deduct from his gross personal income his pro rata share of an alleged “ operating loss ” of the estate, incurred by reason of the fact that the Federal estate tax paid by the administrator in the year 1921 exceeded the income of the estate fox-said year. The deficiency letter is dated June 29, 1925.

      BINDINGS OB BAOT.
    The petitioner is an individual residing in the County of Jefferson, State of Colorado, and is one of the heirs of Ora Haley, deceased. Prior to the taxable year in question Ora Haley died, and there was admitted to probate in the County Court of Denver, Colo., his last will and testament, providing as follows: . .
    * * * I, Ora Haley, being of sound mind and memory, but knowing the uncertainty of human life, do now make and publish this my last will and testament, that is to say: I have never made a will but my intentions are to do so shortly and subsequent to this but in case of my death before doing so I desire my Estate to be divided as follows: One half of which to go to my wife, Gussié Haley, and the remaining one half to be divided equally between my three children named as follows: Ora Benjamine Haley, my son, and my two daughters Mrs. Annie Gussie George and Mrs. Mattie Blanch Smith.
    Oba Halet. .(seal.)
    Signed, sealed, published and declared by the said Ora Haley the testator, as and for his last will and testament; and we, at his request and in his presence, and in the presence of each other, have hereto subscribed our names as witnesses thereto, this sixth day of December A. D. 1905.
    Harold Banner.
    Lawbench O. Phillips.
    In the year 1921 the administrators paid the Federal estate tax of $138,553.28, which amount exceeded the income of the estate for that year by the sum of $82,452.62. The administrators of the estate kept, during the period of administration, book records of all transactions involving- the estate. The income from the operation of the estate was credited to the respective beneficiaries on the books, and in the year 1921 each beneficiary was debited with a share of the alleged loss, proportionate to his interest under the estate.
    In the year 1920 the income from the estate was distributed to the beneficiaries and reported by them in their personal returns. The petitioner in the taxable year held a one-sixth distributive interest in the estate.
   OPINION.

Van Fossan :

Under the terms of the will of Ora Haley, deceased, petitioner became entitled to a one-sixth distributive share of the estate. In the year 1921 the administrators paid a Federal estate tax of $138,553.28, which sum exceeded the income of the estate for that year by $82,452.62. Under the system of accounts employed, the administrators debited the account of this beneficiary with $13,142.10, or one-sixth of this excess. Petitioner now insists that he is entitled to deduct from his gross personal income this amount of $13,142.10 as his pro rata share of the alleged “ operating loss ” of the estate for the said year.

Petitioner concedes that the estate tax was properly payable by the estate and that he is not entitled to deduct it or any part thereof, as such, from his individual return. The fact that the payment of the estate tax caused an alleged loss to the estate does not alter the situation or give petitioner any greater rights than he would otherwise possess. The alleged loss does not fall within the category of deductible losses enumerated by the statute. It was not incurred by petitioner in trade or business, or in a transaction entered into for profit, nor does it arise from fires, storms, shipwreck, or other casualty, or theft. We are aware of no basis on which such a loss could be allowed to the beneficiary.

In the Appeal of George M. Studebaker, 2 B. T. A. 1020, a situation in many respects comparable with the instant case was presented and thoroughly considered by the Board. After citing the statute of 1918 (substantially similar to that of 1921), allowing deduction of losses, we said:

Under these provisions a taxpayer is entitled to deduct losses sustained during the taxable year, if incurred in trade or business, or if incurred in any transaction entered into for profit though not connected with the trade or business, or arising from fires, storms, etc. There are no further provisions in the Act which allow deductions for losses sustained in any other manner. It is difficult to see how a taxpayer can claim a loss for something that was never his, or a loss from a transaction in which he as an individual was not interested, even though at some future date it might affect the income or the capital distributed to him from the trust. With reference to the losses here in question it can hardly be argued that they were sustained by the taxpayers in their trade or business, or in any transaction entered into by them for profit. Acts done by the taxpayers in their individual capacities and those performed by them as trustees are separate and distinct, and losses sustained by them as trustees can not be claimed as losses sustained as individuals.

See also United States v. Woodward, 256 U. S. 632; Keith v. Johnson, 271 U. S. 1.

