author: GREen:

text:
    Appeal of LANE CONSTRUCTION CORPORATION.
    Docket No. 4518.
    Decided September 27, 1926.
    The petitioner erected an obstruction in a public highway. One Emery drove his automobile into the obstruction and was killed. His executors brought suit to recover damages, Irhe petitioner denied liability and appealed irom the judgment of the lower court. Held, that the reserve set up before the final determination of the liability may not be deducted from gross income.

      Jonathan Grout, Esq., for the petitioner.

      R. P. Smith, Esq., for the Commissioner.
    The petitioner has appealed from the Commissioner’s determination of deficiencies in income and profits taxes for the years 1920 and 1921 in the amounts of $8,832.41 and $3,871.06, respectively. The error alleged is the disallowance of certain reserves as a deduction from income for the years in question.
    FINDINGS OF FACT.
    The petitioner is a Connecticut corporation with its principal office in Meriden. It was engaged in road construction work in the State of Rhode Island. On June 25, 1920, one Emery, a resident of the Commonwealth of Massachusetts, while driving on a public highway, ran into an obstruction placed thereon by the petitioner and, as a result of the injuries thus received, subsequently died.
    In the year 1920 suit was instituted to recover from the petitioner such damages as were sustained as the result of the death of Emery. Under the laws of Massachusetts, the recovery in actions of this sort was limited to $10,000. The laws of the State of Connecticut, and also of Rhode Island, permit the recovery of larger amounts.
    In 1920 the petitioner set up on its books a reserve of $10,000 to cover its estimated liability. In 1921 it set up an additional reserve to cover its estimated liability.
    In 1922 the case came on for hearing and the trial court determined that the laws of the State of Rhode Island were applicable as to damages, and the jury brought in a verdict for $131,000 as damages. The petitioner thereupon made a motion to set aside the verdict, which motion was denied, and thereafter an appeal was taken to the appellate court. In 1924, just before the case was called for argument in the appellate court, the petitioner compromised its liability and disposed of the litigation by the payment of $75,000 in cash.
    The petitioner .kept its books upon the accrual basis, but, although it set up the reserves as above set out, it did not at any time admit that it was liable in any sum by reason of the death of Emery.
   OPINION.

GREen:

The question to be decided in this appeal is the year or years in which petitioner is entitled to a deduction, or deductions, as the result of the liability incurred, if any, on account of the death of Emery. The petitioner contends, first, that it should be allowed to take a loss over a period of years, or, second, that it be permitted to file an amended return for the year 1920 and take the entire loss in that year. The Commissioner contends that the loss is deductible only in the year 1924, which was the year in which the final settlement was made.

We are of the opinion that the liability resulting from the death of Emery was not such that the estimated amount thereof could be accrued in the year 1920. The liability was for a tort and had in it none of the elements of a contract liability. There was, and could be, no accurate measure of the damages until the jury brought in its verdict, and even then the verdict of the jury would be subject to the vicissitudes of motions for new trial, etc., and an appeal. The petitioner persistently denied its liability and vigorously defended the damage suit. In a situation where it is doubtful whether there is a liability and where the amount, if there be a liability, is wholly unascertainable, there can be no accrual.

The Appeal of Producers Fuel Co., 1 B. T. A. 202, was not based upon a comparable set of facts. There the liability was based upon a contract which the taxpayer had deliberately broken. There the taxpayer admitted its liability and entered into negotiations for the settlement thereof before the close of the taxable year. There was no doubt as to the existence of the liability, and only the amount to be paid remained to be determined. The liability for which the taxpayer here seeks to set up a reserve was not a fixed and existing liability in 1920 or 1921, and accordingly the reserve set up can not be allowed as a deduction in the computation of income. See also the recent decision of the Court of Claims in the case of Malleable Iron Range Co. v. United States, 62 Ct. Cl. 425.

Judgment for the Commissioner.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Appeal of CENTRAL STATES COAL COMPANY.
    Docket No. 8735.
    Decided September 27, 1926.

      Thomas O. Marlar, Esq., for the petitioner.

      Thomas M. Wilkins, Esq., for the Commissioner.
   Littleton:

This is an appeal from the determination of a deficiency of $5,198.96 for the calendar year 1920. It is claimed that the Commissioner erred in refusing to allow as a deduction $11,050 traveling expenses of petitioner’s two officers during 1920.

FINDINGS OF FACT.

Petitioner is an Ohio corporation engaged as a broker and wholesale dealer in coal, with principal office at Toledo. During 1920 the company experienced difficulty in obtaining a sufficient amount of coal to supply the demand. Two salesmen theretofore employed to sell coal spent their entire time during 1920 in purchasing coal and were paid a commission of 50 per cent. The total amount paid to them during the year 1920 amounted to $28,715. In addition to the activities of these salesmen, the two officers of the corporation, Charles T. Harther and S. T. Walbolt, who owned its entire stock, spent practically all of their time during 1920 in traveling from Toledo to various cities for the purpose of making contracts for the purchase and sale of coal. They made numerous trips to cities in Ohio, Illinois, Pennsylvania, ISTew York, Massachusetts, West Virginia, Kentucky and Tennessee for this purpose. During the year the company paid $6,732.75 for the traveling expenses of Harther, its president, and $6,460.35 for those of Walbolt, its secretary-treasurer.

The total amounts expended by the corporation were ordinary and necessary expenses. The Commissioner disallowed $11,050 of the total amount paid.

Judgment for the petitioner. Order of re-determination will he entered on IB days’ notice, under Rule 50.


text:
    Appeal of RICHARD A. FOLEY ADVERTISING AGENCY.
    Docket No. 4968.
    Decided September 27, 1926.

      Adrian O. Humphreys, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
   Littleton:

This is an appeal from the determination of a deficiency in tax for the years 1918, 1919, and 1920 in the amounts of $6,278.65, $28,067.84, and $26,632.70, respectively. The whole of the deficiency results from the Commissioner’s denial of the petitioner’s claim for classification as a personal service corporation under section 200 of the Revenue Act of 1918,

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation, with principal office at Philadelphia. *It was organized in 1914 with a capital stock of $10,000, consisting of 1,000 shares of $10 par value each, which were originally issued for furniture and fixtures in the amount of $2,000 and good will in the amount of $8,000.

The business was founded as an advertising agency about the year 1900 by Richard A. Foley, formerly a newspaper man, who served as president from its incorporation until his death in 1922.

During the years 1918, 1919, and 1920 the capital stock of the company was held by the following officers and individuals:

Shares
Richard A. Foley, president-742
R. Jenny Foley (not an officer)_190
C. H. Eyles, vice president and secretary_ 21
L. E. Hood, vice president and general manager_ 15
O. O. Shoemaker, treasurer_ 15
James Montgomery, director_ 14
Ida E. Thomas (not an officer)_ 3

All of the stockholders were actively engaged in the business and devoted practically all of their time to it during the tax years in question. Richard A. Foley, president, was a man of unusual capacity and genius for advertising work and it was through his reputation and his individual efforts in soliciting accounts that most of the business was secured for the company. C. PI. Eyles, L. E. Hood, and James Montgomery assisted Foley in soliciting accounts, interviewing clients, originating advertising ideas and exercising general supervision of the business. The several titles of these officers were more or less honorary and did not bespeak a clear division of the duties performed. C. C. Shoemaker performed the usual duties of treasurer, having supervision of the office work. Ida E. Thomas was desigpated executive assistant and had charge of the stenographic, clerical, and other work performed by the employees. R. Jenny Foley, wife of Richard A. Foley, assisted in formulating recipes for food products, made experiments and cooking tests in her own home with various products advertised by the company, gave talks on occasions before women’s clubs and endeavored to familiarize the customers with the use of the client’s product.

The business organization of the agency consisted of seven distinct departments. The average number of employees in each department and their total compensation for each of the years 1918, 1919, and 1920 were as follows:

It was necessary at times for the agency to employ the services of outside artists, engravers, printers and others in the preparation of advertisements.

The handling of all accounts was fairly regular. Having secured a client, the agency submitted rough copies of the proposed advertisements with a list of the publications in which they would appear and an estimate of the cost. The client made a selection of the copy to be used and gave approval to the agency in the form of an order for the advertising as specified in the approved copy. The agency thereupon developed the copy and placed the order with the various publications, seeing that the insertions were made according to specifications.

In the meantime, the agency submitted a bill to the client for the exact total cost of the advertisement, including the cost of materials, art work, engraving, etc., obtained from outside sources, and the cost of the advertising space plus a 15 per cent commission. At some time during the month in which the advertisement appeared, the publications submitted bills therefor to the agency, payable before the 20th of the succeeding month. These bills were made out to the agency with the name of the client usually stated and were paid by the agency with the funds already collected from the client after deduction of the 15 per cent commission. The various publications allowed the agency the 15 per cent discount on the list price of advertising space customarily allowed to reputable advertising agencies. The bills for the materials and outside work were likewise made out to and paid by the agency. There were no written contracts between either the client and the agency or the agency and the publisher. The advertiser was privileged at any time to withdraw his account and transfer it to another agency, retaining the advertising space in its own name under the same terms.

The income and expenses of the company for each.of the years T918, 1919, and 1920 were substantially as follows; -;

In. 1917 the agency handled 10 accounts aggregating $875,372.57 and 84 lesser accounts aggregating $172,940.31; in 1918, 12 accounts aggregating $1,475,581.21 and 60 lesser accounts aggregating $169,348.34; in 1920, 12 accounts aggregating $1,587,826.06 and 57 lesser accounts aggregating $214,508.90.

The advertisements appeared in as many,as 2,300 publications in the United States and Canada.

