author: Smith :

text:
    Appeal of Ocean Accident & Guarantee Corporation, Ltd.
    Docket No. 3114.
    Promulgated April 26, 1927.
    The petitioner filed its income and profits-tax return for 1917 on May 1, 1918, and the amount of tax shown thereby was duly assessed and collected. In March, 1923, an additional assessment for the year 1917 was made by the Commissioner. An abatement claim was filed which was rejected in part on March 9, 1923. The petitioner thereupon appealed to the Board of Tax Appeals on April 6,1925, which appeal was pending before the Board on February 26, 1926. Held, under section 283(f) of the Revenue Act of 1926, the Board of Tax Appeals has jurisdiction thereof. Held, further, that the collection of any additional tax for the year 1917 is barred by the statute of limitations.

      James II. McIntosh, Esq., and Lee J. Wolfe, O. P. A., for the petitioner.

      Arthur H. Fast, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1917 in the amount of $102,441.38.
    FINDINGS OP PACT.
    The petitioner is a corporation organized under the laws of Great Britain and is engaged in the business of writing miscellaneous casualty and liability insurance. It is.licensed to do business in the United States and it maintains an office for that purpose at New York
    The petitioner filed its income and profits-tax return for the year 1917 on May 1, 1918, the time for filing such return having been extended to that date by proper authority. Upon the basis of the return, tax was assessed in the amount of $25,004.37.
    On February 17, 1923, the Commissioner advised the petitioner of a proposed additional assessment for the year 1917, in the amount of $151,767.34, and informed the petitioner that it would be granted 30 days within which to appeal from the proposed additional assessment. An appeal therefrom was duly filed by the petitioner on March 15, 1923.
    On March 21, 1923, the Commissioner advised the petitioner by letter that an additional tax for the year 1917 in the amount of $151,767.34 would be assessed, but that a claim for abatement thereof would be entertained if an appeal were filed within 30 days from the receipt by the petitioner of the Commissioner’s letter, which was as follows:
    An examination of your income tax' returns and of your books of account and records for the year 1917 discloses an additional tax liability of $151,767.34.

      This assessment is in addition to all oilier outstanding and unpaid assessments appearing upon the Collector’s lists.
    The Bureau will, however, entertain a claim for abatement if an appeal is filed within thirty days of the receipt of this letter. The appeal attached to the claim should be filed with the Collector of Internal Revenue for your district and, be under oath, setting forth in full all information upon which you base your protest, and should be addressed to the Collector of Internal Revenue. On reguest a conference will be arranged prior to final decision. If an appeal is not filed, payment should be made upon receipt of notice and demand from the Collector of Internal Revenue for your district.
    The additional tax referred to in the letters of February 11 and March 21, 1923, was assessed in the March, 1923, assessment list, and notice and demand for payment thereof'were served on the petitioner on or about April 5, 1923. On April 11, 1923, the petitioner filed a claim for- abatement of the additional tax assessment against it. After several hearings thereon the claim for abatement was allowed in part and rejected in part. The petitioner was notified of the Commissioner’s action on the claim for abatement by letter dated March 9, 1925, which is as follows:
    Reference is made to your income and excess profits tax returns for the calendar year 1917 and to your protest dated April 11, 1923.
    You are advised that after a thorough review of your case, the Bureau holds that based upon comparative data available, the rate of 7.28% for excess profits tax purposes is equitable.
    A redetermination of your tax liability in accordance with the above conclusion results in the following computation:
    COMPUTATION OB' TAX
    Net income adjusted-$992, 320. 87
    Excess profits tax, Section 210-=- 72,240. 96
    Net income_$992, 320.87
    Less: Excess profits tax- 72, 240.96
    Amount taxable at 6%-$920, 079.91 55, 204. 79
    Correct tax liability- 127, 445.75
    Previously assessed, original return #2755047- 25, 004. 37
    March, 1923, Page 8, Line 5, Special 30- 151, 767.34
    Total_’_ 176, 771. 71
    Correct tax liability_ 127,445. 75
    Overassessment_ 49, 325.96
    In accordance with the above conclusions, your claim for the abatement of $151,767.34 will be rejected for $102,441.38.
    The Collector of Internal Revenue for your district will be officially notified of the rejection at the expiration of thirty days from the date of this letter.
    Upon receipt of notice and demand from that official, payment should be made to his office in accordance with the conditions of his notice.

      The overassessment shown above will he made the subject of a certificate of overassessment which will reach you in due course through the office of the Oollector of Internal Revenue for your district and will be applied by that official in accordance with Section 281(a) of the Revenue Act of 1924.
    This letter supersedes Bureau letter of June 28, 1924, notifying you of an overassessment of $26,659.37 for 1917.
    The petitioner never consented in writing or otherwise to an assessment of any additional income or profits tax for the year ended December 31, 1917, nor to a determination of the assessment or collection of additional taxes after the expiration of five years after the time when the petitioner’s 1917 tax return was filed, namely, May 1, 1918.
    From the determination of the Commissioner as set forth in the letter of March 9, 1925, the petitioner appealed April 6, 1925.
   OPINION.

Smith :

The Commissioner in his answer to the taxpayer’s petition herein alleges that he has not since the enactment of the Revenue Act of 1924 determined a deficiency in tax or imposed an assessment of additional tax for the year 1917 against the petitioner and that therefore the Board is without jurisdiction to hear and determine this appeal. Whatever merit this argument may have had prior to the enactment of the Revenue Act of 1926, it is clear that under the provisions of section 283(f) of that act the Board now has jurisdiction of the appeal. Appeal of William A. Slater Mills, Inc., 5 B. T. A. 971.

The petitioner in its petition raises three issues, namely:

(1) That the assessment of the additional tax in March, 1923, was not a determimation and assessment as provided by section 250(d) of the Revenue Act of 1921, and that the determination made by the Commissioner on March 9, 1925, was at that time barred by section 250(d) of the Revenue Act of 1921, since it was made more than five years after the date when the return was filed.

(2) That even if the assessment of March, 1923, was a valid assessment within the meaning of section 250(d) of the Revenue Act of 1921, collection of the tax is barred by the statute of limitations and the deficiency should be disallowed.

(3) That the Commissioner used improper comparatives in computing the taxpayer’s excess-profits tax for the year 1917 under the provisions of section 210 of the Revenue Act of 1917.

The second allegation of error will be considered first. This is, in short, that the collection of any additional tax for 1917 is barred by the statute of limitations imposed by section 250(d) of the Revenue Act of 1921 and that since its collection is barred the deficiency should be disallowed.

Facts substantially similar to those which obtain in the case at bar were before the court in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346. From the facts stated by the court in its opinion it appears that the New York & Albany Lighterage Co. filed its return of income and excess-profits tax for 1917 on March 26, 1918, and paid the amount shown due. Shortly before the expi ration of five years after the return had been filed, the Commissioner assessed and the collector demanded payment of additional income and excess-profits taxes for the taxable year. The company refused payment. More than five years after the return had been filed the collector dis-trained and sold personal property of the respondent to pay the amount claimed. It was the decision of the court that the distraint proceeding was a “ proceeding ” within the meaning of section 250 (d) of the Revenue Act of 1921 and that by reason of the bar of the statute of limitations imposed by that section the tax had been illegally exacted and that it therefore should be recovered. See also Ehrlich v. Nichols, decided by the United States District Court, District of Massachusetts, March 4, 1927.