Judgment will be entered for the respondent.


author: Love:

text:
    Harry H. DeLoss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7588.
    Promulgated April 11, 1927.
    A loss sustained by reason of securities becoming worthless in 1920, and then known to be worthless, is not deductible in 1921, although sold in 1921 for a nominal consideration.

      Jonathan Grout, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.

      This proceeding is for the redetermination of deficiencies as follows:
    For tlie year 1921_$8, 020.44
    For tlie year 1922_11,196.02
    The deficiencies arose by reason of the action of the Commissioner in disallowing an alleged loss on the sale of certain shares of stock in 1921, and the refusal of the Commissioner to carry over to 1922 an alleged net loss in the sale of that stock in 1921.
    The Commissioner asserts that the worthlessness of the stock was known in 1920, and that the loss, if any, was sustained in that year and hence is not deductible in 1921, and that the net loss in 1921 as claimed by the petitioner may not be carried over to 1922 as there was no loss at all in 1921.
    The Commissioner also claims that the loss, if held to have been sustained in 1921, was not the result of operating a business regularly carried on by the petitioner. The petitioner claims that his stock was not worthless in 1920, that he did not know it was worthless and further that in 1921 he sold it at a nominal price for the purpose of closing it out in order to take the loss, as he had a right to do, which sale resulted in the loss as claimed by him and that such loss more than offset his taxable income from other sources; that he is entitled to carry over the net loss to 1922, he having no net income for 1920.
    FINDINGS OF FACT.
    The petitioner is an individual who resides in Bridgeport, Conn. At the beginning of the year 1920 he was a large stockholder in and a director of the Hawthorne Co., a corporation. In April, 1920, it was decided by the directors, and ratified by the stockholders, to dissolve the corporation, and it was dissolved without bankruptcy or receivership proceedings, the directors acting as liquidating trustees. In June, 1920, said trustees offered for sale at public auction all of the corporation assets, except patents, patterns, special tools, trade name, cash, and accounts receivable.
    At that sale certain of the machinery and. merchandise, on account of lack of bona -fide bids, were knocked down to the trustees at approximately $12,000. After that auction sale in June, 1920, there remained for liquidation the assets above named that were not offered for sale, together with those knocked down to the trustees. At that time claims aggregating $417,004.79 against the corporation had been allowed and $20,539.01 had been disallowed, and $33,130.94 were still under investigation. To meet those claims there was on hand $298,417.16 in cash and the unsold assets above mentioned.
    On October 20, 1920, a dividend to creditors of 60 per cent was declared. At that time the trustees adopted and entered on the minutes a resolution that “ it now appears that the net sum available for dividends to creditors will amount to about 70 per cent of the claims which may properly be allowed.” In August 1920, the trustees estimated that the unsold assets might be sold for about $20,000. They were finally sold in 1922 or 1928 for $100.
    In December, 1920, the petitioner sold, through a brokerage firm in New York, 824 shares of his Hawthorne Co. common stock for $6, for which he paid as commissions and other expenses $88.46. In December, 1921, petitioner sold the remainder of his Hawthorne Co. stock, 374 shares of common, and 550 preferred, through his New York brokers, for $12, and paid as expenses incident to such sale $73.83. On the last sale he figured his loss as follows:
    Cost of 550 shares of preferred stock_$55, 000.00
    Cost of 374 shares of common stock_ 37,400. 00
    Expenses of sale___ 73. 83
    92,473. 83
    Less amount received from sale_ 12.00
    92,461. 83
    The stock cost petitioner par value, in cash, or its equivalent. He deducted the loss as above shown, pro tanto, from his income for 1921, and seeks to carry over the remainder as a net loss, amounting to $35,080.82 as a deduction from 1922 income.
    The petitioner was in 1920 and 1921, as well as years prior and subsequent thereto, regularly engaged in the business of buying and selling securities and borrowing and loaning money, although he was a stockholder in and an officer of the Handy & Harmon Co., which company paid him an annual salary of $10,000.
   OPINION.

Love:

Section 214 (a) (4) of the Revenue Act of 1921 provides that in computing net income there shall be allowed as deductions.

Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.

It will be noted that in the case of a loss, it is deductible in the year incurred. It is not treated the same as a bad debt where the deduction is allowed in the year in which it is ascertained to be worthless. All the evidence in the instant case leads to the inevitable conclusion that petitioner’s stock was worthless in 1920. He testified that he had a hope that the unsold assets, including the trade name, might be sold for enough to enable at least the preferred stockholders to realize something. However, we have,' staring such hope in the face, his own declaration that on account, of depressed business conditions there was no market for such assets; and further, the deliberately expressed conclusion of the trustees that the assets would not pay more than 70 per cent of claims of creditors; that after paying out all the cash on the 60 per cent dividend, there remained claims which had been allowed of more than $100,000, to pay which the trustees had nothing save the unsold assets. Those assets were actually sold, less than two years thereafter, for $100.

Under such conditions no reasonable business man would attach any value whatever to petitioner’s Hawthorne Co. stock in the latter part of 1920, or any time thereafter. The sale of the 824 shares for the nominal price received establishes in our opinion not only the worthlessness of the 824 shares but also the worthlessness in 1920 of all the shares that the petitioner owned.

Petitioner seeks to invoke, as a rule, the idea that a loss of the character of the one here in question may be taken only on sale of the securities, and by way of corollary, that the loss may be taken at date of such sale regardless of when, in fact, the securities became worthless. It is true that in the case of a decline in market value of securities, it has been held that the loss so sustained may not be taken in the absence of a bona fide disposal of the securities, that is, the transaction must be a closed transaction. It may sometimes occur that in the absence of a sale, the worthlessness of the securities is a questionable proposition. We know of no case where it has been held by this Board, or by any court, that if á petitioner presents proof so convincing as to render it practically demonstrable that securities held by him became worthless in a given year, he was refused deduction because he had not sold them. This Board in several cases has allowed the deduction under such conditions. Henry M. Jones v. Commissioner, 4 B. T. A. 1286. It therefore follows that if the proof shows stock became worthless in a given year, the deduction must be taken for that year and may not be taken for any other year.

The petitioner’s loss was sustained in 1920 and he may not take any part thereof for 1921 or 1922.

Judgment will be entered for the respondent.


author: Phillips:

text:
    Charles W. Walworth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8794.
    Promulgated April 11, 1927.
    The petitioner entered into a contract to sell certain real property. Thereafter and before any sale was consummated lie conveyed to another a one-half interest in the property and in the contract for its sale. This latter transaction was Bona fide. Held, that the transferee acquired a one-half interest in the property and in the contract for its sale, that the petitioner divested himself of such one-half interest and, when the sale was later consummated, petitioner was taxable only upon the profit from the sale of his one-half interest.

      Sanford Robinson, Esq., and Truman Henson, Esq., for the petitioner.

      A. H. Murray, Esq., for the respondent.
    The petitioner appeals from the determination by the Commissioner of a deficiency of $6,971.50 in income tax for 1921. Petitioner alleges as error the decision of the Commissioner that the total profit realized upon the sale of a residence, a one-half interest in which it is alleged belonged to his wife, is income to the petitioner.
    FINDINGS OF FACT.