The agency’s balance sheets for the years 1918, 1919, and 1920 show assets and liabilities as follows:

In 1918 the net income to the agency from regular business was $87,324.51 and from securities and investments $3,116.26; in 1919, from regular business $248,559.29 and from securities and investments $3,317.17; in 1920, from regular business $281,158.38 and from securities and investments $5,105.93.

Judgment for the Commissioner. Order redetermining the deficiencies to he $6$78.65 for 1918, .$28,067.84 for 1919, and $26,632.70 for 1920 will he entered accordingly.


text:
    Appeal of HELEN BARCLAY, Executrix of the will of HAROLD BARCLAY, Deceased.
    Docket No. 2474.
    Decided September 28, 1926.
    Evidence held insufficient to warrant a modification of the deficiency.

      Henriette A. Nuehaus, for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for 1920 in the amount of $841.39. The deficiency results from the disallowance by the Commissioner of an amount claimed by petitioner as a loss in connection with the sale of certain real property and deducted from his income for that year-.
    FINDINGS OF FACT.
    Helen Barclay is the duly appointed, qualified and acting executrix of the estate of Harold Barclay, deceased, and is a resident of the City of New York. Harold Barclay died July 25, 1922, a resident of New York.
    Henry Barclay, the grandfather of the deceased, Harold Barclay, who by his will disposed of the property involved in this appeal, described as Nos. 321 and 323 Broadway, New York City, N. Y., died on March 21, 1865, a resident of New York. His will was admitted to probate by the Surrogate’s Court of Queen’s County, New York, on April 10, 1865. The part of the will which concerns the property here involved reads as follows:
    I give and devise to my executors and executrix who may take upon themselves the execution of this my will, and to the survivors and survivor of them, those two certain lots of land with the brick stores thereon, now known as numbers three hundred and twenty-one (321) and three hundred and twenty-three (323) Broadway in said City of New York, situated between the property of the New York City Hospital and the lot of land with the marble front store thereon hereinbefore devised in trust for the benefit of my son James L„ and I also give and bequeath to my said executors and executrix the sum of twenty thousand dollars, to have and to hold said real estate and personal property, in trust, to invest said sum of twenty thousand dollars on bond and mortgage or in public securities, to receive the rents, issues and profits of said real estate and the income or profits of said personal property, and after paying all taxes, assessments and charges for insurance and repairs, to accumulate the net income thereof respectively. Should my son Sackett M. be a minor at my decease during his minority, and on my said son Sackett M. attaining the age of twenty-one years, to pay over to him such accumulations and thereafter, or if at the time of my decease he should be of the age of twenty-one years then, to apply the net income thereof to the use of my said son Sackett M. during his natural life, and on his decease I give, devise and bequeath said trust estate, absolutely forever, to his lawful issue, and the lawful issue of any deceased issue, equally, share and share alike, such issue to take the share of his, her or their parent; and should my said son Sackett M. die without lawful issue, I give, devise and bequeath said trust property, absolutely forever, to my surviving children then living, and to the lawful issue of any deceased child, equally, such issue taking the share of his, her or their parent.
    Sackett M. Barclay, the life beneficiary under the trust covering the property involved as set forth in the portion of the will above set out, was living at the time of Henry Barclay’s death. He died October 10, 1918, leaving five children surviving him and no issue of any deceased child. One of the said five children was Harold Barclay, who was born August 14, 1872.
    The property in question referred to in the will of Henry Barclay consisted of two lots and two five-story brick dwellings which were subsequently altered into stores and lofts. These buildings were leased and produced the following gross rentals from 1913 to 1920, inclusive:
    Year. Amount. Year. Amount.
    1913_ $13,939.88 1917_$9, 000. 00
    1914_ 13,199.92 1918_ 9, 916. 63
    1915_ 12,191.66 1919_ 9, 999. 96
    1916_ 9, 691.64 1920_ 833.33
    The property was sold in 1920 for $200,000. Of this amount, $2,600 was paid as commission.
    The assessed valuation of the entire property for the purpose of local taxation, as determined by the deputy tax commissioner for New York, was as follows:

      Year. Amount. Year. Amount.
    1872_$150,000 1917_$240,000
    1913_ 260, 000 1918_ 240, 000
    1914_ 260,000 1919_ 230, 000
    1915_ 260, 000 1920_ 230, 000
    1916_ 250,000
   OPINION.

Littleton:

Petitioner contends, first, that at the death of Henry Barclay title to the property vested in the brothers and sisters of Sackett M. Barclay, the life tenant, subject to be divested by birth of issue to Sackett M. Barclay; secondly, upon the birth of Harold Barclay in 1872 title to the property vested in him, a portion of his title thereto being divested upon subsequent birth of issue to Sackett M. Barclay; thirdly, that on March 1, 1918, Harold Barclay was the owner of a one-fifth vested interest in the property, that the value of a one-fifth interest in 1872 was $50,000, and that the fair market value of his one-fifth interest on March 1,1913, was in excess of $40,000, his proportion of the sales price of the property in 1920.

The only evidence before the Board as to the value of the property in 1872 and 1913 is certified copies of the records of the City of New York showing the value placed upon the property for the purpose of local taxation. The value thus placed upon the property, unsupported by any other evidence, can not be accepted by the Board for the purpose of determining actual or fair market value of the property. Appeal of William A. Daly, 1 B. T. A. 993; Dorr v. Mass. Title Ins. Co., 238 Mass. 490; 131 N. E. 191.

It is unnecessary to discuss the questions of law raised, since we are without sufficient and proper evidence upon which to predicate a finding of value, either in 1878 or 1913, even if it should be decided that, in computing the gain or loss on the sale in 1920, the value of petitioner’s interest should be deducted from the sales price.

Judgment for the Commissioner.

Phillips concurs in the result only.


author: Arundell:

text:
    Appeals of ELIZABETH W. STRANAHAN and FRANK D. STRANAHAN.
    Docket Nos. 75, 76.
    Decided September 28, 1926.
    1. Dividends paid in 1917 are taxable at 1917 rates to tlie extent of 1917 earnings available for distribution at the time of the declaration of the dividend. Ed-war (Is v. Douglas, 269 U. S. 204 ; 46 Sup. Ct. 85; 5 Am. Fed. Tax Rep. 5666.

      2. Commissioner’s finding by pro rata method that one-sixth ' of 1917 earnings was available for distribution on March 1, 1917, approved. Douglas v. Edwards, 287 Fed. 919; 2 Am. Fed. Tax Rep. 1890.

      Harry J. Oerrity, Esq., and Thomas 0. Marlar, Esq., for the petitioners.

      Robert A. Littleton, Esq., for the Commissioner.
    These appeals involve deficiencies in income taxes for the calendar year 1917, as follows:
    Elizabeth W. Stranahan-$6, 61S. 12
    Frank D. Stranahan-1- 14,337. 69
    The Commissioner filed a plea in each case questioning the jurisdiction of the Board to hear and determine the appeals. When the appeals came on for hearing the Commissioner filed an answer to the appeals, thereby raising an issue as to the rate at which dividends received in 1917 are taxable. A written stipulation of facts was filed at the hearing.
    FINDINGS OP PACT.
    On or about March 1, 1917, the Champion Spark Plug Co., a corporation, declared a dividend of $300,000, payable partly in cash and partly in stocks and bonds owned by the company.- The resolution declaring the dividend provided as follows:
    900 Upton- Avenue
    . Toledo, Ohio
    March 1, 1917
    Ten A. M.
    A meeting of the Board of Directors was held at the time and place above specified, upon call of the President, there being present Robert A. Stranahan and Frank D. Stranahan.
    Upon motion, duly adopted, the President and Treasurer were authorized and ordered to make distribution to the stockholders of this company, as per list thereof presented at this meeting, of certain stocks and bonds held by the company or for the company account, and, for the purpose of equalizing the value thereof among said stockholders, there was ordered paid to the stockholders of the company, from the surplus funds of the company, the following cash payments.
    To E. W. Stranahan__$16, 302. 66
    To Frank D. Stranahan_ 33, 007. 71
    To Robert A. - Stranahan_ 33, 007. 72
    The meeting thereupon adjourned.
    (Signed) Frank D. Stranahan.
    At the time the foregoing dividend was declared the Champion Spark Plug Co. was a close corporation, the stockholders being Elizabeth W. Stranahan and her two sons, Frank D. Stranahan and Eobert A. Stranahan, each of whom owned one-third of the stock of said corporation.
    When' the dividend was declared on March 1, 1917, the books of the Champion Spark Plug Co. had not been closed or balanced since January 1, and the earnings of the corporation for the months of January and February were unascertained. As of January 1, 1917, the surplus of the Champion Spark Plug. Co., representing earnings 'for 1916 and prior years, amounted to $1,611,759.78. The distribution of cash to the three stockholders in the amount' specified by the resolution set out above was for the purpose of equalizing the total •dividend of $300,000 so that each of the three stockholders of the company would be entitled to $100,000, part cash and part securities. ■ The list of stocks and bonds referred to in the dividend resolution showing the date of purchase and the cost thereof, is as follows:

    The petitioner, Elizabeth W.- Stranahan, received as her pro rata share of the $300,000 dividend, the following cash and securities:
    Cash____$16, 302. 66
    Bonds ¡
    Armour & Co_ 18,847. 50
    American Telephone & Telegraph Co_ 18, 335. 56
    New York Central Bailway Co_ 11, 042.08
    Swift & Co_ 10,229.17 Stock:
    Owens Bottle & Machine Co_ 25, 243.03
    Total-1- 100,000.00
    The petitioner, Frank D. Stranahan, received as his pro rata share of the $300,000 dividend, the following cash and securities:
    Cash-$33, 007. 71
    Stocks: ,
    Fisk Tire & Rubber Co- 41, 749.26
    Owens Bottle & Machine Co_ 25, 243. 03
    Total 100, 000. 00

