text:
    Ferry Market, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3671.
    Decided October 21, 1926.
    1. Distributive net earnings of a vessel jointly owned should be included in the gross income of the co-owners in proportion to their several undivided interests.
    2. Deduction from gross income of amounts paid as bonus or extra compensation to employees allowed.

      J. JS. Kehoe, G. P. A., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts deficiencies in income and profits taxes for the years 1916,1918 and 1919, in the respective amounts of $58.79, $262.55 and $160.31. Only the deficiencies for the years 1918 and 1919 are in controversy. The petitioner alleges that the Commissioner erred (1) in disallowing certain payments to employees, as bonuses or compensation in addition to regular salary, as deductions for ordinary and necessary expenses, and (2) in making certain additions to its gross income for the taxable years.
    FINDINGS OF FACT.
    During the taxable years the petitioner owned an undivided 2/100ths interest in the steam schooner, Claremont, which was operated by the Hartwood Lumber Company as managing owner. The net income from the operation of this vessel for the year 1918 was $100,-279, and for the year 1919, $120,365.41. During the year 1919 the petitioner owned an undivided 2/100ths interest in the steam schooner San Diego. The net income from the operation of this vessel for the year 1919 was $117,580.30.
    The petitioner’s shares of the net earnings of the two vessels in each of which it owned an undivided 2/100ths interest were as follows:
    1918. 1919.
    Claremont_$2, 005. 58 $2,407. 00
    San Diego- 2, 530. 00
    In distributing the net earnings of these vessels to the several co-owners, the managing owner retained certain amounts as reserves against the expenses of future operation. For the year 1918 the amount of the net earnings of the Claremont distributable to the petitioner but retained in reserve was $805.58; for 1919 the amounts of the net earnings of the Claremont and San Diego distributable to the petitioner and so retained were $907.31 and $850.61, respectively.
    In making its income and profits-tax returns for the taxable years the petitioner included in its gross income only the parts of its shares of the distributive net earnings of the Claremont and Sam Diego which it received in cash. Upon audit of such returns the Commissioner added to gross income the amounts retained in reserve for each of the taxable years.
    About Christmas time of each of the taxable years the petitioner made certain payments to or on account of its employees in the respective amounts of $165 and $140, as additional compensation to its employees.
   OPINION.

Lansdon :

The petitioner contends that it should include in gross income for the taxable year only amounts of the distributive net earnings of the vessels of which it is one of several co-owners that it actually received. The Commissioner has held that the entire annual distributive earnings of such vessels should be included in the gross income of the individual co-owners, even though a part of such earnings is retained by the managing owner as a reserve for use in future operations.

We are of the opinion that the managing owner of a vessel jointly owned by several co-owners is the agent of such co-owners and that net earnings received by him must be regarded as received by the several co-owners in the proportion of their interests in such vessel. While the co-ownership of a vessel does not constitute a partnership or a joint stock association, it does result in the creation of an operating entity that earns income by the use of capital. Such income is taxable.

We are of the opinion that the amounts of $165 and $140, respectively, were properly deductible as additional compensation. See Appeal of Edwin G. Brandenburg, 4 B. T. A. 108.

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


source: Caselaw Access Project

author: Phillips :

license: Public Domain

text:
    Appeal of J. T. Liggett.
    Docket No. 3489.
    Decided October 21, 1926.
    A transfer of oil-producing property by a father to his son upon the agreement of the son to divide the proceeds among the father, his wife and his children, held not to constitute the son an agent of the father so that the entire proceeds of the sale are taxable to the father, but to be a conveyance to the son of all interest of the father, except to the extent to which the father retained an interest in the proceeds.