    The petitioner is a citizen and resident of the town of Greenwich, Conn. Late in August, 1920, while the petitioner was in London, England, he received a cablegram from a Greenwich real estate broker asking him to set a price upon his residence. The petitioner answered that the property was not on the market for sale. Petitioner returned to the United States on September 29. 1920, after which date the broker again approached him regarding a possible sale. At that time business conditions were bad. Petitioner talked the matter over with his wife, who was adverse to selling. She desired her own home and did not want the proceeds of the sale to be risked in the petitioner’s business. Petitioner stated to her at that time that one-half of the property was hers, that she would receive one-half of the proceeds and might use them to purchase another home in an environment better suited to her needs. She consented to the sale.
    Thereafter on or about November 29, 1920, the petitioner entered into a contract to sell his residence for $115,000, title to be conveyed on January 3, 1921. A payment of $25,000 was made upon account of the purchase price when the contract was signed.
    On December 29,1920, in accordance with the oral agreement with his wife and to carry out the same, petitioner conveyed a one-half interest in such real estate to his wife by deed duly executed and delivered. This deed was recorded on December 30, 1920. On December 29, 1920, he also executed an assignment to his wife of an undivided one-half interest in and to the aforementioned contract to sell, which assignment was accepted by the wife, who agreed to carry out the terms of the sale. The assignment, acceptance and agreement on the part of the wife were written at the foot of the original contract and read as follows:
    For value received, I, Charles W. Walworth, hereby sell, assign, transfer and set over to Lillian E. Walworth of Greenwich, Connecticut, an undivided one-half interest in and to the above foregoing contract between myself and Sher-burne Prescott, dated November 29, 1920, for the sale of certain real estate in Greenwich, Connecticut, and I, the said Lillian E. Walworth, hereby accept this assignment and covenant and agree to and with the said Charles W. Walworth to join with him in the fulfilment of the terms thereof insofar as said fulfilment devolves upon him in as full a manner as if I were an original joint party of the first part thereof.
    Signed and dated Greenwich, Connecticut, this 29th day of December, 1920.
    (Signed) Charles W. Walworth.
    Lillian E. Walworth.
    On January 3, 1921, the petitioner and his wife conveyed said real estate, by deed duly executed and delivered and thereafter recorded, to the purchaser, who made payment of the balance of the purchase price by check dated January 3, 1921, drawn on the Chase National Bank to the order of Charles W. Walworth and Lillian E. Walworth in the amount of $40,000, and two promissory notes of $25,000 each drawn to the order of Charles W. Walworth and Lillian E. Walworth.
    The first note was paid by check for $25,120.83 dated February 1, 1921, drawn on the Chase National Bank, payable to Charles W. Walworth and Lillian E. Walworth and thereafter endorsed by them.
    The second note was paid by an order for the transfer of $25,000 to Walworth at the Irving Bank of New York.
    All of these amounts were passed to the personal account of Wal-worth with the approval and consent of his wife on the understanding that her share of the proceeds was to be paid back to her in some form, either in cash or in securities. In compliance with this arrangement Walworth, in his personal books of account, credited his wife with one-half of the entire sale price and afterward accounted to her for her one-half of the purchase price by the delivery of securities to her and the purchase of another home for her and other payments made to her or for her account, all totaling $54,-664.66, which was the amount of the wife’s one-half share in the purchase price of $115,000 after deducting commissions and expenses of the sale.
    The Commissioner determined that the entire profit from the transaction was income to the petitioner and determined the deficiency accordingly.
   OPINION.

Phillips:

There is no contention that the agreement between husband and wife, made prior to the execution of the contract to sell, that the wife should have one-half of the proceeds of the sale was supported by any valuable consideration. It was in effect a promise to make a gift. An executory gift, being a promise to make a gift, has no standing either in law or equity, and that only when executed by physical, symbolic, or constructive delivery of the subject matter will a gift be recognized or enforced. Here the gift was not made until December 29, 1920, when a deed to one-half of the property and an assignment of a one-half interest in the contract was made and delivered by petitioner to his wife. We are convinced that Such gift was then made in good faith, that thereafter one-half of the proceeds ivere legally the property of the wife and that she, in fact, received and retained them.

We come then to consider the effect of the gift made on December 29,1920. The two instruments gave to the wife more than the right to receive one-half of the proceeds which would come to the husband from the sale. They vested in her a present interest in the contract to sell and in the property. If the purchaser defaulted she became the owner of one-half of the real estate and would be entitled, as one of the real parties in interest, to join as party plaintiff in a suit for damages for such breach. Nor would a payment of the entire proceeds to the husband have been sufficient to discharge the purchaser had notice of the assignment been given him.

While an executory gift will not be enforced either in law or equity, a gift which is executed passes the property and will be enforced in the same manner and to the same extent as a transfer of property for .which a consideration was paid.