      The Commissioner originally held that the net earnings of the Champion Spark Plug Co. for the calendar year 1917, available for dividend purposes after the books had been closed, amounted to $1,374,730.13, and that there was available for the payment of the dividend declared on March 1, 1917, one-sixth of the said amount, or $229,121.69, and the petitioners were each taxed at 1917 rates on $76,-373.89 and at 1916 rates on $23,626.11, these sums aggregating the $100,000 dividend received by each of them, as though the dividend payments were actually made wholly in cash.
    The return of Elizabeth W. Stranahan for the calendar year 1917 was audited in the Commissioner’s office and in March, 1923, a jeopardy assessment of additional taxes in the amount of $6,618.12 was made, without giving the petitioner the benefit of the thirty-day appeal provision of section 250(d) of the Eevenue Act of 1921. No hearing was granted the petitioner prior to the making of this assessment and accordingly, with the consent of the Commissioner, a claim for abatement was filed on or about March 24, 1923. This claim for abatement related solely to the additional tax on account of the dividend received by the petitioner from the Champion Spark Plug Co. on or about March 1, 1917, and the claim was formally rejected by the Commissioner on August 5, 1924.
    The return of Frank D. Stranahan for the calendar year 1917 was audited in the Commissioner’s office and in January, 1921, an assessment of additional tax in the amount of $14,337.69 was made. This petitioner filed a claim in abatement against the assessment in the amount of $12,683.14, covering that portion of the additional tax relating to the dividend received by him from the Champion Spark Plug Co. on or about March 1, 1917. The claim for abatement was rejected by the Commissioner in a letter dated April 13, 1923, which rejection was sustained by a further letter from the Commissioner to the petitioner dated August 5, 1924, affirming his former decision.
    The Commissioner now admits that the net earnings of the Champion Spark Plug Co. for the calendar year 1917, available for dividend purposes after the books had been closed, amounted to $932,7 355.54; that there was available for the payment of the dividend declared on March 1, 1917, one-sixth of that amount, or $155,392.59; that the petitioners are each taxable at 1917 rates on $51,797.53 and at 1916 rates on $48,202.47, these sums aggregating the $100,000 dividend received by each, as though the dividend payments to them were actually made wholly in cash.
   OPINION.

Arundell:

If there was any doubt at the time of filing these appeals as to our jurisdiction to hear and determine them, it has been removed by section 288(f) of the Revenue Act of 1926, which provides in part:

If any deficiency in any income, war-profits, or excess-profits tax imposed by the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or the Revenue Act of 1921, or by any such Act as amended, was assessed before June 3, 1924, but was not paid in full before that date, and if the Commissioner after June 2, 1924, but before the enactment of this Act finally determined the amount of the deficiency, and if the person liable for such tax appealed before the enactment of this Act to the Board and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal.

In the case of Elizabeth W. Stranahan the Commissioner made no final determination until August 5, 1924, when he notified the petitioner of the rejection of her abatement claim. In the case of Frank D. Stranahan, while the Commissioner notified him by letter of April 13, 1923, of the rejection of the abatement claim, the case was apparently kept under consideration until August 5, 1924, when the petitioner was notified that the rejection of his claim was sustained. The letter of August 5, 1924, in our opinion, was the notice of -final determination by the Commissioner. Appeal of J. S. Hoskins Lumber Co., 3 B. T. A. 846. We accordingly hold that we have jurisdiction in both cases and the plea of the Commissioner asking that the petitions be dismissed is denied.

We now come to the merits of the cases. There is no question raised as to the taxability of the full amount of the dividends of $100,000 in each case The question is what portion of the dividends is subject to tax at 1917 rates. The petitioners contend that that portion of the dividends which is represented by securities purchased by the corporation in 1915 and 1916 should be taxed at the rates for those years. The Commissioner seeks to tax at the 1917 rates that portion of the amount of dividends represented by a pro rata portion of the 1917 earnings of the corporation and allowing the balance to be returned as taxable at 1916 rates.

The dispute between the parties arises under section 31 (b) of the Revenue Act of 1916, which was added by the Revenue Act of 1917, the pertinent portions of which read:

(b) Any distribution made to the shareholders or members of a corporation, * * * in the year nineteen hundred and seventeen, * * * shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the dis-tributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation.

The petitioners rely principally upon that portion of section 31 (b) which provides for a tax upon distributions “at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation.” They contend that this portion of the-section .reflects the paramount intent of Congress in enacting section 31 (b). The answer to this contention is found in the decision in the case of Edwards v. Douglas, 269 U. S. 204; 46 Sup. Ct. 85; 5 Am. Fed. Tax Rep. 5666, where it is said in part:

While the 1917 Act was under consideration, it was recognized that this rapid increase in the income tax rate might result in unjust discrimination if no change were made in the then exisiting rule governing the taxation of dividends. * * * The stockholders in those corporations which had deferred the distribution of proiits .earned prior to 1917, either generally from prudence or specifically with a view to stabilizing over a long period the rate of dividend, would be at a great- disadvantage as compared with the stockholders'in tho.se corporations which had pursued the practice of distributing each year substantially all profits earned. On the other hand, if corporations were left free to determine out of what year’s profits dividends paid in 1917-and, subsequent years should be deemed to have been made, a corporation with a surplus derived from earnings made prior to 1917 could, while' accumulating the profits of the war years, pay dividends on which its stockholders would escape the heavy war tax, by simply declaring that the dividends were payable out of the earnings of earlier years. And if- there were still on hand such sufficient surplus earnings from the. period prior to March 1, 1913, the, dividends would be exempt from all tax. It was apparently to obviate such inequalities that Congress provided by sec. 31 (b) for an objective consideration of the date when the corporation earned the profits, as well as the date when the taxpayer received his share of them in the form of the dividend. ■

From the decision in that case and the decision of the District Court thereby affirmed (Douglas v. Edwards, 287 Fed. 919; 2 Am. Fed. Tax Rep. 1890), the conclusion is inevitable that section 31 (b) was intended to tax at 1917 rates distributions made in that year up to the full amount of the current earnings, and only after the current earnings were exhausted could any distributions made in 1917 be returned as taxable at rates applicable to earlier years.

The petitioners also contend that the presumption created by that part of section 31 (b) which prescribes that distributions “ shall be deemed to have been made from the most recently accumulated undivided profits or surplus,” is disputable rather than conclusive. This contention, it seems to us, is disposed of by what we have said above, but if anything further need be said it can be found in the case of Douglas v. Edwards, in both the decisions of the District Court (287 Fed. 919) and the Circuit Court of Appeals (298 Fed. 229). In the latter decision, after defining the word “deemed,” it is said:

We think it was the purpose of the statute that any distribution made to shareholders' should be conclusively presumed to have been made from the most recently accumulated undivided profits or surplus.

While the decision of the Circuit Court of Appeals was reversed, the question of the presumption created by the word “ deemed ” was not raised in the Supreme Court, 269 U. S. 204, foot-note at page 207.

The petitioners object to the pro rata method used by the Commissioner in determining the amount of ’ the years profits of the corporation for the months of January and February, 1917. By this method the Commissioner found that one-sixth of the year’s earnings was available for the payment of the dividends declared on March 1, 1917. This proposition is disposed of by Douglas v. Edwards, 287 Fed. 919, where it said, at page 926:

There is nothing t.o indicate that a pro rata apportionment thereof [of the net earnings] is not in accordance with the facts.

As set forth in the last paragraph of our findings of fact, the Commissioner concedes that the amount of corporate earnings for 1917, the amount of the earnings available at March 1, 1917, and the amount taxable to each petitioner at 1917 rates, are lower than the amounts used in his determination of the deficiencies. In accordance with this concession of the Commissioner, the deficiency in each case should be recomputed on the basis of $51,797.58 being taxable at 1917 rates. The balance of the dividend in each case, $48,202.47, the Commissioner holds to be taxable at 1916 rates. No evidence was offered to show that this amount was not a part of 1916 surplus and the Commissioner’s allocation of this part of the dividend to that year must accordingly be approved.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


author: Marquette:

text:
    Appeal of EVERETT U. CROSBY.
    Docket No. 3764.
    Decided September 28, 1926.