The decision in the New York & Albany Lighterage Co. case controls the situation here. The Commissioner is contending that a deficiency exists where the collection of the tax is barred by the statute of limitations, more than five years having elapsed from the date of the filing of the return to the date of the determination of the deficiency.

Discussion of the other allegations of error is unnecessary.

Judgment will be entered for the 'petitioner.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Edward S. Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent. Scranton Trust Co. and Louise E. W. Jones, Executors, Estate of Thomas E. Jones, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7230, 7231.
    Promulgated April 26, 1927.
    1. Value of certain bonds received by the petitioner in the taxable year determined.
    2. Prior to March 1, 1913, petitioners rendered services to a corporation as its officers. It was at all times understood that salaries were to be paid for such services, but the amount thereof was not determined until 1920. In 1920 petitioners received full payment for all salaries earned from 1903 until January 1, 1920. Held,, that the amounts so received, which represented salaries earned prior to March 1, 1913, were income in 1920.

      Douglass D. Storey, Esq., and J. F. W. Hembokel, O. P. A., for fehe petitioners.

      W. Frank Gibbs, Esq., for the respondent.
    The Commissioner has determined deficiencies in income taxes for 3920 as to Edward S. Jones and Thomas E. Jones, in the respective amounts of $6,387.62 and $6,349.19. Two issues are in controversy: (1) Whether amounts alleged to have been earned as salaries prior to March 1,1913, and received after that date, are income of the year in which received, and (2) the value of certain bonds received by the petitioners in the taxable year. The parties agree that the two cases should be consolidated for hearing and decision.
    BINDINGS OR FACT.
    Edward S. Jones and Thomas E. Jones organized the Blue Creek Coal & Land Co , hereinafter referred to as the company, and, from May 1,1903, to January 1, 1920, continuously acted as president and treasurer of the same. Each made income-tax returns on the receipts and disbursements basis.
    The company is a corporation holding coal land in fee and by lease. It mines and sells coal and leases lands for coal, oil, gas, and timber exploration and production.
    The petitioners were officers and directors of the company and during all the time from May 1, 1903, were actively engaged in its affairs. It was understood by all the directors, some twelve or fifteen in number, that each of the petitioners should receive a salary for his services to be paid whenever the financial condition of the company permitted. Salaries of such officers were discussed in directors’ meetings, but no amounts were determined, accrued on the books, or paid prior to March 1, 1913.
    Prior to January 1, 1920, after discussion and consideration of the claims of the petitioners for salaries, the directors appointed a committee of three of their own number to consider the claims and report their findings and recommendations thereon to the full board. On January 5, 1920, the committee made, and the directors unanimously adopted, the following report:
    Your Committee, especially appointed to ascertain the compensation due the President and Treasurer, for services rendered the Company during its existence, to January 1st, 1920, beg to report as follows:
    That Edward S. Jones, President, he paid the sum of $05,000.00 in full for his services to January 1st, 1920, less any and all indebtedness owing by him to the Company.
    To Thomas E. Jones, Treasurer, the sum of $35,400.00 in full for his services to January 1st, 1920.
    Further, that the payment of these two officers be made as follows: $43,000.00 Kanawha & West Virginia Railroad Company Bonds at $60.00, the balance to be paid in Blue Creek Coal & Land Company bonds at $60.00, tbe coupons to be detached and cancelled to December 1st, 1919.
    Pursuant to the above report the company, on April 20, 1920, made the following described payments to the petitioners:
    (a) To Edward, 8. Jones :
    1. $26,000.00 par value 60 Year Dive Per Cent First Mortgage Gold Bonds of Kanawha & West Virginia Railroad Co., bonds due in 1965, with all unmatured interest coupons attached to each bond;
    2. $57,000.00 par value First Mortgage Five Per Cent Thirty Year Sinking Fund Bonds of the Blue Creek Coal & Land Company due 1938, to each of which bonds there were attached interest coupon No. 24 due June 1, 1920, and all subsequent coupons, but not interest coupons Nos. 9 to 23 inclusive maturing between the period December 1, 1912 to December 1, 1919 and unpaid on April 29, 1920, nor coupons Nos. 1 to 8 inclusive, which matured prior to December 1, 1912; and
    3. $16,200.00 in cash.
    (b) To the late Thomas E. Jones:

    1. $18,000.00 par value 50 Year Five Per Cent First Mortgage Gold Bonds of Kanawha & West Virginia Railroad Co. bonds due in 1955, with all unmatured interest coupons attached to each bond; and
    2. $41,000.00 par value First Mortgage Five Per Cent Thirty Year Sinking Fund Bonds of the Blue Creek Coal & Land Company, due in 1938, to each of which bonds there were attached interest coupon No. 24 due June 1, 1920 and all subsequent coupons, but not interest coupons Nos. 9 to 23 inclusive maturing between the period December 1, 1912 to December 1, 1919 and unpaid on April 29, 1920, nor coupons Nos. 1 to 8 inclusive, which matured prior to December 1, 1912.
    At April 20, 1920, the $1,000 bonds of the Kanawha & West Virginia Bailroad Co. had a value of $600, and the $1,000 bonds of the Blue Creek Coal & Land Co. had a value of $360, each.
    In their respective income-tax returns for 1920, the petitioners included in gross income only that part of the payments received for salary that covered the time between March 1, 1913, and January 1, 1920. Upon audit of such returns, the Commissioner held that the entire payment on account of accrued salaries was income to the petitioners in the year 1920, and that, at the date received, the $1,000 bonds of the company had a readily realizable value of $360, and determined the deficiencies here in controversy.
   OPINION.

Lansdon:

The value of the bonds of the company at April 20, 1920, is the only question of fact in controversy here. The evidence shows that'some sales of such bonds, with all past due coupons attached, were made about that time at the price of $530 for each $1,000 bond. The bonds received by the petitioners had all interest coupons maturing before January 1, 1920, detached, and, obviously, were worth less than if they had carried all the overdue coupons. The petitioners contend that each overdue coupon was worth its face value of $25, and that, as 15 such coupons had been detached, the value of each bond was $550, less 15 times $25, or $175. We can not agree with this reasoning or the conclusion based thereon. The company, as the evidence discloses, had large and valuable properties; it was a going concern under the management of owners; and, at the date here involved, it had just received substantial sums from the sale of certain of its assets. The bonds in question were secured by a first mortgage on the property of the company, and there is nothing in the evidence that raises any presumption that they could not or would not be paid in full at maturity. The petitioner argues that the fact that all interest coupons maturing before the transaction here in question had been detached reduced the value of the bonds at the date of payment proportionably to the number of such coupons removed. We are unable to give any weight to this contention. A purchaser of bonds is concerned not with past but future interest accumulations and with capital values. We are of the opinion that the evidence adduced by the petitioners is insufficient to establish a value of the bonds in question less than that determined by the Commissioner, and that the receipt of such bonds in the taxable year was a closed transaction resulting in income based on that value.