      H. L. Washington, Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    The petitioner appeals from the Commissioner’s determination of a deficiency of $9,096.24 individual income tax for 1919, alleging that the Commissioner erroneously included as income to the petitioner nine-tenths of the proceeds from the sale of certain oil, gas and mineral rights which he did not in fact receive.
    FINDINGS OF FACT.
    The petitioner formerly owned 320 acres near Peabody, Kans. By instrument dated August 7, 1918, and recorded June 11, 1919, he transferred to his son, E. W. Liggett, an undivided one-half interest in the oil and gas under the W. ½ of the N. E. ½ of section 7, T. 23 S., B. 4 E., Butler County, Kans., containing 80 acres more or less, including the rights under an oil and gas lease theretofore made to one Dedrich. At the time of the conveyance there was an oral agreement that E. W. Liggett would divide the proceeds among the petitioner and his wife and eight children.
    On June 10, 1919, E. W. Liggett transferred the same interest to the Guarantee Title & Trust Co., trustee for a syndicate, under an agreement that the property so conveyed should be disposed of by the syndicate, together with other property, and that E. W. Liggett should receive 40 per cent of the net proceeds realized by the syndicate. At some subsequent time, not disclosed by the record, E. W. Liggett received $37,000 from the syndicate, which he distributed in accordance with the oral agreement.
    In computing the deficiency the Commissioner included as income to the petitioner $32,254.80, as a gain from such transaction.
   OPINION.

Phillips :

It is the contention of the Commissioner that the transfer by the petitioner to his son of the oil and gas rights in the 80-acre tract with which we are here concerned was made only for the purpose of enabling the son to dispose of this property as agent of the father. He further contends that, while an express trust in real property, not in writing, is void under the Kansas statutes and decisions, a constructive or implied trust arising out of transactions between principal and agent, or others acting in a fiduciary relation, is recognized and will be enforced; wherefore, he contends that the proceeds of the sale were received by the son as agent of the father, (hat the agency will bo recognized by the law, as a constructive trust if necessary for enforcement, and that the father is to account for the sale as his own. We need not comment upon these contentions other than to say that the evidence does not establish any such agency, but rather a conveyance by the father of all his interest, except as he may have retained an interest in one-tenth of the proceeds.

Petitioner alleges error only as to nine-tenths of the gain determined by the Commissioner. As to the remaining one-tenth which was paid him by his son in accordance with the oral agreement, no error is alleged. The deficiency, if any, should be recomputed after reducing the net income determined by the Commissioner by nine-tenths of $32,254.80.

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


author: Smith:

text:
    Appeal of Louis Cohen.
    Docket No. 5398.
    Decided October 26, 1926.
    An individual keeping his books of account on the accrual basis and setting aside on those books amounts to be held by him in trust and to be paid to his sons at a future date under the circumstances stated herein, is not entitled to deduct such amounts from gross income in income-tax returns as ordinary and necessary expenses.

      John G. Jaeger, Esq., for the petitioner.