      George G. Witter, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income tax for the year 1918 in the amount of $3,909.59-
    There was no appearance for the taxpayer at the hearing, but it has been stipulated that so far as the same issues are involved, the facts are in all respects the same as those in the Appeal of Henry 1. Brown, 4 B. T. A. 1129.
    FINDINGS OF FACT.
    The taxpayer is a resident of Philadelphia, Pa..
    During 1918 the taxpayer was a member of the partnerships of (1) Wi'llcox, Peck, Brown & Crosby, (2) Henry W. Brown & Co.. (3) Brown, (Jrosby, Story & Co., and (4) the Independence Bureau. Henry I. Brown also owned interests in each of these firms and various other persons were interested in one or more of them.
    During 1918 the taxpayer received from the Independence Bureau $3,000 as salary and $1,314.12 as his distributive share of the partnership profits. He reported his total income from this partnership as $4,314.12. The Commissioner increased this amount by $3,000 on the theory that the salary payment had not been reported.
    The Commissioner determined that the books of the Independence Bureau were kept on the accrual basis during the year 1918, and in computing the taxpayer’s income from that source increased the amount reported by the taxpayer in his return.
    Because of disagreement among the partners as to the conduct of its affairs and in order to facilitate the retirement of one of the partners, it was decided during 1918 to dissolve the firm of Henry W. Brown & Co. Distribution of the assets was commenced, and, in an attempt to solve the problem of distributing accounts receivable they were arbitrarily charged off as bad debts. The Commissioner has disallowed the taxpayer’s claim for a deduction from income of an amount equal to his share of these alleged bad debts.
    During 1918 Henry W. Brown & Co. spent $2,248.23 for office furniture and equipment, and in accordance with its usual practice charged the expenditure to expense. The furniture and equipment bought has a useful life of at least 10 years. The Commissioner restored the amount mentioned to income of the partnership and increased the taxpayer’s income accordingly.
    The taxpayer owned a 39.54 per cent interest in a building at 435 Walnut Street, which was occupied under a lease by Henry W. Brown & Co., one of the partnerships of which the taxpayer was a member. The lease, which was for a five-year term ending December 31, 1918, provided that repairs and improvements were to be at the lessee’s expense. The lease contained no “ renewal clause ” and there was no specific agreement that it would be renewed, yet the taxpayer understood that a renewal would be granted unless unforeseen developments occurred, and on expiration the lease was in fact renewed for a five-year period.
    During 1918 Henry W. Brown & Co. found it necessary to lease three floors of an adjoining building at 437 Walnut Street. The new leasehold was unheated and the company therefore installed a new furnace at 435 Walnut Street, with a capacity sufficient to heat that building and the new leasehold.
    The Commissioner determined that the cost of installation of the new furnace was income in the form of additional rent to the owners of 435 Walnut Street and accordingly increased the taxpayer’s income by $1,846.72, representing his share of such alleged income.

      The Commissioner added to the taxpayer’s income the amount of tax paid at the source on interest received from tax-free covenant bonds.
   OPINION.

Marquette:

The Commissioner erred in adding to the taxpayer’s income, as reported by him for the year 1918, the amount of $3,000 representing salary paid him by the Independence Bureau, and the amount of the tax paid at the source on interest from tax-free covenant bonds. In all other respects the determination of the Commissioner is approved.

Order of redetermination will be entered on 15 days’ notice, under Bule 50.

Phillips and Smith dissent in so far as the decision includes the cost to the tenant of installing a furnace as income to the landlord.


author: AitoNdelx :

text:
    J. B. LILLY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 5933.
    Decided September 28, 1926.
    Community property. — In 1921 the petitioner, who with his wife was domiciled in California, collected income from corporate securities which were acquired subsequent to their marriage but were kept in the wife’s safe deposit box, to which he had access. Field, the evidence is insufficient to overcome the presumption that the securities were community property, and the income therefrom held taxable to the petitioner. United States v. Robbins, 269 U. S. 315; Appeal of D. Oerruti, 4 B. T. A. 682.

      Irving M. Walker, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1921 in the amount of $329.41. The issue raised is whether the Commissioner erred in including in income of the petitioner the income from certain securities claimed to be separate income of the petitioner’s wife and which she separately reported.
    FINDINGS OF FACT.
    The petitioner is married and during 1921 he and his wife were domiciled in the State of California. Mrs. Lilly had been an invalid for a number of years and during this period, including the year 1921, the petitioner acted as her agent under a written power of attorney. In 1921 the petitioner collected income in the amount of $1,594.00 on securities of domestic and foreign corporations. The securities were kept in Mrs. Lilly’s safe deposit box to- which the petitioner, as her agent, had access. They were 'acquired subsequent to the marriage of the petitioner and Mrs. Lilly, which occurred in 1910.'
    In auditing the return of the petitioner the Commissioner added to the income reported the interest received on these securities, in the amount of $1,594, as shown by information returns bearing the signature of the petitioner.
   OPINION.

AitoNdelx :

The petitioner’s case is predicated on the assumption that the securities which produced income in 1921 were the separate property of the wife of the petitioner. The Commissioner has asserted the deficiency on the assumption' that the income from the securities was income to the petitioner.

The1 evidence shows that the securities were acquired dufing the existence of the marital community.

The statutes of California (section 687, Civil Code) define what is community property as follows:

Community property is property acquired by husband and wife, or either, during marriage, when not acquired as the separate property of either.

Sections 162 and 163 define the separate property of the. husband and of the wife to be that which was owned by them, respectively, before marriage and that acquired afterwards ■ by gift, bequest, devise, or descent, with the rents, issues, and profits thereof. Section 164 provides that: ..■■■:

All other property acquired after marriage by either husband or wife, or both, * * * is community property * * *.

The presumption, under these statutes, is that all property in the possession of either spouse during marriage is community property until the contrary is shown. Fennell v. Drinkhouse, 131 Cal. 447; 63 Pac. 734; In re Pepper's Estate, 158 Cal. 619; 112 Pac. 62. In Fennell v. Drinkhouse, supra, the husband sued to recover from the administrator of the estate of his deceased- wife money on deposit' in the name of the wife. It is said there,' in part:

This presumption can be overcome “ only by evidence of a clear, certain, and convincing character establishing the contrary, and the burden of this showing rested with the parties claiming the separate character of the property. In the absence of such proof, the presumption as to the community character was absolute and conclusive.” In re Boody’s Estate, 113 Cal. 682, 686; 45 Pac. 858, and cases there cited.

To the same effect is the decision in the case of In re Jolly's Estate, 238 Pac. 353, decided July 30, 1925, where it is said:

“ The disputable presumption raised by. section 164, Civil Code, - is a form of evidence under section 1957, Code Civ. Proc. It may be controverted by other evidence, direct or indirect; but, unless so controverted, the court or jury is bound to find according- to the presumption.” Stafford v. Martinoni, 192 Cal. 724, 221 P. 919. “The community [property] generically embraces all property belonging to the-spouses, except such , as the statute specifically removes from its operation. Community property is the rule, separate property the exception thereto. Hence the presumption * * * follows. '* * * Bal-linger on Community Property, p. 213.”
* * * * * * *
* * •* ruie dominating the situation before us is well stated by the text in 31 C. J. 47, as follows:
“ Since the very basic conception of the community property system is that it is a species of partnership between a husband and wife, whereby they are to share equally in the benefit and enjoyment of the results of their joint or separate industry, labor, and earning capacity, and accordingly ‘ separate property ’ is defined in terms necessarily making it an exception to the usual estate held by the members of the community, every inquiry as to whether particular property belongs to the community, or to the separate estate of one or the other members thereof, begins with a prima facie presumption that it belongs to the former, especially where the matrimonial union has continued for a considerable length of time. * * * The burden of overcoming the general presumption in. favor of the community is upon the party asserting separate ownership. * * * ”

The evidence in the present casé, in which the property in, question was acquired subsequent to marriage, does not show that it was acquired by. gift, bequest, devise or descent and is therefore not sufficient to overcome the presumption that the securities from which the income was received were community property. Under the decision in United States v. Robbins, 269 U. S. 315; 46 Sup. Ct. 148, income from community property in California is taxable to the husband. See also Appeal of D. Cerruti, 4 B. T. A. 682. We accordingly find no- error on the part of the Commissioner in including in the income of tlie petitioner the income received from corporate securities in 1921.

Judgment for the 0ommissioner.


text:
    RUTH IRON COMPANY et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

    Docket No. 7224.
    Decided September 28, 1926.
    In January, 1913, petitioners sold certain ore-bearing property arid ea ch of them received in exchange for its or his interest therein a certain amount in cash and forty-one non-interest-bearing promissory notes, payable annually thereafter, endorsed by the United States Steel Corporation and further secured by a vendor’s lien upon the property. Held, that the amounts received by petitioners upon the payment of their respective notes in the years 1919, 1920, 1921, and 1922, in excess of the fair market value of such notes on March 1, 1913, which value was in excess of cost, was taxable income.

      Guy Chase, Esq., and Francis W. Sullivan, Esq., for the petitioners.

      John W. Fisher, Esq., for the respondent.
    Petitioners question the determination of deficiencies as follows:

    Upon motion the proceedings were consolidated and heard together, since they all involve the same question, to wit, whether any taxable income was received upon the payment in the years for which the deficiencies have been determined of non-interest-bearing notes received by petitioners on January 1, 1913, as part of the consideration for property sold by them on that date.
    FINDINGS OP PACT.
    For many years prior to 1913 petitioners were owners of certain undivided interests in an iron-ore-bearing property known as the Kosmerl Mine in St. Louis County, Minn. In 1903 they leased the property to the Oliver Iron Mining Co. for a term of fifty-one years, ending in 1954, at a royalty of 35 cents a ton of ore mined, and certain minimum annual royalties. All minimum royalties had been paid to and including December 31, 1912.
    On January 1, 1913, all of the fee owners joined in a sale of the property to the Oliver Iron Mining Co., lessee, at the price specified in subdivision 12 of the contract of sale as follows:
    The purchase price of said lands shall be determined by multiplying the number of tons of iron ore found to exist on said lands on the foregoing basis, by thirty-five (35) cents for each ton; from such product there shall be deducted the sum of $530,000 heretofore paid in royalties under the aforesaid lease by the Purchaser to the Vendors; the remainder shall be divided into forty-one (41) equal annual payments considered as payable one forty-first each year, commencing with January 1st, 1913, such payments to be evidenced by the promissory notes of said Oliver Iron Mining Company, dated January 1st, 1913, without interest, the payment of which shall be guaranteed by the United States Steel Corporation, which guarantee the Purchaser agrees to procure. Each of the following Vendors shall be entitled to separate notes, payable to his or its order for his or its interest in said property, said interests of said Vendors being as follows:
    Francis S. Kosmerl, an undivided 441/1080,
    Frank B. Kellogg, an undivided 7/90,
    Cordenio A. Severance, an undivided 7/90,
    Ruth Iron Company, an undivided 107/960,
    Reading Investment Co. an undivided 823/5760,
    Eva Iron Company, an undivided 1/12,
    The Gregory Company, an undivided 63/640.
    Subdivision 13 of said contract reads as follows:
    The Vendors shall at all times have a first lien upon the lands for the full amount remaining unpaid upon said notes from time to time, such lien of the Vendors to be secured by a first mortgage thereon, executed by the Purchaser to the. Vendors, satisfactory to the Vendors, but in any case permitting the mining and shipping away of iron, ore, equal in value, at thirty-five (35) cents per ton to the amount of all said purchase money notes theretofore paid.
    While any of said notes remain unpaid no ore shall be mined from said premises exceeding in value at thirty-five (35) cents per ton, the amount that shall theretofore have been paid on said notes. The Purchaser shall keep a record of the number of tons of ore mined and shipped from said lands, and at the end of each calendar year in which shipments are made, shall furnish the Vendors a duly verified statement of the number of tons shipped during the year.
    The sale was effective on January 1, 1913, and the deed, the mortgage and.notes bear that date.
    The deed declared that “A lien is hereby reserved by said parties of the first part [vendors] to secure the unpaid balance of the purchase price of said lands.”
    The mortgage provided as follows:
    * * * That if the said Mortgagor, its successors or assigns, shall well and truly pay or cause to be paid to the holders of the notes or obligations hereinafter described, or to their respective heirs, executors, administrators or assigns, the sum of three million, eight hundred and nineteen thousand, five hundred twelve dollars and twenty cents ($3,819,512.20) in gold coin or its equivalent and interest, if any, according to the conditions of four hundred (400) promissory notes, all bearing even date herewith, all made by the Mortgagor, then this deed to be null and void; otherwise to be and remain in full force and effect; * * *
    This mortgage is given to secure the unpaid portion of the purchase price of said mortgaged premises, the lien for which is referred to and reserved in a deed given therefor by Francis S. Kosmerl, Frank B. Kellogg and wife, Cordenio A. Severance and wife, Ruth Iron Company, Eva Iron Company, Reading Investment Company and The Gregory Company to the said Oliver Iron Mining Company dated January 1st, 1913, and upon the discharge of this mortgage the said lien referred to in said deed shall thereby, without any other act or thing done, be and become satisfied and discharged.

      Notwithstanding anything herein contained to the contrary, the Mortgagor and, the Trustees, have agreed to, and this mortgage is made and accepted upon the conditions following, to-wit; The Mortgagor may mine and remove from said lands at any time a quantity of iron ore equal in value at the rate of thirty-five cents (35 cents) per ton to the sum of six hundred twenty-five thousand, four hundred eighty-seven dollars and eighty cents ($625,487.80) heretofore paid by the Mortgagor and also in addition thereto a quantity of iron ore equal in value at the rate of thirty-five cents (35 cents) per ton .to the aggregate amount of all notes given as a part of such purchase price and paid prior to the time of removal of such ore; and the Mortgagor covenants and agrees that no iron ore exceeding the total of the aforesaid quantities, which the Mortgagor may remove from time to time as .aforesaid, shall be removed from said lands until the notes given for the purchase price of said lands are fully paid.
    Each of the notes given were the same with the exception of the amount thereof and the name of the payee. They were signed by the Oliver Iron Mining Co. by its president and its secretary and assistant treasurer, and read as follows:
    Duluth, Minnesota, January 1st, 1918.

    $-
    On or before-years after date the OLIVER IRON MINING COMPANY, a Minnesota Corporation, promises to pay to the order of RUTH IRON COMPANY_dollars in gold coin or its equivalent, at The First National Bank of Duluth, Duluth, Minnesota, without interest until after maturity. Value received.
    Each note was endorsed by the United States Steel Corporation by its treasurer, as follows: “ For value received the payment of the within note, according to its terms, is hereby guaranteed.” Each of the vendors received separate notes for his or its proportionate part of the total purchase price less his or its proportion of the cash payment made on January 1, 1913.
    The total sale price of the land was computed on 12,700,000 tons of ore at 35 cents a ton, amounting to $4,445,000, less advance and minimum royalties theretofore paid amounting to $530,000. One forty-first of the purchase price was paid in cash on January 1, 1913.
    Certain of the purchase price notes given by the vendee to petitioners came due on January 1, 1919, 1920, 1921, and 1922, and the face amounts thereof without interest were in each instance promptly paid.
    The Commissioner held that as the notes were paid each year the owners thereof realized taxable income to the extent of the excess of the amount of payments received over the fair market price or value of the notes on March 1,1913. Such value was determined by him to be the present worth of the notes on that date computed at a discount of 5 per cent compound interest.

       The following .proceedings were heard with the above and are decided herewith: Eva Iron Company, Docket No. 7128; Reading Investment Co., Docket No. 7220;. Francis S. Ivosinerl, Docket No. 8875; Merchants Trust Co., Executor, Estate of Cordenio A. Severance, Docket No. 12710.

   OPINION.

Littleton:

Petitioners do not question the Commissioner’s determination of the March 1, 1913, value of the notes in question, but they contend that no portion of the payments of the face amount of the notes in the years involved constituted taxable gain, profit or income under the Eevenue Acts of 1918 and 1921, for the reason that the face amount of the notes, which in the hands of the vendors of the property represented merely evidence of deferred purchase-price payments, was capital on March 1, 1913, and that subsequent payment thereof represented entirely such March 1, 1913, capital.

When, on January 1, 1913, the petitioners herein sold their respective interests in the property known as the Kosmerl Mine for cash and notes of the Oliver Mining Co., there was an exchange of property for property, a completed transaction. Thereafter, and on March 1, 1913, all that the petitioners had of exchangeable value was the nondnterest-bearing notes of the Oliver Mining Co., maturing annually over a period of 39 years, 10 months. The cost of these notes to the petitioners was the fair market value of the Kosmerl Mine, at the date of the exchange, less the total of the minimum royalties theretofore paid by the purchaser which was allowed as an offset against the purchase price and the cash payment of 1/41 of tiie remainder of the purchase price which was paid on January 1, 1913. The petitioners have offered no evidence to prove the fair market value of the mine at the date of the exchange. On the other hand, they contend that the cost of the notes was 12,700,000 tons of ore of the value of 35 cents per ton or the equivalent of their face value. But such is not the case. The cost of the consideration received in exchange for the mine could be no greater than the fair value, at the date of the exchange, of the mine with which they parted. This seems so obviousfy correct to us that its mere statement is sufficient for present purposes. Lacking evidence of the fair market value of the mine, at the date of the exchange, the logical assumption is that the petitioners received value for value. That is to say, that (he value of the mine was equivalent to the value of the consideration. received therefor. If the value of the mine, at the date of the exchange, is equivalent to the cost of the consideration as well as the value of the consideration, it follows as a necessary corollary that the cost of the consideration is equivalent to the value of the consideration. So, the Commissioner has determined that the cost of the notes to the petitioners was their discounted value, at 5 per cent, compound interest, at the date of exchange, a cost necessarily lower than the March 1, 1913, value of the notes, since at March 1, 1913, the discount period was two months less than at the date of the exchange. •

But, contend the petitioners, the notes of the Oliver Mining Co. were capital assets at March 1, 1913, and any amount received in liquidation thereof or from the sale thereof, subsequent to that date, if not in excess of the face value of the notes, represents a mere return of capital owned on March 1, 1913. Not entirely so. We agree that the notes were capital assets at March 1, 1913, but the contention that the amounts received in liquidation thereof after that date represent a return of capital can only be true if the face value of the notes was the fair market value thereof at March 1, 1913. True, the notes evidence the right of the petitioners ultimately to receive the full amount of their face value; but the amount which the petitioners will ultimately receive does not represent their capital investment in these notes at March 1,1913; rather this investment is represented by the fair market value of the notes at that date. This is the principle laid down in section 202(a) of the Be venue Acts of 1918 and 1921, where, in prescribing the basis for the determination of gain or loss upon an exchange of property, Congress directed that the determination be made upon the basis of the fair market value of the property at March 1, 1913, in the case of property acquired before that date. One might acquire a bond having a par value of $100 at a cost of $25 and having a fair market value, at March 1,1913, of $50. Certainly, it can not be successfully maintained that, because the bond will entitle him to receive $100 if held to the date of maturity, he is entitled to have returned to him, free from taxation, the amount which at March 1, 1913, he was entitled to receive at some future date. Yet this is precisely the thing for which the petitioners contend.

The petitioners further contend that no part of the deferred payments of the purchase price is income within the meaning of the applicable statutes, and that that which the Commissioner treats as income from the notes is in fact a part of the defei'red payments on the purchase price of the mine, a part of the capital itself. But we are not here dealing with deferred payments of the purchase price, as such. The sale of the Kosmeii Mine in 1913 for cash and notes was one transaction, and the conversion of some of those notes into cash during the years in question is another transaction. It is this latter transaction which we have under consideration and it involves simply a disposition, for cash, of notes which the petitioners owned on March 1, 1913, and which had an ascertainable value at that date. To the extent that the proceeds from the notes exceeded the March 1, 1913 value thereof, which the Commissioner has ascertained to be greater than cost, the petitioners have realized a taxable gain upon the conversion of those notes.

Judgment for the Commissioner.