The facts as to the second issue are all stipulated and only a question of law is left for our consideration. The petitioners continuously asserted their claim for salaries, and the company repeatedly acknowledged such claim in principle, but, until 1920, did not fix the amount thereof. On that date the claims were compromised and payments in the respective designated amounts of $65,000 and $45,000 were made as set forth in our findings of fact. The respondent holds that, as the petitioners kept their accounts and made their income-tax returns on the receipts and disbursements basis, the entire amount was income in the year it was received. The petitioners contend that at March 1,1913, each had a valid and undisputed claim against the company as salaries for services rendered prior to that date, and that the payment of such claims, in 1920, did not result in taxable income, since the amounts so received were their property at March 1, 1913, and their receipt in the taxable year, therefore, constituted a return of capital.

The respondent contends that the payments in question come within the statutory definition of “ gross income ” as set forth in the Revenue Act of 1918, as follows:

Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”' — •
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United! States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period * * *.

The language of the quoted section is clear and unmistakable. It includes practically every source of income. If there could be any doubt, either as to the meaning of the statute or the intention of Congress, it has been definitely removed by judicial interpretation. The facts here are similar to those in the case of Woods v. Lewellyn, 252 Fed. 106, in which the plaintiff sought to recover Federal taxes paid on renewal commissions on insurance policies which he had earned prior to the taxable year in which they had been received and included in gross income by the petitioner. In that case the court said:

Tbe commissions in controversy appear to us to be embraced by this widely inclusive language. No doubt they were earned by work done and money spent in the earlier years; the agent’s work.was complete when he obtained the application and the society issued the policy; his right to commission on future renewals came then into being, and he himself was required to do no more. He had earned his pay, and had received a part of it; to the rest, he then acquired a right, such as it was, but no determination could then be made how much the rest would be, and in no event could he receive it except in annual installments. Although the right had value, it lacked an essential element ; no renewal premium might ever be paid, and in that event he would receive nothing more; or renewals might be paid only in part, and then he would be entitled to commission on that part only. The insured might die before a given renewal fell due, or he might allow his policy to lapse, and in either event the right of the agent to future commissions perished. The right, therefore, was contingent; his contracts so provided, for they declared that commission should accrue only as premiums should be paid in cash, and certainly until such payment should be made he had no collectible claim against the society. He had a property right that had value, but contained also an element of risk, and unless he turned it into money it remained contingent. The act taxes money, or its equivalent, or its representative, and a contingent right such as this is not “income” in the sense used by the act. The question has been decided against the plaintiff in the Second Circuit. Edwards v. Keith (D. C.) 224 Fed. 585, affirmed 231 Fed. 110, 145 C. C. A. 298, L. R. A. 1918A, 498, certiorari refused 243 U. S. 638, 37 Sup. Ct. 402, 61 L. Ed. 942.

That Congress is within its powers in the imposition of such taxes is held in Lynch v. Hornby, 247 U. S. 339, in which the court declared that “Congress was at liberty * * * to tax as income without apportionment, everything that became income, in the ordinary sense of the word, after the adoption of the amendment.” See also, Hays v. Gauley Mountain Coal Co., 247 U. S. 189.

In the instant proceeding, even if the rights of claims possessed by the petitioners had any value at March 1, 1913, it is apparent that such value was not only inchoate and unliquidated, but that it was also contingent. The company might never have been financially able to discharge its obligations whether formally or informally incurred. It was not immune to the common business hazards and, to that date, it had not earned profits sufficient to meet its ordinary and necessary operating expenses and pay the interest on its bonds. It is admitted that its liability for salaries to its officers had never been determined by formal corporate action. There were from 12 to 15 directors, and their informal action raises no presumption, as in the case of a close corporation, that such action was regular. Whether, in the circumstances disclosed by this record, an informal agreement which was no more than a mere general understanding could have been disavowed by subsequent formal corporate action is, at the best, an open question.

That the services for which the payments in question were made were not rendered in the taxable year in which the salaries were earned is not material, and does not affect the taxability of compensation therefor when received. In Edwards v. Keith 231 Fed. 110, the court said “ The statute does not provide that the ‘ personal services,’ compensation for which is to be considered income, must be rendered in the same year in which the compensation is received.” See also Jackson v. Smietanka, 272 Fed. 970.

It is also argued in behalf of the petitioners that the inclusion of the entire amounts in question in taxable income for the year in ■which they were received would result in an incongruous distortion of the incomes of the petitioners for such years. Since it is agreed that each of the petitioners kept his accounts and made his income-tax returns on the cash receipts and disbursements basis, this argument is not persuasive. In such circumstances distortion of income is no more than an accounting term -which loses all materiality in the face of the fact that taxpayers on such basis voluntarily elect to include all actual realizations of money, or money’s worth, as income for the years in which they are received.

Judgment will be entered for the respondent.


author: SteRnhagen :

text:
    Hammack, Rish Sons Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10516.
    Promulgated April 26, 1927.

      FrcmJc Reagan, Esq., for the petitioner.

      A. H. Murray-, Esq., for the respondent.
    This proceeding involves a deficiency of $1,819.14 for the year 1919, and overassessments for the years 1916 and 1917 in the amounts of $55.60 and $1,668.36, respectively. The issues are: (1) Failure of the Commissioner, in computing the overassessment for 1917, to allow as a credit against the total tax liability of that year interest in the amount of $113.81 paid on additional assessment asserted by the Commissioner and paid in 1921; (2) failure of the Commissioner to allow as deductions for 1919 the expenses of the first 15 days of the year, amounting in the aggregate to $4,454.99; and (3) reduction of invested capital for 1919 by the amounts of $1,857.99 and $31.17, on account of income and profits taxes for prior years. Respondent moved to dismiss the proceeding as to 1917 for lack of jurisdiction, ■ on the ground that the total tax for that year, as shown in the deficiency notice, is less than the total tax shown by the petitioner upon its return. The parties agree that for 1916 there is an additional tax to be paid of $31.17.
    FINDINGS OF FACT.
    Petitioner is a Georgia corporation with its principal office at Edison, Calhoun County.
    On its income and profits-tax return for 1917, petitioner showed a total tax of $461.07. The total tax for the same ye.ar as computed by the Commissioner in the deficiency notice is $334.35; and the over-assessment of $1,668.36 is shown in the deficiency notice as follows:
    Total tax assessable_ $334. 35
    Tax previously assessed:'
    Original, April 1918 list, page 9, line 8_$461. 07
    Additional, February 1920 list, page 4, line 9_ 599. 02
    Additional, March 1924 list, page 7, line 2_ 942.62
    - 2,002. 71
    Overassessment_ 1, 668. 36
    In its return for 1919, petitioner reported gross sales of $157,-133.03, and total purchases of $136,248.59, and a net income of $5,131.-46. The books of account show total sales of $6,769.57 for the period January 1 to January 15, 1919, and $157,133.03 for the period January 16 to December 31, 1919; also total merchandise purchases of $3,462.59 for the period January 1 to January 15, 1919, and $136,-248.59 for the-period January 16 to December 31, 1919. The books of account also show general expenses, salaries, office expenses, and advertising, of $992.40 from January 1 to January 15, 1919. The Commissioner added to the net income shown by petitioner’s return the sum of $5,882.56, purporting to represent the sales of the fifteen-day period, J anuary 1 to J anuary 15, 1919, omitted from petitioner’s gross income, but failed to allow the deduction of $3,462.59, purchases made during the same period, also omitted from the return.
    The Commissioner reduced the invested capital for 1919 by the amounts of $1,857.99 and $31.17, because of income and profits taxes of prior years.
   OPINION.