The assignment created in the wife a vested property right in the property and in the contract to sell. The proceeds were received by her, not because the husband gave them to her, but because, by a prior conveyance, she had acquired the property out of ivhich the proceeds flowed. The assignment was of a contract to sell property and the property to be sold was also transferred to the assignee. The contract to sell was executory; no sale had taken place, no money was then due from the purchaser and no income had yet been realized, or would be realized until and unless the sale was consummated. Before this event took place; before he became entitled to any part of the purchase price, the petitioner convej^ed to his wife one-half of his interest in the real estate and in the contract for its sale. He thereby divested himself of a one-half interest in both the property and the contract and, necessarily, in the proceeds of the sale. When the sale was completed he conveyed his interest and his wife conveyed her interest and each received payment therefor. A distinct line of demarcation is to be drawn between such an assignment of property before it has given rise to income and any assignment which could have been made after the sale was consummated, when all that the assignee could transfer would be the right to receive the proceeds of the sale. We are therefore of the opinion that the petitioner had divested himself of a one-half interest in the property and in the contract for its sale and is taxable only on the gain derived from the one-half interest he retained.

Decision for the petitioner mil he entered on 15 days’ notice, under Rule 50.

Smith dissents.


author: Steknhagen :

text:
    C. D. Lehman, Executor, Estate of J. C. Lehman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4202.
    Promulgated April 13, 1927.
    Section 402 (c), Revenue Act of 1921, requires that a transfer made within two years before decedent’s death be taxed as made in contemplation of death unless shown to the contrary. Held,, the evidence does not show the contrary.

      H. W. Ingersoll, Esq., for the petitioner.

      J. F. Qreaney, Esq., for the respondent.
    Deficiency of $485.41 estate tax. The Commissioner included in decedent’s estate the value of certain lands transferred by decedent within two years before his death.
    FINDINGS OF FACT.
    J. C. Lehman, the decedent, died a resident of Grafton Township, Lorain County, Ohio, on December 28, 1922. He was over 90 years old, and, prior to December 18,1922, was in good health and had been for many years. On December 18, 1922, he fell and was injured. He went to bed, his condition became complicated, and 10 days later he died.
    For several years prior to 1922 he had said to his children that he wished to divide his property equally among them, but that he was unable to determine the value of the several parcels of real property. He had made a will in 1912 in which he provided for the distribution of the property he then owned approximately as he finally distributed such property by the gifts here in question. For many years, since perhaps 1892, decedent had told one of his sons that he would give him the home farm of 197 acres if the son would live with him and work it. This the son did, and he (the son) and the other members of the family regarded the home farm as belonging to such son. The decedent paid the taxes on it. Some improvements on the farm were paid for out of farm income. The son had no other income.
    In January, 1922, decedent had a conference with his children and his attorney. Pursuant thereto deeds to the properties in question were executed and delivered in May, 1922, with the understanding that adjustment of values was to be made by the children among themselves. The property covered by these deeds consisted of the said home farm at Grafton, another farm' at Grafton, a farm in Columbia Township, and some lands in Elyria, Ohio, and Cleveland, Ohio.
   OPINION.

Steknhagen :

The question for determination is whether the property which decedent conveyed to his children after the conference in January, 1922, is within his gross estate under section 402 (c), Revenue Act of 1921. That section expressly includes within the value of the gross estate any property of which decedent made a transfer in contemplation of death, and then lays down the following rule to facilitate the determination of the question whether a transfer was so made:

Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

The legal title to the property ivas transferred in 1922, and although petitioner suggests that as to some of the property this was but the confirmation of a gift long since made and, as to others, of a contractual transfer made earlier, the evidence is not sufficient to establish an equitable title before the deeds were delivered. At most the evidence indicates that the children understood that such a distribution would be made, and this is short of proof of a gift or transfer. The presumption is against it.

The petitioner urges that the deeds were not given in contemplation of death. Here again we find the proof insufficient. The statute lays down the rule that such a transfer as this is in the first instance to be regarded as made in contemplation of death. The Government has the presumption, and unless the estate can affirmatively prove the contrary, the property transferred is within the gross estate. If a fair consideration of the evidence does not overcome the presumption fixed by the statute, the tax attaches. It is not as if the Government were permitted or required to prove the transfer as having been made in contemplation of death. Under such a rule it would be necessary to consider the essentials of such a transfer, and unless they were present the property would be excluded. The statute has reversed this and said that it can only be excluded if “ shown to the contrary,” and thus the burden is thrown entirely on the taxpayer.