Phillips concurs in the result only.


author: Muedooic :

text:
    Appeals of W. H. ROBERTS and J. J. HILL.
    Docket Nos. 6017, 6018.
    Decided September 28, 1926.
    The mere stipulation that certain expenditures were “ development expenses ” is not sufficient to change the ruling of the Commissioner that part thereof was not deductible under section 214 (a) (1) of the Revenue Act of 1918.

      Robert Ash, Esq., for the petitioners.

      W. H. Lanuder, Esq., for the Commissioner.
    Taxes in controversy in the appeal of W. H. Roberts amount to $1,809.60 and those in the appeal of J. J. Hill amount to $1,986.16. They are income taxes for the year 1919. The petitioners agreed with the lessees of several pieces of land that they would bear the expense of drilling and developing the leased premises on condition that they be given an undivided fractional interest in the lease when the drilling had progressed to a certain extent. The Commissioner held that so much of the amount of money expended as bore the same relation to the entire amount expended as the fractional part of the lease retained by the original lessee bore to the entire amount of the lease could not be allowed as an expense to the petitioners, but should be considered for income-tax purposes as a capital expenditure. The petitioners contended that the entire amount of money expended by them in compliance with these agreements should be deducted as an ordinary and necessary expense of carrying on a business. The facts were stipulated.
    FINDINGS OF FACT.
    W. H. Roberts and J. J. Hill were sole partners in the partnership of Roberts & Hill, and each owned a one-half interest. They were residents of and conducted their business in Wichita Falls, Texas. In 1919, they entered into four contracts, each with the lessee of a separate piece of land. Under these contracts, the partnership drilled wells at its own expense and, when the drilling had proceeded to a certain extent, acquired an undivided fractional share in the ownership of the respective leases, all in the year 1919. The petitioners designated as “ development expenses ” the entire amount of money which they thus expended, and charged it to profit and .loss on their partnership books in the year 1919.
    The following table sets out the facts in detail:

   OPINION.

Muedooic :

The petitioners rely upon a stipulation that certain expenditures which they made were “ development expenses.” They now ask this Board to say that “ development expenses ” are, per se, ordinary and necessary expenses of carrying on a trade or business?. We can not decide whether they are expenses or capital expenditures under the statute, since we do not know what the money was paid for nor what the circumstances were under which it was paid.

In the Block 15 and Block 96 leases, the Commissioner held that where a taxpayer under an agreement, in order to acquire a three-eighths interest in a lease, pays out money to drill holes on land embraced in that lease, he is not entitled to deduct more than three-eighths of the money as an ordinary and necessary expense of carrying on the business, because he has acquired a three-eighths interest, in the lease and for it he has given the original lessor the benefit of five-eighths of the money spent. There was a similar holding pertaining to the other leases. We do not decide that this calculation is correct, but the petitioner has not proven that he is entitled to a larger deduction for expenses by simply stipulating that the money was spent for “ development expenses.” See Appeal of L. Z. Dickey Grocery Co., 1 B. T. A. 108; Appeal of Bonta Narragansett Realty Corporation, 1 B. T. A. 208; Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803; Appeal of Gilliam Manufacturing Co., 1 B. T. A. 967.

Judgment for the Gommissioner.

Phillips concurs in the result only)


author: ■'Smith :

text:
    ROBERT C. ALSTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 9446.
    Decided September 28, 1926.
    An individual who is bound to exercise reasonable care, skill, and diligence pertaining to the business of bis clients, and wbo maybe liable to damages .if he fails to do so, is not entitled-to deduct from gross income an amount set up on bis books of account as a reserve to provide for such contingent liability.

      Robert O. Alston, Esq., pro se.

      Henry Ravenel, Esq., for the respondent.-
    Proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $3,440.29.
    FINDINGS OF FACT.'
    The petitioner was a member of the law firm of Robert C. Alston and Philip H. Alston, practicing law in Atlanta, Ga. A part of the business of the firm was the examination and certification of titles to real estate. During the course of the year 1921, titles to real estate of the value of $1,000,000 at least, possibly running to several million dollars, were examined. The partnership was dissolved on October 1, 1921. -In the determination of the profits of the partnership for the period January 1 to October 1, 1921, the partnership- deducted from its gross-income of $56,859, $10,000 as a reserve to provide against a contingent liability upon any- suit which might be brought against the members as a result of not using due care, skill, and diligence in the searching of titles. Although five years.have elapsed since the firm was dissolved, no claims have been asserted for any negligence or bad faith in connection with its certificates of title upon work done by the partnership during the year 1921.
    In his income-tax return for 1921, the petitioner reported his pro rata share of the net profits of the partnership of which he was a member after- said partnership.had deducted from gross income the reserve of $10,000 above referred, to.
   OPINION.

■'Smith :

It is the contention of this petitioner that the partnership of which he was a member during the year 1921 did not realize the full amount of income received by it during- that year by reason of the fact that the members of the partnership were subject to a contingent liability in r.espect to certificates of title issued by - it. , The existence of such a liability1", it is alleged, is made clear by the cases of Cox v. Sullivan, 7 Ga. 144-148; and O'Barr v. Alexander & Trammell, 37 Ga. 195. In Lilly v. Boyd, 72 Ga. 83, the Supreme Court of Georgia said of this liability:

When a person who wishes to purchase land retains an attorney to examine the titles, and such attorney reports to his client that the title of the person from whom he wishes to purchase is good, and it would be safe to purchase, and this report of the attorney is false, he is guilty of a breach of duty, and a right of action immediatedly accrues to the client. If no special damage or injury has resulted to the client, then he may nevertheless recover nominal damages; if special damage result from the misconduct of the attorney, it is not of itself a cause of action; the breach of duty imposed by the contract is the cause of action, and not the consequential damage resulting from it. And the statute of limitations begins to run the date of the breach of duty.

The partnership estimated that it might be liable to as much as $10,000 damages in respect of the titles to which it had certified and therefore claimed that amount as a deduction from gross income for the year 1921.

The liability of this petitioner for income tax is governed by section 218 of the Revenue Act of 1921, which provides substantially that a partner must return as income the distributive share of the profits of any partnership of which he was a member, whether distributed or not, and that a partnership like an individual is entitled to deduct from gross income in computing net income only those specific deductions permitted by the Revenue Act in question. These specific deductions do not comprehend any such item as a reserve against a contingent liability. This Board has had occasion to pass upon this question in numerous decisions. In Appeal of Pan-American Hide Co., 1 B. T. A. 1249, it said:

Since tbe statute does not permit a taxpayer to deduct as an expense an amount which he fears he may some day be called upon to spend, there can be no sanction for such a deduction.

See also Appeals of Thatcher Medicine Co., 3 B. T. A. 154; M. C. Stockbridge, 2 B. T. A. 327; Ederheimer-Stein Co., 2 B. T. A. 711; M. I. Stewart & Co., 2 B. T. A. 737; Northwestern Bakers Supply Co., 2 B. T. A. 834; Morrison-Ricker Mfg. Co., 2 B. T. A. 1008.

Judgment for the Commissioner.


author: Littleton :

text:
    HIRST & BEGLEY LINSEED CO. v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7482.
    Decided September 28, 1926.
    1. A deduction of $10,000 on account of the loss of a security acquired subsequent to March 1, 1913, for that amount, allowed.
    2. Petitioner sold its assets and business during the fiscal year ended July 31, 1919, and agreed to liquidate. For certain reasons liquidation was not completed for several years. Held, that expenditures paid or incurred in years subsequent to the fiscal year ended July 31, 1919, by reason of its continued existence and in connection with the matter of final settlement of its affairs, were not proper deductions from gross income for the fiscal year ended July 31, 1919.