      John W. Fisher, Esq., for the Commissioner.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $2,823.78, arising from the addition to the net income returned of certain amounts set apart from the petitioner’s books of account to be paid to three sons.
    FINDINGS OF FACT.
    The petitioner is a resident of Baltimore, Md., and is and was in 1919 engaged in the wholesale wall paper jobbing business under the trade name of The National Wall Paper Co. In addition to conducting his individual business, he was a member having a one-third interest in the partnership carrying on business under the name and style of West Baltimore Wall Paper Co., of Baltimore, Md.; a member of a like partnership and having a like interest in the Capital Wall Paper Co., of Washington, D. C.; and a stockholder having approximately a one-third interest in the Stahl Wall Paper Co., Inc., of Richmond, Va. In the conduct of his individual business the petitioner selected samples of wall paper and bound from 800 to 1,000 samples in a sample book. He made up for his trade four or five different books and these were sent to prospective customers. The taxpayer purchased the paper from factories and sold it to thousands of different customers, including the partnerships of which he was a member.
    In 1919 the taxpayer had in his individual employ three sons, Samuel, age 25, Jacob, age 22, and Benjamin, age 19. Each of these sons had entered his employ when about 15 or 16 years of age. In 1918 and 1919, Samuel was drawing a salary of $4,000, and Jacob and Benjamin were drawing weekly salaries of $25 and $20, respectively. The sons desired larger compensation or a right to participate in the business. The taxpayer did not think that they should have larger salaries to do with as they chose, but in lieu thereof entered into an agreement with them under date of January 1, 1919, which reads as follows:
    This agreement, Made as of January 1st, 1919, by and between Louis Coben, of the first part, and Jacob Cohen, Samuel Cohen and Benjamin Cohen, of the second part, all of Baltimore City, in the State of Maryland,
    Whereas the said Louis Cohen is engaged in the wholesale wall paper jobbing business in Baltimore and is holding certain interests in similar enterprises, viz: in the West Baltimore Wall Paper Company of Baltimore, Md., the Capital Wall Paper Company of Washington, D. C., and the Stahl Wall Paper Company, Inc., of Richmond, Va., and whereas the several parties of the second part are employed by and working with the said Louis Cohen and are actively engaged in promoting the prosperity of the business and allied enterprises conducted by said Louis Cohen, their father, and whereas said Louis Cohen, is desirous to make the employment of his said sons as attractive as possible and to furnish special incentive, in addition to the salary they are now receiving, and in order to foster their interest in the business and interests held and owned by their said father, and whereas it is the desire of the said Louis Cohen that the inducements and interest given by him to said sons in consideration of their services and efforts, shall enure to the benefit of his said sons at certain times as hereinafter provided,
    Now therefore, this agreement witnesseth, that in consideration of the premises and the promise and agreement on the part of said sons, to continue their active work and interest for the continuous welfare and prosperity of the business and interests built up by said Louis Cohen from very small beginning and to insure a continuance of said business and allied interests by binding said sons to said business, the said Louis Cohen, doth hereby covenant and agree to pay unto each of said three sons, viz: Jacob, Samuel and Benjamin, twenty-five per cent of the net amount received annually by him from his interest in the said West Baltimore Wall Paper Company and the Stahl Wall Paper Co., Inc., to begin with the earnings for the year 1919, and to affect no prior earnings whatsoever.
    And the said Louis Cohen hereby covenants to open accounts on his regular business ledger for his said three sons, and that the amount due them under the terms of this agreement shall be credited to them in the ordinary course of business as the said Louis Cohen receives the share in the profits from the several concerns hereinbefore mentioned, but shall be no later than February 15th in each and every year, and the said sons shall have the right to inspect said accounts at any and all times, but neither of them shall have the right to draw upon any amount standing to their credit, except as hereinbefore provided, it being agreed and understood, that said accounts shall be held in trust by said Louis Coben for the several sons, parties of the second part, hereto, until such time as each of them shall marry, at which time, the amount standing to the credit of said son or sons shall be paid over to him, together with interest at the rate of 3 per cent per annum.
    Provided however that it is required of each son, that when he or they do marry, that they marry or contract marriage with a party of the Jewish faith and Jewish parentage, subject to the approval of the said Louis Cohen and his wife, Sarah Cohen. This provision is made a part of this agreement, because it also constitutes a part of the last will and testament of said Louis Cohen and is fully agreed to and understood by the said sons.
    And provided further, in the event, that any or all of said parties of the second part, shall not marry prior to arriving at the age of thirty-five years, then and In that event, such son or sons, shall be entitled to receive payment of the amount standing to his or their credit as hereinbefore provided.
    And further provided, in the event that the said Louis Cohen shall deem the conduct, behavior and endeavors of his said sons, in and about the business and allied enterprises, insufficient and unsatisfactory, and therefore on account of the lack of interest and zeal, on the part of any or all of said sons, decide that such son or sons is no longer entitled to share in the profits as hereinbefore provided, then and in that event the question whether or not such son or sons is or are doing his or their best to further the interest of the said business and allied enterprises, shall be submitted to a Board of Arbitration to consist of three men, to be selected as follows: one by said Louis Cohen, one by such son or sons, and the two so selected shall choose an umpire between themselves, and a Board of Arbitration elected in a similar manner shall be called, in the event that said Louis Cohen and his wife shall object to the person selected as bride by any one or all of said sons, and such son or sons shall feel aggrieved by said objection, but in the latter event, it shall be a condition agreed upon and accepted by all the parties hereto, that such Board of Arbitration shall consist solely of men of Jewish Faith.
    And in the event, that such Board of Arbitration shall determine that such son or sons has failed in his or their performance of the conditions and agreements herein provided for, and is no longer entitled to the profits and emoluments as herein specified to be received by him or them, then and in that event this agreement shall cease and terminate as to such son or Sons and the share or shares to which he or they would have been entitled in accordance with the provisions herein contained, shall again be and become the sole property of said Louis Cohen, and it is agreed and understood that the decision of said Board of Arbitration shall be accepted by all the parties hereto and it is agreed that such decision, if necessary, may be made the order or decree of any Court of Record of Baltimore City. And provided further that such decision shall always date back to the last division or entry of profits for the preceding year, so that such son or sons shall be excluded from his participation in the profits for the year during which it may be decided that he or they have broken their agreement, but all such amounts as may stand to the credit of such son or sons at the time the decision is rendered by the Board of Arbitration, shall be held by said Louis Cohen in trust for such son or sons until the time arrives when he or they shall be entitled to receive same in accordance with the provisions hereinbefore contained.
    The special inducement and interest hereinbefore provided by said Louis Cohen, for his said sons, is not made solely for the purposes of accelerating the interest in his business by the said sons, for pecuniary reasons alone, but because it is the heartfelt desire of said Louis Cohen that the large business and the name he has established in the wall paper business, may be continued by his sons as a monument to the genius of the father, who through poverty and adversity, by unfailing zeal and hard labor, established the business and allied enterprises and made the name of Louis Cohen a byword in the wall paper business.
    The sons worked for the father during the year 1919, oftentimes working late at night and also on Sundays. Their time was spent almost exclusively in the store of the petitioner in Baltimore, although they worked for the interests of the two partnerships of which the petitioner was a member and also of the corporation with principal office at Richmond, Ya.
    Prior to the date of the hearing one of the sons had married and was paid at that time $7,000 or $8,000 of the amount that stood to his credit upon the petitioner’s individual books of account. He would have been paid the balance at that time as per the terms of the agreement if he had demanded it.
    The petitioner’s books of account of individual business showed the receipt of money from the partnerships and the allocation thereof to the sons and to the father as provided by the agreement. The total income of the petitioner from the partnerships for the year 1919 amounted to $15,901.83. The petitioner returned as income one-fourth of this amount, or $3,833.68. The balance was not returned as income of the petitioner but was claimed to constitute income of his three sons held in trust by the father.
    The three sons were not made members of the partnerships.
   OPINION.