SteRnhagen :

The total tax for 1917, as shown in the deficiency notice, is less than the tax shown on petitioner’s return plus amounts previously assessed as deficiencies. Respondent’s motion to dismiss the appeal as to 1917 is granted and order will be entered accordingly. Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

As the basis for the determination of the deficiency for 1919, the Commissioner caused an examination to be made of the petitioner’s books, and found that the original return covered the period from January 16 to December 31, inclusive, by reason of the fact that the petitioner, on January 16, inaugurated a new set of accounts. Finding that the items of income for the period January 1, 1919, to January 15, 1919, had been omitted in the petitioner’s computation of taxable net income, the Commissioner added to income the amount of $5,882.56, alleged to represent the sales of the fifteen-day period which had been omitted from the original return. The petitioner, at the hearing, presented in evidence the merchandise purchase and sales accounts for the fifteen-day period in question, from which it appears that the gross sales amounted to $6,769.57, and the gross purchases to $3,462.59. We have found, therefore, that the revision of the net income resulting from the inclusion of the fifteen-day period should be accomplished in part by increasing it by the difference between these two amounts, namely, $3,306.98, and not by the amount asserted in the deficiency notice of $5,882.56. This means that the Commissioner overstated the net income in this respect by the difference between $5,882.56 and $3,306.98, or $2,575.58.

Petitioner contends that the net income shown in the deficiency notice should be further reduced by $992.40, representing general expenses, salaries, office expenses, and advertising, of the fifteen-day period, but proof of the failure of the Commissioner to allow these expenses as deductions is lacking.

The petitioner does not dispute the correctness of the amounts by which the Commissioner has reduced invested capital for 1919, because of income and profits taxes for prior years, but merely questions the right of the Commissioner to make such a reduction. No evidence was offered to show that the Commissioner’s action is not in accordance with Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

Judgment udll be entered on W days' notice, under Rule 50.


author: TRAmmell :

text:
    Husch Bros., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7591.
    Promulgated April 26, 1927.
    At the time of a lire petitioner had on hand certain merchandise belonging to itself and certain other merchandise as bailee or warehouseman for customers. Insurance policies taken out by petitioner covered both classes of merchandise. An amount was set aside or held as a reserve, to meet customers’ claims the amount of which wore unknown and undeterminable. About two and a half years later the amount so set aside was reported as income. Held, that the amount was income in the year in which received and not in the subsequent year.

      Maurice W. Stoffer, Esq., and Miller P. Firestone, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes in amount of $5,237.43 for the fiscal year ended January 31, 1920. The deficiency results from the respondent including in petitioner’s income an amount of $8,982.06, representing a portion of the proceeds from fire insurance policies and from salvaged merchandise paid to petitioner during its fiscal year 1920.
    FINDINGS OF FACT.
    During the taxable year under consideration, petitioner was engaged in the business of operating a retail store in St. Paul, Minn. It sold ladies’ ready-to-wear goods.
    In connection with its retail trade, petitioner stored for its customers fur garments, fur-trimmed garments and any other articles of clothing that its customers desired to store. Upon accepting apparel for storage, the petitioner issued to the customer a storage receipt which contained a provision that the petitioner would keep the goods of the customer insured against loss by fire. Most of the stored garments were deposited in the spring and withdrawn in the fall.

      Petitioner in the operation of its retail business, in addition to selling for cash, had certain customers to whom it sold merchandise on credit. Frequently such customers after making a purchase would leave it with petitioner for alteration or remodeling.
    The petitioner had certain other customers to whom it would not extend credit. These customers would make a selection of merchandise, make a partial payment thereon, and petitioner would then put the goods aside. It carried such goods in a special account and held them hntil the customer completed payment. This class of business petitioner designated as “Will-call ” or “ C. O. D.” business.
    A fire occurred in petitioner’s establishment on the night of May 23, 1919. While the walls and some of the lower floors remained, the entire stock of merchandise, together with that in storage, that left for alterations, and that on which partial payments had been made was almost totally destroyed. Only a portidn of it was salvaged.
    Petitioner’s records except certain of those that were in a vault were partially destroyed. The records relating to articles in storage, articles left for alterations and those held under partial payments were destroyed, and petitioner had no means of ascertaining the amount of goods in these classes which Avere held by it. After the fire the only information available from petitioner’s records as to any of these classes of goods was the total balance due on all the goods held under partial payments.
    The petitioner carried fire insurance upon its merchandise and that of others held by it. The same policies covered both classes of merchandise. The policies contained no statement as to what portion of the insurance represented insurance on merchandise of the petitioner and what portion represented insurance on merchandise of customers.
    During petitioner’s taxable year ended January 31, 1920, a settlement was made with the insurance companies by which petitioner received the full amount of the insurance policies, $102,500 and $6,657.75 from the salvaged merchandise. The amounts received from the insurance companies, the amount received from salvage, and two other small amounts were credited by petitioner to an account called “ Insurance Recovered Merchandise,” which it had set up on its books.
    For about ten weeks folloAving the fire, petitioner was out of business. However, immediately after the fire, it established an office in a nearby building, to which some of its customers Avho had goods in storage, or who had left goods for remodeling, or had made partial payments on goods they had selected, came to have adjustments made.