In our opinion the evidence does not show the transfers not to have been made in contemplation of death. The evidence is entirely consistent with the statutory presumption that they were so made, and we therefore leave the property within the gross estate where in the first instance the statute places it.

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


author: Phillips :

text:
    Rice-Sturtevant Automobile Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6597.
    Promulgated April 13, 1927.
    The evidence is held insufficient to establish that a business was not carried on by the petitioner corporation, as determined by the respondent.

      P. J. O^Oownor, Esq., for the petitioner;

      I). W. Green, Esq., for the respondent.
    Petitioner appeals from the determination by the Commissioner of a deficiency of $4,161.84 in income and profits tax for the fiscal year ended January 81, 1920, alleging that the Commissioner has erroneously included earnings of a partnership as income of the petitioner corporation.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation with its principal office at Kansas City. It was incorporated in 1916 under the name of Rice-Sturtevant Motor- Co. It was a recognized agency of the Ford Motor Co., selling its cars, its parts, and service. On July 31, 1919, the name was changed to Rice-Sturtevant Automobile Co. On the same date a bill of sale was executed by the Rice-Sturtevant Motor Co., purporting to convey to L. D. Rice and L. M. Sturtevant all automobiles, stock, parts, accessories, office equipment, accounts, bills receivable, and all other personal property owned by the Rice-Sturtevant Motor Co. and theretofore used and acquired in the operation of its business in Kansas City, including also the good will of said business and the right to the use of the name “ Rice-Sturtevant. Motor Company.” The said instrument recited a consideration of $15,609.06 in hand paid by the individuals to the corporation and the further consideration of the assumption by the individuals of all outstanding obligations, debts, liabilities, and accounts of the corporation, excepting such as arose by reason of the purchase of real estate or interest in real estate or by reason of erection of improvements upon real estate.
    Thereafter the business in Ford cars, parts, and service continued to be operated in the name of Eice-Sturtevant Motor Co. The net income from such business during the period from August 1, 1919, to January 31, 1920, was $14,355.40. The income from such business was reported by Eice and Sturtevant- as partners. The Commissioner determined that such income was income of the petitioner corporation and determined the deficiency upon that basis.
   OPINION.

Phillips :

The sole question at issue is whether or not a partnership was formed' on July 31, 1919, which took over the assets and liabilities of the corporation other than its real estate and real estate liability, and thereafter operated the business of selling Ford cars, parts, and service. There was introduced as a part of the evidence a bill of sale, dated July 31, 1919, and a certified copy of the certificate filed in the office of the Eecorder of Deeds, County of Jackson, Missouri, showing the change of name. The only other evidence is the testimony of one of the two stockholders of the corporation that a written agreement of partnership was entered into and that the business was thereafter transacted by the partnership. This witness was unable to say how the consideration of $15,609.06 set forth in the bill of sale was paid or whether it was ever paid. He was unable to state whether any notice to creditors of the sale in bulk of the assets of the corporation had been given as required by the laws of the State. He was unable to recall any one who had been told of the existence of the partnership. He was unable to recall that any assignment had ever been made of the contract between the corporation and the Ford Motor Co. under which the corporation acted as agent or any recognition by the Ford Motor Co. of the partnership or, in fact, any notice to them of the change of the corporate name, stating that the business continued to be sent to the Ford Motor Co. in the name of Eice-Sturtevant Motor Co., which was the name of the corporation prior to the change and the formation of the alleged partnership.

No books of account of the partnership or of the corporation were produced, no part of the record of the bank in which it is claimed that two separate accounts were kept was produced, none of the canceled checks of the so-called partnership were produced, none of its letterheads or of the letters sent out by it were produced, nor is the absence of any evidence of such a collateral nature, which might have supported the contention of the petitioner, excused in any way.

The record is not convincing that there was in fact any tona fide delivery of the bill of sale which was executed on July 81, 1919, or any tona fide transfer of the assets named, or that the business was in fact carried on by the partnership and not by the corporation. It does not justify us in disturbing the determination of the Commissioner.