Smith:

In this proceeding the petitioner contends that the Commissioner erred in adding to the net income reported by him amounts credited to his three sons for the year 1919, under the agreement dated January 1, 1919. It appears that the petitioner originally contended that a portion of the partnership profits to which he became entitled constituted no part of his income by reason of the agreement. We think that the entire amount of partnership profits to which the petitioner became entitled for the year 1919, as a result of being a member of two partnerships, constituted income to him, and that the agreement of January 1, 1919, does not warrant the petitioner’s failure to include in his gross income any part of the partnership profits so accrued to him. Appeal of Ormsby McKnight Mitchel, 1 B. T. A. 143; Mitchell v. Bowers, 9 Fed. (2d) 414. The sons were not made members of the partnerships. We also think that the petitioner was required to include in his gross income the dividends, if any, which he received during the year 1919 upon his shares of stock in the Stahl Wall Paper Co., Inc., of Richmond, Va.

But it is the contention of the petitioner that if a proportionate amount of the partnership profits set aside for the benefit of his sons must be included in his gross income he is entitled to deduct therefrom the amounts placed to the credit of his sons upon his books of account as additional compensation paid to them under the agreement of January 1, 1919; that the sons were receiving inadequate compensation for services performed and that the agreement was entered into in lieu of paying to them outright a larger amount of money than they had received during the preceding year.