      During the remainder of petitioner’s taxable year and down to about May, 1921, it continued to make adjustments with customers for losses resulting from the fire.
    Some adjustments were made by furnishing the customers with new merchandise which was taken directly out of stock. Other adjustments were made by allowing credit on the customer’s account and others were made by the payment of cash. Subsequent to the closing of petitioner’s taxable year, J anuary SI, 1920, no cash adjustments were made with customers. Where payments were made in cash, the amounts were charged against the account “Insurance Recovered Merchandise” to which was also charged the balance of petitioner’s merchandise account at the time of the fire, the balance due from customers on will-call or C. O. D. business at the time of the fire and the amount of invoices for goods received prior to but not entered o'n the books at the time of the fire. At the close of the petitioner’s taxable year, January 31, 1920, the “Insurance Recovered Merchandise” account had a credit balance of $10,122.06.
    The officers of petitioner after conferring among themselves and with petitioner’s attorney and its accountant, decided to treat the amount as a reserve for liability on account of claims that had not yet been settled and which might arise in the future. No adjustment was made in the “ Insurance Recovered Merchandise ” account at the end of the petitioner’s taxable year, and no part of the credit balance shown therein was reported as income. During the fiscal year ended J anuary 31, 1921, the “ Insurance Recovered Merchandise ” account was charged with an item of $1,140, reducing the credit balance of $8,982.06 on January 31, 1921. No part of the amount of $8,982.06 was reported as income in petitioner’s return for its taxable year 1921.
    While some adjustments were made with customers during the year 1922 by the delivery of merchandise out of stock, no cash payments were made. Petitioner did not report any part of the $8,982.06 as income for its taxable year 1922, but by an entry under date of January 28, 1922, transferred the amount from the “ Insurance Recovered Merchandise ” account to an account designated “ Reserve from Insurance Recovered.” By an entry dated December 16, 1922, this latter account was closed and the amount of $8,982.06 was transferred to surplus. Petitioner in its return for the taxable year ended January 31, 1923, reported the amount as income. The respondent has included it in petitioner’s income for the taxable year ended January 3.1, 1920.
   OPINION.

TRAmmell :

The parties have presented only one question for our decision and that is whether the amount of $8,982.06 was income in that year or in the fiscal year 1923 when the petitioner claims the amount was actually realized as income upon the termination of its liability as bailee or warehouseman. In other words the question is whether the amount was taxable income in the fiscal year 1920 or 1923. No other issue is presented or argued. The insurance policies taken out by petitioner, while having a clause covering the merchandise of customers in the hands of petitioner, did not show what part of the face of the policy represented insurance on petitioner’s merchandise and what part represented insurance on customers’ merchandise.

The petitioner did not know the extent of its liability to customers for merchandise destroyed in the fire, and had no means of accurately determining such amount. After charging against the receipts from insurance policies and from salvaged merchandise and certain other minor sources, certain amounts representing as nearly as could be determined the merchandise on hand belonging to petitioner at the time of the fire, the balance due on C. O. D. and will-call merchandise held by petitioner and cash payments made to customers as a result of adjustments, the petitioner held the remainder as a reserve out of which to make payments to customers as further adjustments were found necessary. The credit balance remaining on January 31, 1920, was $10,122.06.

After that date, no further cash payments were made to customers but their losses were adjusted either by allowing a credit to their accounts or by furnishing them with new merchandise. The only other charge made against the credit balance of $10,122.06 was an amount of $1,140 made on February 28, 1920, and after that date the balance stood at $8,982.06. The petitioner carried the undiminished balance on its books until December 16, 1922, when it was transferred to surplus, and in its return for the year ended January 31, 1923, reported the amount as income.

With respect to the customers’ goods the petitioner was in the position of bailee or warehouseman, and customers were entitled to collect from the petitioner whatever amount it had received as insurance on their goods in excess of any charges it was entitled to against the customer. The amount received by the petitioner in excess of its charges, if any, was the property of the customers, which petitioner held as trustee. 3 R. C. L. 108; Ferguson v. Pekin Plow Co., 141 Mo. 161; 42 S. W. 711; Fish v. Seeberger, 154 Ill. 30; 39 N. E. 982; Southern Cold Storage & Produce Co. v. Dechman (Tex.) 73 S. W. 545. Consequently, such amount, or any part of it set aside or held as a reserve from which to make payment to customers for their losses as such became known to the petitioner, is in a different class from reserve set aside out of profits to meet contingent liabilities. The liabilities here were not contingent. Such amount as was received from insurance on goods belonging to others belonged to the persons who owned the goods. The petitioner received it only in a fiduciary capacity. The fact that it was not paid out until later is not material.

The difficulty here, however, is lack of evidence as to the amount of money which the petitioner actually received in such capacity. It did not make any cash disbursements after 1921. We do not know whether the charge of $1,140 made in 1921 was a cash disbursement or not, but that fact is not material here. While we do know that adjustments were made with customers after 1920 and also after 1921, there is no evidence as to the nature thereof or the amounts, if any, finally determined to be due to customers on account of the fire loss. Any amounts due them did not belong to the petitioner but we can not find what portion, if any, of the amount of $8,982.06, the amount finally reported as income by the petitioner, was ever paid or credited to customers, to what extent the petitioner was liable to make adjustments with respect thereto, or what part of that amount represented money which should have been paid to customers on account of their losses. In view of this fact we must hold that the amount of $8,982.06 was income to the petitioner in its fiscal year ended January 81, 1920, the year in which it was received by it, and not in 1923.

The reserve set up by the petitioner is not deductible. Appeal of William J. Ostheimer, 1 B. T. A. 18; 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; Appeal of Helvetia Milk Condensing Co., 5 B. T. A. 271; Crescent Cotton Co. v. Commissioner, 5 B. T. A. 850.

This disposes of the only issue presented by the pleadings, or in the argument of counsel.

Judgment will he enten'ed on 15 days' notice, wider Rule 50.


author: Miuliken:

text:
    Multibestos Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7598.
    Promulgated April 26, 1927.
    1. A loss deduction on account ol abandonment, due to a change in business conditions, of a building in the use for which it was specially designed, and its devotion to a radically different use requiring costly alterations, allowed, in the year it was abandoned, the loss being measured by the difference between the depreciated value and the residual value.
    2. An estimate by the officers of a corporation which abandons a building, as to the residual value of such building is entitled to considerable weight. .

      Harvey H. Bundy, Esq., and Abbot P. Mills, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding results from the Commissioner’s determination of a deficiency in income and excess-profits taxes, for the year 1919, in the amount of $14,721.70, all of which is in controversy.
    Error is alleged in the disallowance of loss deductions claimed on account of equipment sold and scrapped, and loss due to abandonment of one of the petitioner’s buildings.
    FINDINGS OF FACT.
    Petitioner was incorporated under the laws of Massachusetts, in 1911, with its principal offices at Worcester, Mass. It was first engaged in the manufacture of heavy cotton belting and cotton covering for fire hose. During 1914, the petitioner moved to a plant which it had built at Framingham, Mass., and engaged in the manufacture of asbestos clutch and brake lining. Subsequently, it also began the manufacture of friction or tire tape, rubberized cotton cloth and a rubber splicing compound. These latter articles were rubber specialities in the making of which reclaimed rubber was an ingredient. To effect economies in the making of its rubber specialties, petitioner needed a rubber-reclaiming mill. A plant, located at Walpole, Mass., owned by a rubber company which was in the hands of receivers, was on the market, and as the plant included a building especially built as a rubber-reclaiming mill, the petitioner purchased the plant in the fall of 1915, and moved its business there. Operations were begun in the purchased plant in January of 1916, and the Framingham plant was sold in the spring of 1916.
    Following the move to Walpole, other rubber specialties, including rubber heels, rubber matting, and mechanical rubber, were added to the products theretofore manufactured. The making of rubber specialties had no relation to the asbestos clutch and brake lining features. The processes of manufacture were distinct and separate, and were carried on in separate buildings. The production of friction or tire tape represented about 90 per cent to 95 per cent of the rubber specialty output. During 1918 and 1919, the price of sheeting used in making the tire tape increased, first from 6 cents or 7 cents, to 10 cents, and then to 12 cents. Also, the price of crude rubber, theretofore very stable, was materially reduced. This change in market conditions caused petitioner to discontinue its rubber specialty business in 1919. The machinery used in that business was either sold or scrapped during that year, and the buildings used were in part, at least, utilized in the manufacture of the asbestos clutch and brake linings.