Decision will te entered accordingly.


author: LaNSdoN :

text:
    Conklin-Zonne-Loomis Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7223, 13461.
    Promulgated April 13, 1927.
    1. During the taxable years petitioner owned substantial amounts of stocks and bonds of other corporations and received material portions, of its income therefrom. Held,, that it is not entitled to personal service classification.
    2. Held, that respondent correctly excluded certain amounts representing investments in domestic stocks from the computation of the petitioner’s invested capital.

      E. A. Mihills, G. P. A., for the petitioner.

      J. ArtTvwr Adams, Esq., for the respondent.
    The Commissioner has asserted deficiencies for the fiscal years ended April 30, 1920, and April 30, 1921, and for the fiscal period which terminated at December 31, 1921, in the respective amounts of $9,047.73, $5,930.92, and $3,935.03, or a total of $18,913.68.
    The principal issue to be determined is whether the petitioner was entitled to classification as a personal service corporation ■ during the taxable years and taxable period involved. If the Board finds against personal service classification, the petitioner then contends that certain stocks owned by it during the entire time involved should be included in the computation of its invested capital for profits tax purposes. It was agreed that the two cases should be consolidated for hearing and decision.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation, with its principal office at Minneapolis. During the time involved in this proceeding its principal business was the management, as agents, for owners of certain office and retail store buildings located in Minneapolis. Its operations consisted in the renting of such buildings, collection of rents, payments of taxes, arranging and paying for insurance, and all other operating expenses, and in the employment of the personnel required for the operation of buildings under its management. For these services it received a commission of approximately 5 per cent on the gross rentals collected. During the fiscal year ended April 30, 1921, it purchased coal for the owners of the buildings and received a commission of 5 cents per ton on such purchases. The petitioner also had some income from dividends, commissions on loans, and for rental of space in its offices, and from making appraisals of real estate.
    During the taxable years, the officers of the petitioner and their stockholdings were J. F. Conklin, president, 1 share; A. E. Zonne, vice president, 124 shares; and, G. B. Loomis, secretary, 41 shares. No other stock was outstanding. Zonne and Loomis devoted practically all their time to the business. Conklin’s activities were nominal.
    The business of the petitioner was secured by advertising in newspapers, by the circulation of printed matter among prospective clients, and by personal solicitation by the officers. None of the employees took any part in acquiring new business. The only equipment used consisted of office furniture, fixtures, and supplies.
    The employees of the petitioner, their positions, and the salaries paid during the taxable years, were as follows:

    Bents of buildings managed by the petitioner were payable monthly in advance. Collections were always made before the end of the month, and settlements were made with clients between the tenth and fifteenth of the succeeding month. There was always sufficient money to pay all operating expenses, and to settle with clients without the use of either invested or borrowed capital.
    The petitioner owned substantial amounts of the stocks of various other Minnesota corporations, and received dividends therefrom, in the several taxable, years, in the respective amounts of $8,649.96, $6,203.76, and $4,127.46. Such investments totaled $39,760, $41,495, and $39,110, for the respective taxable years. It also owned and received income from a relatively small investment in Liberty bonds.
    The parties agree that the income and deductions therefrom of the petitioner for the taxable years were as follows:

      Income anil deductions, fiscal year ending April 80, 1920.

    Income:
    Sales and loans business-$19, Oil. 16
    Rental business_ 44, 357.72
    Interest on obligations, United States- 819.17
    Interest from bank balances, etc-;- 267.08
    Interest from bonds- 468.08
    Rentals_ 1, 339.98
    Dividends_ 8, 649.96
    74,913.15
    Deductions:
    Compensation to nonstockholders_$10,280.11
    Interest paid_ 286. 33
    Advertising_ 820. 64
    Compensation — stockholders_ 13, 600. 00
    Rent paid_ 3,200.00
    Depreciation_ 215.54
    Other deductions_ 7, 975.24
    - 36,377.86
    38, 535.29 Net income reported_
    Adjustments to find taxable income:
    Deductions—
    $8, 649.96 Dividends_
    693.01 Liberty bond interest_
    88.56 Adjustment to book profit_
    - 9, 431. 53 Income on which tax is computed_ 29,103. 76

      Income and deductions, fiscal year ending April 80, 1921.