      Oswald D. Luby, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This proceeding involves a deficiency of $31,246.03 for the fiscal year ended July 31, 1919, of which amount $8,400 is in controversy by reason of the refusal of the Commissioner to approve petitioner’s claim that it was entitled to a deduction of $10,000 on account of the loss of a United States security of that value, and a further deduction of $10,536.27 alleged to have been incurred during the taxable year as expenses of liquidation.
    FINDINGS OF FACT.
    Petitioner was, during the taxable year, a New York corporation, with principal office at Chicago, Ill. Between November 26, 1918, and April 30, 1919, it purchased United States securities as follows:
    November 26, 1918_$10,000
    'January 27, 1919_ 25, 000
    April 11, 1919_ 10, 000
    April 28, 1919_ 10, 000
    April 30, 1919_1_ 20, 000
    Thereafter the petitioner sold $65,000 of these securities at par. The security purchased on November 26, 1918, for $10,000 was charged upon the records to “Tax Account.” The other securities were charged to Federal Reserve and Liberty Loan accounts. The petitioner’s records show that during the taxable year all of the securities with the exception of the one purchased November 26, 1918, were sold for $65,000. Its income and profits taxes for the taxable years ended July 31, 1918, and July 31, 1919, were paid by check. The loss of the $10,000 United States Certificate of Indebtedness purchased November 26,1918, was discovered during the taxable year ended July 31,1919, and every effort to locate it was unsuccessful. The petitioner claimed the cost of the bond as a loss for the taxable year ended July 31, 1919, and deducted that amount from gross income.
    On December 14, 1918, petitioner sold its business to the National Lead Co. under the terms of the following agreement entered into between the president of the petitioner and a committee representing the National Lead Co.:
    First: Vendor Company agrees to sell, and Vendee Company agrees to buy, the entire Linseed Oil manufacturing plant of Vendor Company situated at 2013-19 Mondel Street, Chicago, substantially as said plant existed November 26, 1918, including all land, buildings, maahinery, tools, and equipment used or intended to be used in connection therewith, together with all trade-marks, brands and good will of the business then and theretofore conducted thereat, for the sum of One Hundred Six Thousand, ■ Five Hundred Seventy-Six and 41/100 Dollars ($100,576.41), possession of said plant to-be given and payment therefor to be made, in cash or its equivalent, on January 15, 1919.
    Second: Vendor Company further agrees to sell or deliver to Vendee'Com-pany, and Vendee Company agrees to buy and pay for in cash within, thirty days from said January 15, 1919, at the respective market prices ruling Janu- ■ ar.y 15, 1919, all raw materials, supplies and merchandise on hand, ■ at-said plant or in transit thereto on January 15, 1919, and not under contract-to be otherwise disposed of, except Linseed Oil manufactured or in process of manufacture. ’ . .
    Third: For a period of ninety (lays from and after the date of its taking possession of' said plant, Vendee Company further agrees to deliver from time to time at points within the City of Chicago, for account of Vendor Company and upon its order, and Vendor Company agrees to order for delivery by Vendee Company within such ninety day period, such quantities of pure Linseed Oil of merchantable quality as shall equal in the aggregate the quantity of such Linseed Oil on hand at said' plant and delivered into the custody of Vendee Company on January 15, 1919, such deliveries tó be subject to' the following charges, and the following charges only, which Vendor Company agrees promptly to pay: (a) a reasonable charge for handling and loading;' (b) .a reasonable cartage charge for deliveries other than at said plant; and (c), with respect to so much of said aggregate quantity if any as represents Linseed Oil in process of manufacture at said plant on January 15, 1919, the actual cost of completing the manufacture thereof.
    Fourth: It is further understood and agreed that the conveyances of property herein contemplated to be made by Vendor Company shall be in form satisfactory to Vendee Company and shall be, as respects real property, by full covenant and warranty deed, free and clear of any and all liens or incum-brances, said conveyances to be delivered to Vendee Company simultaneously with possession of said plant and with the payment by Vendee Company of the purchase price thereof hereinbefore mentioned; and that at the same "time Vendor Company shall also deliver to Vendee Company satisfactory evidence of the authorization and ratification of said conveyances by the Directors and Stockholders of Vendor Company, in the form of a certified copy of resolution duly adopted by the Board of Directors, and a written consent and ratificatiop signed by all the Stockholders of Vendor Company.
    Fifth: Vendor Company further agrees, following the conveyance of property herein contemplated, to proceed as rapidly as possible to' a liquidation of its affairs and a distribution of its assets among its Stockholders, and furthermore agrees, as soon as such liquidation and distribution have been effected, either to deliver or cause to be delivered to Vendee Company certificates, representing all of its capital stock issued and outstanding, duly endorsed in blank for transfer, or at its own expense to cause the necessary steps to be taken for its dissolution and the surrender of its charter, as Vendee- Company may elect.
    The transfer of the property mentioned in the contract, was made on January 15, 1919. On that date petitioner ceased business and immediately proceeded with liquidation, which, due to the’confused condition of the company’s records and on account of the matter of Federal taxes, was, not completed during the fiscal year ended July 31, 1919, and has not been completed to this date. More than $10,-000. has been paid or incurred in years subseqüent to the fiscal year ended July - 31, 1919, for accountant’s and attorney’s fees, officers’ compensation,..capital stock tax for the year ended June 30, 1920, discount on, accounts receivable, revenue stamps, state corporation fees, deferred charges in connection with claims against the corporation, collection expenses, and rent of safe deposit boxes. Petitioner claimed that the total of the amounts expended in years subsequent to the taxable year incident to the winding up of its affairs necessary before liquidation could be completed, was a proper deduction from gross income for the fiscal year ended July 31, 1919, and deducted the same in its return filed for that year. The Commissioner denied the deduction of the amounts from gross income for the taxable year 1919, upon the ground that they were not expenses paid or incurred within the taxable year in carrying on the business, and were not deductible from gross income for 1919.
   OPINION,

Littleton :

We are of the opinion from the evidence that petitioner is entitled to a deduction of $10,000 on account of the loss of the security costing that amount. It is shown that securities costing $75,000 were purchased between November 26, 1918, and April 30, 1919, that the loss of the security purchased on November 26, 1918, for $10,000 was discovered during the taxable year, and that all of the other securities either matured and were paid, or were sold for their face value, the total amount received being $65,000. The purchase of the securities was a transaction entered into for profit and petitioner was not compensated for the loss of the $10,000 by insurance or otherwise.

In the opinion of the Board, the position of petitioner that all amounts expended in years subsequent to the fiscal year ended July 31,1919, the year in which it sold its business and agreed to liquidate, either in connection with matters necessary to complete liquidation, or in connection with its continued existence, were deductible from gross income for the fiscal year ended July 31, 1919, is not well taken. The mere fact that petitioner sold all of its assets and was compelled under its agreement to discontinue manufacturing opera- ■ tions, but was unable under the circumstances to completely dissolve during the taxable year,, does not justify the deduction from gross income for the taxable year of amounts paid or incurred in subsequent taxable years, notwithstanding- that such expenditures máy have been made in carrying out its agreement entered into during the taxable year. The petitioner did not become liable under the contract of December 14, 1918, for the payment of any specified amount. It has been allowed to deduct such amounts as were paid or incurred during the fiscal year ended July 31, 1919. We find no warrant in the circumstances of this proceeding for allowing as a deduction in the taxable year expenditures made in subsequent years, notwithstanding such expenditures may have been the result of prior transactions or agreements. Appeal of Consolidated Asphalt Co., 1 B. T. A. 79, Appeal of Uvalde Co., 1 B. T. A. 932, Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008.

Order of redetermination will he entered on 15 days' notice, under Rule 50.


text:
    Appeal of KOSSAR & COMPANY, INC.
    Docket Nos. 5932, 6293.
    Decided September 28, 1926.
    Petitioner was not a personal service corporation during 1918 and 1919.

      Isaac N. Jacohson, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    These appeals involve deficiencies for the years 1918 and 1919 in the amounts of $4,760.05 and $3,935.48, respectively, arising from the Commissioner’s denial of petitioner’s claim that it should be classified as a personal service corporation. Separate petitions were filed for each year and were consolidated for hearing and decision..
    FINDINGS OF FACT.
    Petitioner is a New York corporation, organized in 1912, engaged in selling live poultry on commission, with its principal place of business in the City of New York. Its authorized capital stock was $20,000, divided into 200 shares of the par value of $100 each, the whole of which was issued for cash.
    The stockholders and the amount of stock held by each in 1912 was as follows:
    Shares.
    Max Kossar_ 50
    Edward M. Blumenkranz_ 50
    Wm. Simon_ 50
    Max Sokoloff_,_ 25
    Isaac Dinerman_ 25
    In 1914 Kossar and Blumenkranz purchased the stock of Simon and became the owners of 75 shares each, no further changes occur, ring until 1922.

      The assets and liabilities of the petitioner during the years in question were as follows:

    Petitioner sells poultry for the account of shippers, receiving a commission of 4 per cent of the proceeds of the sales. Accounts of sales are rendered to the shippers. It is licensed as a commission agent under article XX of the Farm and Market Law of the State of New York.
    The essentials of the business consist of the solicitation of accounts of shippers and the sale of the poultry. This work was performed exclusively by Kossar and Blumenkranz. The other stockholders had no part in the conduct of the business and received no compensation. The other employees were a bookkeeper and a telephone operator and four men who performed manual labor in unloading and loading the goods. Kossar and Blumenkranz were experienced commission agents and desired to enter the field on their own account. Simon was a slaughter-house man operating a large market in the City of New York and purchasing a considerable quantity of live poultry. Dinerman and Sokoloif were slaughter-house men operating two large markets and were large purchasers of poultry. The mutual advantages in Dinerman and Sokoloif becoming interested in petitioner’s business were that they furnished a substantial and ready outlet for poultry handled by petitioner. The success of the commission business depends upon the procurement of the accounts of shippers and a speedy and advantageous disposition of the poultry, which is a highly perishable commodity, subject to considerable shrinkage and market fluctuations, and must be regularly fed and watered. This requires immediate movement of the goods into consumptive channels, and upon the ability to do this depends the commission agent’s ability to obtain a shipper’s account. Both Kossar and Blumenkranz were experienced in this line. Dinerman and Sokoloif were not, and were unknown to the shippers. They took no part in the business except to purchase poultry goods the same as any other buyer. For the purpose of procuring shippers’ accounts, both Kossar and Blumenkranz visited the shippers and solicited accounts by mail. Every account acquired by petitioner, without exception, was due to the efforts of Kossar and 'Blumenkranz. The handling and sale of the goods was also entirely discharged by Kossar and Blumenkranz. Every branch of the business was conducted by Kossar and Blumenkranz, the interests of the other stockholders being purely passive and financial. They were taken into the business only because they furnished a ready and substantial outlet for a large part of the poultry handled.
    From the time of incorporation until 1917, Kossar and Blumen-kranz each received a salary of $4,600 yearly, which was charged to expense. Their salaries were increased to $5,725 in 1918, and $7,800 in 1919. Neither of the other stockholders or any one in their behalf received any salary or compensation of any kind from the petitioner. Kossar and Blumenkranz had no other business, employment or investments and devoted their entire time to the petitioner’s business.
    The petitioner handled poultry in three ways: (1) Consignment, being poultry received for sale for account of shippers, solely upon a commission basis; (2) joint account, being poultry received from shippers, in which the petitioner and shippers shared profits and losses, on which no commission was received; and (3) purchases, being poultry bought and sold by the petitioner- entirely for its own account.
    The total sales of each of such branches during the years in question were as follows:

    The income for 1918 on consignment was $44,481.56 and on joint account transactions was $10,638.56. The income for 1918 on consignment was $88,067.05 and on joint accounts was $3,404.54. The income on purchases is not disclosed by the record.
    After the poultry is gathered and shipped, the shipper forwards the bill of lading therefor, to which is attached a draft for a portion of the contemplated proceeds. For the amount of this draft the petitioner gave its note to its bank and that sum was thereupon credited to the petitioner’s account and the draft paid. The bill of lading is thereupon delivered to the petitioner and upon the sale of the poultry it paid the note and remitted the net proceeds to the shipper, less its commission.
    The loans above referred to were obtained by the petitioner throughout the taxable years in the following amounts:

   OPINION.