      However, the rubber-reclaiming mill, having been especially built for the purpose it was intended to serve, was not adaptable to use in the production of asbestos brake and clutch linings. The mill was a five-story building, 35 by 55 feet inside measurements, the walls being of concrete, reinforced in part, and 2^4 feet thick. In this building, there were 13 bins or tanks, through which the crude rubber was run at various stages of the reclaiming process. These tanks were enclosed in heavy concrete, and extended uninterrupted by floors, from above the fifth floor to within 4 or 5 feet of the ground floor. The dimensions of 8 of these tanks were about 3 by 5 feet, and 3 tanks were 8 by 10 feet. The tanks, together with the airways between, and the stairways, occupied about two-thirds of the floor space, with the exception of the ground floor, where they extended only part way to the floor. The machinery used in the rubber-reclaiming processes was of very heavy construction, and the walls of the buildings and of the tanks were designed to house and withstand the use of such machinery.
    During the latter part of 1919, petitioner used this mill building only for the purpose of storing baled cotton. This use was negligible, as .petitioner never purchased more than a carload of cotton at one time. Nor was the building suitable for storage purposes. The floor space was limited and only two floors at most were available for such storage purposes, as there were no elevators in the building. The building was centrally located with respect to other buildings of the plant, and there was no other space suitable for the erection of a centrally located plant unit needed to house part of the brake and clutch lining business, and to facilitate the passage of the product from one building to another at the various stages of manufacture. Under these circumstances, petitioner was faced with the necessity of demolishing the building and erecting a suitable one in its stead, or of reconstructing the old building to adapt it to fill the new requirements. During 1919, petitioner considered demolishing the building, but found that demolition could not be safely done by means of blasting, because of the proximity of the mill to other buildings. The only alternative of blasting was the electric drill, which was a slow and expensive means. Petitioner was advised by competent building engineers that the cost of demolition of the building would be prohibitive. The idea of razing the building was, accordingly, abandoned, and the building used incidentally for the storage of cotton during the remainder of 1919, as above indicated. Such machinery as could be removed from the building was sold or scrapped in the year 1919.
    The depreciated cost of the building, as of the close of 1918, was stipulated to be $31,661.38. The officers and directors of petitioner knew the building could not be utilized in its brake and clutch lining business without expensive alterations. They considered the maximum residual value of the building to be $10,000 as of the close of 1919, which estimate conformed to an engineering estimate given, and it was marked down on the books to that value, and the remainder of the depreciated cost was claimed as a deductible loss sustained within the year.
    . Petitioner found the building to be a liability rather than an asset and found something, must be done with the same; accordingly, remodeling of the building was begun during the year 1920. It was impracticable to remove the concrete-enclosed tanks for the same reasons that it was impractical to demolish the building. The remodeling consisted largely of cutting through the concrete enclosures, extending the flooring inside the tanks, cutting windows through the walls, and making other alterations in preparation for the installing of machinery to be used, and to permit the materials to pass from one floor to another during the course of the processes to be carried on in that building. The remodeling was completed at a total cost of $35,404.03. Thereafter, the processes of preparing the raw cotton and asbestos, and the intermixing of those raw materials, were carried on in that building, from whence the mixture was passed on to other buildings, where the spinning and weaving took place. Some heavy machinery was used in crushing asbestos rock, but the rock was easily crushed, there being no vibration requiring unusual solidity in building construction. The remodeled building was not well adapted to the use to which it was put. The floor space was badly cut up and the various- processes were divided between five floors. They could have been carried on more economically had the building had fewer floors with more space to each floor.
    It was stipulated at the hearing that the additional deductible loss sustained on the equipment sold or scrapped, is $3,982.81.
   OPINION.

Miuliken:

In view of the above-mentioned stipulation, we need only consider the loss sustained on the rubber-reclaiming mill building during the taxable year. In support of the disallowance of this loss, the respondent cites article 143 of Regulations 45, which provides that a deduction may be taken on account of a loss in useful value of buildings “ only when they are permanently abandoned or permanently devoted to a radically different use,” and contends that the facts do not bring the petitioner within the prescribed test of deduction, to wit, a radically different use, as the building was continued in use in the manufacture of petitioner’s standard line of products.

We are not persuaded by this contention, even if in point. We are of the opinion that the building was devoted to a radically different use. Summarizing, the facts show the building was constructed as a rubber-reclaiming building and that at least two-thirds of the space contained therein was occupied by concrete-enclosed tanks especially designed for and peculiar to the rubber-reclaiming processes; that expensive remodeling added only a comparatively small amount of badly cut up floor space to the remaining one-third of the original floor space which was in any sense adaptable to the new use, and that such remodeling was done only because the building could not have been safely and economically razed to provide space for the erection of a more suitable building. Petitioner decided, in 1920, to attempt to reconstruct the building, not because it thought that the same could be suitably or economically adapted to its asbestos brake and clutch lining business, but because the building was centrally located and it needed the site upon which to carry on its regular business. Petitioner could have constructed a building suitable in size and dimensions at a cost of not to exceed $32,000, whereas because of the impracticability of demolition of the old building, it spent over $35,000 and had an unsatisfactory building-on its hands. We are unable to see the pertinency of respondent’s suggestion that the use is not radically different, because petitioner used it to carry on the manufacture of its standard line of products, for the mill was designed to serve in the production of rubber specialities and that line of production was permanently abandoned. The record convinces us that there is little resemblance between the processes required to reclaim rubber and those incident to the preparation and .mixing of cotton and asbestos raw materials.

The estimate made by petitioner’s officers that the residual value of the building in question amounted to $10,000, was fixed somewhat arbitrarily, as representing the maximum value. Their judgment is strongly supported by testimony indicating that the building was a liability rather than an asset, as the cost of constructing a new and more suitable building would have been less during either 1919 or 1920 than the amount expended in remodeling the old building. We have heretofore held that the opinion of the corporate officers is entitled to considerable weight in estimates of this character, Appeal of Dilling Cotton Mills, 2 B. T. A. 127; Kilby Car & Foundry Co. v. Commissioner, 4 B. T. A. 1294. In view of the supporting testimony, we feel constrained to accept their estimate. The deficiency will be recomputed, allowing as a deductible loss the difference between the stipulated depreciated value of the building and $10,000, its residual value, and to accord with the stipulation with respect to the other deductions claimed.

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


author:
Korner,
      Chairman:

text:
    Acme Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1598.
    Promulgated April 26, 1927.
    In tlie condition and circumstances under which the sale of the mill property in question was made in October, 1912, the selling price does not establish the March 1, 1913, market value thereof, since there was not the open market and freedom from compulsion in that sale that is contemplated by the Board’s prior rulings.