    Income:
    Sales and loans business_ $629. 00
    Rental business_ 49,467. 44
    Interest — bank balances, etc_ 442. 85
    Interest on bonds_ 240. 00
    Interest on obligations, United States_ 1,013.82
    Dividends_ 6,203.76
    Income on coal sales_ 1,551.43
    59, 548.30

      Deductions:
    Compensation to nonstockholders-$10, 581.42
    Interest paid_ 150. 00
    Advertising_ 803. 95
    Compensation' — stockholders- 9, 050. 00
    Exchange_ 74. 87
    Rent and light_1_:--- 3,060. 00
    Depreciation___ 193. 99
    Other deductions_ 6, 237. 09
    - — $30,151.32
    Income reported- 29, 396.98
    Adjustment to find taxable income:
    Deductions—
    Dividends_ $6,203. 76
    Interest, Liberty bonds_ 1,013. 82
    - 7,217.58
    Total_ 22,179.40
    Additions—
    Taxable Liberty bond interest_,_ 190.00
    Taxable net income_ 22,369.40

      Income and deductions, fiscal yew ending April 30, 1922.

    Income:
    Sales and loans business_ $720. 00
    Rental business_ 54, 709. 36
    Interest earned_ 352.30
    Dividends__ 4,127.46
    Libex’ty bond interest_ 955.14
    60,864.26
    Deductions:
    Compensation to nonstockholders_1_$12, 635. 00
    Advertising_ 1, 817. 92
    Compensation, stockholders- 9,400.00
    Exchange_ 66.58
    Rent and light___— 3,085. OO
    Depreciation_: 180. 57
    Other deductions_ 6,182.41
    - 33,367.48
    27, 496.78
    Adjustment to find taxable income:
    Deductions—
    Dividends_ $4,127. 46
    Liberty bond interest_ 955.14
    -=- 5.0S2.60
    22,414.18
    Additions—
    Taxable Liberty bond interest_ 190.00
    Taxable net income_ 22,604. IS

      The parties agree that the balance sheets of the petitioner for the years involved herein were as follows:

   OPINION.

LaNSdoN :

The record of this proceeding discloses that a material part of the petitioner’s income for each of the taxable years, and the taxable period in question, resulted from dividends received from investment of capital in stocks and bonds. We are of the opinion, therefore, that the petitioner is not entitled to personal service classification in any of the years as to which deficiencies are asserted by the respondent.

The petitioner argues that the investments of securities should be regarded as belonging individually to the stockholders of a personal service corporation, and in proportion to their stockholdings and that income therefrom in no way resulted from its business activities. In the case of Matteson Co. v. Willouts, 12 Fed. (2d) 447, the court said:

Any corporation claiming to be a personal service corporation must bring itself fairly •within the requirements of such an organization, as provided by law. Every corporation has full control of its own activities. It knows what the requirements of a personal service corporation are. It may comply therewith and easily keep within the limits thereof if it so choose, or it may not if it otherwise prefers. If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly conrply with the law, or to come within hailing distance thereof, is. not enough.

It was within, the power of this petitioner to distribute in kind or cash its surplus funds invested in income-bearing securities. It elected not to do so, and, as a consequence, the income so realized can only be regarded as income of the corporation from the use of capital. See Appeal of Seaboard Mills, Inc., 5 B. T. A. 575.

As an alternative contention the petitioner argues that the amount of its surplus invested in stock of other corporations should be included in its invested capital for excess-profits tax purposes. The evidence disclosed that, in computing the petitioner’s net income, the Commissioner gave full effect to the provisions of section 234(a) (6) of the Revenue Act of 1918, and the corresponding provisions of the Act of 1921. In the determination of the deficiencies here in question, no part of the income derived from investments in the stock of domestic corporations has been included in the petitioner’s net taxable income. Such investments, therefore, are inadmissible assets in the computation of statutory invested capital. On the alternative contention we, therefore, approve the determination of the Commissioner. Appeal of Securities Investing Fund, Inc., 1 B. T. A. 279; Appeal of Collins Co., 3 B. T. A. 1213.

Judgment wild be entered for the respondent.