Littleton:

It is contended that the capital in nse in petitioner’s business was not a material income-producing factor in respect of sales on consignment, but was a material income-producing factor only in respect of sales on its own account; that capital was not essential.or necessary in respect of the consignment business transacted, but was necessary only in respect of the business in which it traded as a principal. The facts herein disclose that the petitioner, in addition to its invested capital, used money borrowed from the bank in 1918 and 1919 in the amounts, respectively, of $450,500 and $579,500 to pay the drafts attached to the bills of lading for poultry consigned to it. The loans upon notes are not in question, but it is contended that no part of this money was retained, kept or used in the business, and ivas not borrowed for use in its business, but that it was a loan to the shipper upon the security of the bill of lading entrusted to the petitioner for the sale of the poultry whereupon the loan was immediately taken up. It is obvious from the facts disclosed that the bill of lading could not be delivered to the petitioner until the draft attached to it was paid, and for this purpose the petitioner used borrowed capital, at least until the poultry could be unloaded, sold, and the money repaid, which usually covered a period of ten to fifteen days.

With these facts before us we are constrained to hold that capital was a material income-producing factor and petitioner is not entitled to classification as a personal service corporation. Appeals of Cliver-Wright-Rainey Co., 2 B. T. A. 561, and John Dais Co., 2 B. T. A. 1167; Hubbard-Ragsdale Co. v. Dean, 15 Fed. (2d) 410.

Judgment for the Commissioner,


author: Tkussell:

text:
    Appeal of AMERICAN ENVELOPE COMPANY.
    Docket No. 5815.
    Decided September 28, 1926.

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

      P. S. Grewe, Esq., for the Commissioner.
   Tkussell:

This proceeding has been brought for the redetermination of deficiencies in income and profits taxes for the year 1920 in the amount of $3,264.10, and for the year 1921 in the amount of $2,245.64, totaling $5,509.74.

Only so much of such deficiencies are here in controversy as result from the Commissioner’s inclusion in corporate income for the year 1920 of $1,960.21, interest on obligations of the United States, and failing, to deduct the same in computation of the normal tax, and from the exclusion from allowable deductions of the amount of $5,100 paid during 1920 for an architect’s building plans and drawings.

The Commissioner’s answer admits error in respect to the inclusion of interest on obligations of the United States.

FINDINGS OP PACT.

The petitioner is an Illinois corporation doing business in the City of Chicago. During the year 1920 and for several years prior thereto the petitioner had carried on its business upon leased premises at 817-825 West Washington Boulevard. Prior to 1920 it had acquired and at that time owned land which is now known at 3100 West Grand Avenue. During 1920 it had under consideration a proposition to erect a building for its use upon its own property at the last above street number and it employed an architect to prepare plans and specifications for such a building. These plans were completed on or about December 8, 1920, and at or about that date it called for bids for constructing a building in accordance with such plans. During the year 1920 it paid to the architect $5,100 for his services in preparing building plans and specifications.

At that time R. P. Murray was president of the company and owner of 45 per cent of its capital stock. Henry G. Steinson was secretary and treasurer of the company and the owner of 55 per cent of its capital stock. At about the time of calling for bids for the erection of the proposed building differences developed between these two stockholders and after getting estimates of building construction Murray determined that he preferred not to go through with the building project and, in order that he might withdraw from the company, made a proposition under which Steinson might purchase his (Murray’s) stock. Negotiations for the purpose of carrying out this plan were immediately entered upon. In December, 1920, Murray resigned as president of the corporation and Steinson was elected to succeed him. No further consideration was at that time given to the building project and shortly thereafter the building site was offered for sale. On or about March 11, 1921, Murray’s stock was purchased by the corporation for the sum of $225,000. Thereupon, Steinson became the owner of all the outstanding capital stock of the company.

At the beginning of the negotiations for the retirement of Murray, Steinson abandoned for the time being any thought of proceeding with the erection of a building for the use of the company. No action was ever taken upon the bids received in December, 1920, for constructing such a building. The lot at 3100 West Grand Avenue was not sold, and in the year 1924 the petitioner erected a building upon that property, constructed in accordance with new plans and specifications, and the plans purchased and paid for in the year 1920 have never been used. The total cost of these plans was something more than $5,100, but $5,100 was the amount paid and entered upon the books of the company for the year 1920. Some two or three hundred dollars more was paid to the architect during the year 1921.

In making its income and profits-tax return for the year 1920 the petitioner claimed this sum of $5,100 as a loss during that year. The Commissioner disallowed such deduction.

Order of redetermination of deficiencies will be made, (1) giving effect to the elimination of the amount of $1,960.81, interest on United States obligations from corf orate income subject to normal tax for the year 19W, and (8) in other resfects approving the findings of the Commissioner, on 15 days’ notice, under Rule 50.


author: SteRnhagen :

text:
    Appeal of TROOST AVENUE CEMETERY ASSOCIATION.
    Docket No. 1114.
    Decided September 29, 1926.

      Justin D. Bowersock, Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    Deficiencies aggregating $1,394.36, income tax for 1920, 1921, and 1922, arising from the inclusion in petitioner’s income of amounts alleged to be a trust fund for perpetual maintenance.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation which owns “ Forest Hill Cemetery,” at Kansas City, and sells lots for burial purposes.
    On May 25, 1914, it executed a trust agreement with the Fidelity Trust Co., now the Fidelity National Bank and Trust Co. of Kansas City, trustee, establishing a trust fund to assure the proper care and attention of the cemetery. At the time of making the agreement it placed certain securities in the fund and agreed to add any gifts or bequests made to it for such purpose. It also agreed “ with said trustee for the benefit of all present owners and future purchasers of a lot in said cemetery, to deposit with said trustee or its successors in this trust, 5 per cent of the gross amount of money received from the sale of all lands in said cemetery made after the date of this agreement.” The trustee was to pay interest on the fund until invested and was to invest the deposits whenever they reached $1,000. For twenty years from January 1, 1904, no part of the fund or its income was to be used for cemetery purposes and after January 1, 1924, the income was to be used for perpetual maintenance. The principal of the fund was never to be used for any purpose.
    The original trust agreement was modified by a supplemental agreement of May 22, 1918, so as to change the period of accumulation from 20 years to a period ending when the principal of the fund becomes $300,000, the Cemetery Company agreeing to maintain the cemetery during such period. No part of the principal of the fund was to be used, except to pay expenses of the trust, until the $300,000 was accumulated. The income of the fund was payable to the Cemetery Company for maintenance. The duty of the Cemetery Company continued “ to deposit with the trustee five per cent of the gross amount of all money received by it at any time from the sale of lands in said cemetery.”
    By a second supplemental agreement of May 1, 1922, the Cemetery Company agreed to deposit an additional “ five per cent of the gross amount of-money received from the sales of all lands in said Forest Hill Cemetery made after the date of this agreement.”
    As each lot was sold a deed was given in which no reference was made to perpetual care, or the trust agreement, or an apportionment of the purchase price. At the same time the Cemetery Company issued a receipt containing the statement, “ the total amount to be paid in purchase of said lot being $-, of which $-represents actual cost of lot and $-represents deposit made for Permanent Maintenance of the lot in accordance with agreement between the Fidelity Trust Company in behalf of all purchasers of lots and the Troost Avenue Cemetery Company.”
    During the years in question many of the lots were sold on deferred payments. At the time the deed was executed 5 per cent of the purchase price was received by petitioner and deposited with the trustee. The progress of the fund was as follows:
    December 31, 1919, amount in fund_$43,930. 78
    Interest on fund in 1920_$2,229. S3
    Deposits 5% sales price 1920_ 1, 886. 50
    4,116.33

      December 31, 1920-$48,047.11
    Interest on fund in 1921_$2,922. 38
    Deposits 5% sales price 1921_ 2, 879.55
    - 5, 801.93
    December 31, 1921_ 53,849.04
    Interest on fund in 1922_ 2, 541. 51
    Deposits 5% and 10% sales price 1922_ 3, 996.10
    - 6, 537. 61
    December 31, 1922_ 60, 386. 65
    No part of this amount has been paid to the petitioner, but the entire fund is still held by the trustee.
   OPINION.

SteRnhagen :

The Commissioner has disallowed the deduction of the aforesaid amounts of $4,116.33 for 1920, $5,801.93 for 1921, and $6,537.61 for 1922, “ inasmuch as such fund constitutes a reserve to provide for the future expenses of the corporation.” In this we think he was in error. The deposit with the trustee was a present outlay pursuant to an obligation incurred in carrying on its business and forever beyond the recovery or control of the petitioner. The trust was expressly established and, unlike the Appeal of Springdale Cemetery Assn., 3 B. T. A. 223, the commitment was completé and the fund was irrevocably in the possession of another. We think that the full amount received by petitioner from the purchasers of lots was gross income and the percentage of the gross amount paid to the trustee under the trust agreement was deductible as an ordinary and necessary expense. The interest received by the trustee is clearly gross income of the trust and not of the Cemetery Company, which neither received it nor benefited by it.

Judgment for the 'petitioner.