      James Breathitt, Jr., Esq., for the petitioner.

      DonaLd D. Shepard, Esq., for the respondent.
    This proceeding involves deficiencies of $4,908.71, $2,107.23, and $224.65 for 1917, 1918, and 1920, respectively. They result from the Commissioner’s computation of the allowance for exhaustion, wear and tear of property on the basis of original cost thereof plus cost of improvements instead of on the basis of an alleged value as of March 1, 1913.
    FINDINGS OF FACT.
    The petitioner is a corporation engaged in the business of operating a flour mill in Hopkinsville, Ky.
    The mill consisted principally of two units known as Mill “ A ” and Mill “ B.” They were well built and were of mill-type brick construction on a stone foundation, and they had suitable elevators, storage room, and a power plant. They were erected at a total cost of approximately $150,000, exclusive of machinery, and it would have cost about that amount to reconstruct them as of March 1, 1913. The cost of equipping a mill with machinery as of March 1, 1913, would have been from $110 to $115 per barrel of capacity. Mill “ A ” was built about 1898 and Mill “ B ” about 1905 or 1906. The total capacity of the mill was 1,000 barrels of flour a day. The land on which the mill was located had a value of about $10,000, as of March 1, 1913.
    The mill had formerly been operated by the Acme Mills & Elevator Co. On January 1, 1910, the mill property was mortgaged or deeded in trust to a local bank as security for a proposed bond issue of $200,000. Of this amount $191,350 in bonds was actually issued.
    In 1911 it became financially involved as a result of the misappropriation of its funds by certain of its officers. Two of the officers were indicted, tried, convicted and sentenced to the penitentiary. Suit was filed against it on March 29, 1911, by its creditors; on June 14, 1911, judgment was entered decreeing a sale of the assets of the company; and on July 8, 1911, the property was sold by the commissioner of the court for the sum of $78,710. This was only slightly in excess of two-thirds of the value of the property as appraised by housekeepers of the county, apparently in pursuance of local law.

    The appraisal is as follows:
    Mill “A,” as described in judgment-$85,000
    Mill “ B,” as described in judgment_ 25,000
    Personal property, consisting of wagons, harness, typewriter, and office fixtures_ 513
    110,513
    The property was acquired by three trustees acting for creditors and stockholders of the defunct company. None of these trustees had any knowledge whatever of the milling business. Two of the trustees are now dead. The mill was not operated and was idle during the whole of the period from a date several months prior to July, 1911, to December, 1912. The trustees endeavored to sell the property. No purchaser for the property could be found locally nor in the county. Advertisements offering the property for sale were placed in newspapérs, including the Louisville Courier Journal, and in various trade magazines of the milling business. The creditors were impatient and were pressing for a disposition of the matter, and in October, 1912, a contract of sale was made with persons from Clarksville, Tenn., who were experienced in the milling business. The amount of $49,250 was paid for the property. A representative of the purchasers immediately took charge of the mill and conditioned it for operation, at a total cost of about $6,000.
    At the time of the sale by the trustees the property had sustained an average depreciation of about 80 per cent and was in a condition substantially equivalent to 70 per cent of what it would have been if new.
    The purchasers formed the petitioner corporation, Acme Mills, Inc., and by deed under date of January 1, 1918, the property was conveyed to it. The mill started operations the latter part of January.
    None of the officers or stockholders of the petitioner were connected in any way with the Acme Mills' & Elevator Co. at any time.
    There was no general depression in the milling business around March 1, 1918.
    The boobs of the Acme Mills & Elevator Co., showing the exact cost of the property, are lost.
    The value at March 1, 1913, of the property involved in this controversy was $100,000.

       Carroll’s Kentucky Statutes, § 1682, subsection 1, and § 1684.

   OPINION.

Korner, Chairman:

The issue here to be determined is the market value on March 1, 1913, of the mill property-owned by petitioner. The respondent contends that the sale of the property by the trustees in the latter part of 1912 established a market value sufficiently close in point of time to March 1, 1913, to establish value at that date. The petitioner contends that' the sale does not establish a market value at the basic date for the reason that the conditions at the time of sale and at the basic date are dissimilar, and that the evidence establishes the market value as of March 1, 1913, in an amount not less than $150,000.

In the instant case the sale of the property by the trustees for $49,250, does not, in our opinion, establish the market value of the property as of March 1,1913, under the conditions in which that sale was made. A thousand-barrel flour mill situated in a small community may have a market which would not be found readily in that small community. The market for such a mill would of necessity be limited in extent and difficult of quick or easy ascertainment. The trustees were making efforts to dispose of the property. The creditors were becoming more and more restive and impatient for a disposition of the property and for at least a partial settlement of their claims. We feel that a.sale of this property under such circumstances for $49,250 is not a fair or just criterion of its market value. The purchasers obtained the property at a price which, in our opinion, was not commensurate with its market value. While not, perhaps, under a strict compulsion to sell, the action of the trustees was impelled by a very decided pressure from creditors whom they represented to dispose of property which, under existing conditions, was to them a white elephant. There was not an open market and willingness to sell, free of compulsion or necessity.

Another factor operates against the establishment of the selling price of $49,250 as the March 1,1913, market value. When the property was sold the mill was not in operation and all of the circumstances then surrounding it were permeated with an atmosphere of gloom. Contrast this condition with affairs as they existed on the basic date. $6,000 had been expended in making repairs and in conditioning the mills for full operation. It had been so conditioned on the basic date and was then in operation under the management of experienced and successful millers.

The petitioner contends that it has proved the market value of this property at March 1, 1913, to be not less than $150,000. Considerable testimony was adduced tending to show the value at that date to be in that amount or more. It offered the testimony of the builder of the mill and of the operator of another mill in the same town tending to show the market value to have been in excess of that amount. One witness, had been in the milling business for thirty years as the active head of a large mill. He had inspected the petitioner’s plant several times in the year 1912 with a view to a possible purchase of it. He was thoroughly familiar with the character and construction of the mill and tlhe type of its equipment. He was a member of the various milling associations and had annually attended their meetings and heard discussions yearly as to the cost and values of mills and their construction and equipment. He was entirely disinterested in this controversy, having no interest in the petitioner. He gave it as his opinion that, assuming the rule laid down heretofore by the Board as to the bases and elements to be considered in fixing a value, the mill had on March 1, 1913, a value of $200,000. The fact that he did not purchase at that figure when the opportunity was then afforded him, tends to modify the weight of his testimony as establishing a value in that amount. Other testimony, while tending to support the last named valuation, lacks the particularity and definiteness which would justify a finding of such a value.

We have given careful consideration to all the evidence and have weighed it as a whole. It is our conviction, that the petitioner has established a valúe of $100,000 and we have so found.

Judgment will be entered on B0 days notice, under Bule 50.

       This decision was prepared during Mr. Korner’s term of office.


author: Teammell :

text:
    S. R. Kelsey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6082.
    Promulgated April 26, 1927.
    Gain derived from the sale of stock determined.

      S. R. Kelsey pro se.

      A. S. Lisenby, Esg., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for 1920 in the amount of $113.40. The deficiency arises from the action of the Commissioner in increasing the income reported on the return in the amount of $2,408.95 upon the ground that $100 thereof represented salary received and $2,308.95 represented a taxable distribution of a corporation.

      FINDINGS OF FACT.

      { The petitioner, on July 1, 1919, purchased sixteen shares of the capital stock of Alpern & Co., a New Jersey corporation, for $2,000. On February 6,1920, the petitioner surrendered this stock to the corporation for $3,000 cash.
    The petitioner was vice president of the corporation until he sold his stock on February 6, 1920.
   OPINION.

Teammell :

The petitioner purchased stock for $2,000 in 1919 and sold it for $3,000 in 1920. There was-testimony to the effect that if all the earnings had been distributed during 1919 and 1920 the petitioner’s share thereof based on his stock ownership would have been $691.05 for 1919 and $308.95 for 1920. No dividends, however, were declared. It was contended by the petitioner that these amounts should not be included in taxable gain resulting from the sale of the stock. The fact that earnings had been accumulated by the corporation which would have been paid to him as dividends if dividends had been declared, is immaterial. It might have affected the value of the stock and enabled him to secure a larger price for it than he otherwise would, but the accumulated earnings of the corporation not distributed in the form of dividends is not taxable to stockholders. The petitioner received his entire gain from the transaction in 1920 when he sold the stock. This was $1,000 instead of $2,308.95 as determined by the respondent.

There was no satisfactory explanation by the petitioner with respect to the $100 which the respondent added to income as salary. In the absence of evidence that the action of the respondent was erroneous, we must affirm his action in that regard.

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


author: Trammell :

text:
    Farm Implement Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9823.
    Promulgated April 26, 1927.

      Benjamin H. Flesher, Esq., for the petitioner.

      F. O. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes in the amounts of $3,052.89 for 1919, and $1,248.91 for 1920.

      The deficiencies arise from the action of the Commissioner in computing the net income of the petitioner by the comparison of the net worth of the petitioner at the close of the respective years with the net worth at the beginning thereof, the books being kept upon the single-entry method.
    FINDINGS OP PACT.
    The petitioner is a Minnesota corporation, organized May 1, 1917. It is engaged in the retail farm-implement business and retail automobile sales agency in the City of Albert Lea.
    The petitioner filed its income and profits-tax returns showing thereon a net income of $3,518.78 for 1919, and a net income of $5,365.11 for 1920. The returns were accompanied by balance sheets taken from its books of account. The petitioner kept its books by the single-entry method and from its books the net income could only be determined by making a comparison of the net worth at the close of the year with the net worth at the beginning of the year.
    A revenue agent examined the petitioner’s books and computed the net taxable income upon that basis. The petitioner protested the agent’s adjustments and as a result of information submitted an adjustment of $2,093 was made in the válue of assets as of December 31, 1919, resulting in a decrease of that amount in the income for that year and a corresponding increase in income for 1920.
    The adjustments made by the revenue agent in reducing the values of assets to the extent of $2j093 were sufficient to reduce the values shown by the books to the values at that time.
    The assets appearing on the books at the close of 1920 were overstated $120, which resulted in the income for 1920 being overstated to that extent.
   OPINION.

Trammell :

In our opinion, the determination of income, under the facts in this case, made by a comparison of the net worth at the close of the year with the net worth at the beginning of the year, is the correct and proper method of determining the income of the petitioner. In the Appeal of Index Notion Co., 3 B. T. A. 90, we said:

Where books oí account are maintained by the single-entry method of bookkeeping, the determination of net income is made by comparison of the net worth at the close of the year with the net worth at the beginning of the year.

The testimony of the petitioner was to the effect that certain assets as shown by the boobs as of December 31, 1919, were overstated and that certain assets shown by the books at the end of 1920 were overstated.

Upon tbe evidence we are not convinced tliat tbe net worth as determined by the respondent at the end of 1919 has been incorrectly stated. On the protest of the petitioner the respondent made a reduction in the values of assets and the evidence does not convince us that the assets should be further reduced in value at the end of 1919.

With respect to the balance sheet at the end of 1920, it appears that the respondent has determined the value of a truck at $1,200 when the cost thereof was $1,061, with $37 freight charges, making a total of $1,098. This truck should not be included in the balance sheet at a greater amount than $1,098. This reduces the net worth ■at the end of 1920 by $102, resulting in a reduction of the net income by that amount.

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


text:
    William G. Frank, Administrator, Estate of George Doehne, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9344.
    Promulgated April 26, 1927.
    Interest due decedent during his lifetime is not income to his estate when received by it.

      G. H. Preston, O. P. A., 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 years 1923 and 1924.
    findings of fact.
    George Doehne died on November 4, 1922, leaving a will in which William G. Frank was named as administrator. The decedent prior to his death kept his books on the basis of cash receipts and disbursements and the estate, subsequent to his death, kept its books on the same basis.
    At his death the decedent left an estate which included among other assets certain accrued interest receivable. During 1923 the amount of $5,564.28 of such interest which had accrued at the time of the death of the decedent was received by the estate, which amount the respondent has included in taxable income of the estate which results in the deficiency.
   OPINION.

Teammell :

It is contended by the petitioner that the accrued interest which was owing to the decedent at the time of his death was capital in the hands of the estate and was not taxable income when received by it. The respondent, on the other hand, contends that such accrued interest was taxable income when received by the estate.

The value of the gross estate of a decedent, under section 402 of the Eevenue Act of 1921 which was in effect during the calendar year 1923, is determined by including the value at the time of the decedent’s death of all property, real or personal, tangible or intangible, wherever situate, which belonged to the decedent. The accrued interest owing to the decedent at the time of his death was property in the form of a debt due him. While the interest would have been taxable income to the decedent if he had received it during his lifetime, in the hands of the estate after his death, such accrued interest took on a different character. It then became a part of the corpus of the estate. The decedent and his estate are separate taxable entities. Bankers' Trust Co. v. Bowers, 295 Fed. 89. An account receivable or interest receivable in the hands of a decedent at the time of his death is as much a part of the estate of the decedent as any other asset, and the payment thereof is not income to the estate. Nichols v. United States (Court of Claims, decided April 4, 1927).

The collection of a debt owing to the estate does not constitute taxable income to it, except to the extent that the cash received exceeds .the value of the account receivable or the indebtedness at the time of the death of the decedent. We have no evidence here nor is it contended that the amount received by the estate exceeded the value of the debt represented by the accrued interest.

The assets belonging to the decedent during his lifetime became capital in the hands of the estate. It seems to us that a situation is presented similar to that where a taxpayer owned assets before March 1, 1913, and after that date converted them into cash which did not exceed the March 1, 1913, value. Taxable income is not received by a taxpayer upon the conversion of assets which he owned prior to March 1, 1913, except to the extent that the cash or other assets received exceed the value on that date.

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