The taxing statute permits an individual to deduct from gross income in his income-tax return:

All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * * (Section 214(a) (1), Revenue Act of 1918.)

This language is explicit and unambiguous. The simplicity of the language should be preserved in its interpretation. The petitioner paid his sons certain amounts to compensate them for their services. The amounts that were actually paid undoubtedly constituted ordinary and necessary expenses of doing business. The father was, however, interested in the future welfare of his sons and desired that they should marry girls of Jewish parentage. In order to accomplish this result, the agreement of January 1, 1919, was entered into. The agreement was not solely one of compensation for services rendered. We think that amounts set aside by the petitioner upon his books of account in fulfillment of the agreement were not ordinary and necessary expenses of the individuál in the conduct of his business.

Judgment will be entered for the Commissioner.

Phillips concurs in the result only.


author: Lansdon :

text:
    W. J. Byrnes & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4000.
    Decided October 26, 1926.
    Personal service classification denied.

      H. H. Tooley, C. P. A., for the petitioner.

      George E. Adams, Esg., for the respondent.
    The Commissioner has determined a deficiency in income and profits tax for the year 1918 in the amount of $6,447.76. The alleged deficiency arises (1) from the Commissioner’s refusal to allow the petitioner classification' as a personal service corporation, and (2) from the disallowance of certain deductions from gross income on account of donations and organization expenses, as to which the petitioner does not appeal.

      FINDINGS OF FACT.
    The petitioner is a corporation with its principal office in San Francisco, where it is engaged in the business of customs broker. It had branch offices in New York and Seattle during the taxable year. It was incorporated in 1917, with an authorized capital stock in the amount of $10,000, divided into 100 shares of the par value of $100 each. During the taxable year W. J. Byrnes, president, and T. A. Eisfeldt, vice president, each owned 40 shares of stock, and J. A. Bainbridge, secretary, and N. S. McNulty, treasurer, each owned 10. shares of stock. Each of these officers devoted his entire time to the business of the petitioner.
    The petitioner rendered services to customers engaged in trade between foreign countries and the United States. During the taxable year, for importers, it cleared shipments through the custom houses, computing the duties and exchange thereon; delivered such imported goods locally or to transportation companies for transmission to other parts of the United States, making out the customary bills of lading and arranging for insurance coverage, and in. many instances advanced money for the payment of freight on such shipments. For exporters it handled shipments of goods from various parts of the United States, which it placed in storage until it could book available cargo space for transportation to foreign companies. In connection with its business, it operated a leased warehouse during the taxable year and charged its customers rent or hire for the use of space therein.
    The petitioner’s balances of income and operating expenditures for the taxable year are fully set forth in the following statement:

    The financial condition of the petitioner at the beginning and end of the taxable year is disclosed by the following:

      Balance sheets.

    [Schedule O, as of Jan. 1,1938, and Dec. 31,1918.]

   OPINION.

Lansdon :

The petitioner advanced considerable sums for the payment of freight on shipments of goods belonging to its customers. Such advances were generally collected in a short time, but required the use of substantial amounts of capital. Its balance sheets show that at December 31, 1918, it had accounts receivable in the amount of $63,057.39 and accounts payable in the amount of $51,049.48. During the year it operated a warehouse for hire and derived income therefrom in the amount of $4,415.83. These facts indicate the use of capital which, though borrowed, was a material income-producing factor.

Judgment will be entered for the Commissioner.


author: LansdoN :

text:
    Appeal of Thomas County Bank.
    Docket No. 1456.
    Decided October 26, 1926.

      H. L. Washington, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
   LansdoN :

The Commissioner has found deficiencies in income and profits taxes for the years 1919 and 1921 in the respective amounts of $107.12 and $207.91, and an overassessment for 1920 in the amount of $207.91. The taxpayer alleges that the Commissioner erred in disallowing a deduction, in the amount of $1,693.15, from its gross income on account of certain notes which it contends were ascertained to be worthless and charged off during the year 1921. Apparently the deficiency for 1919 and the overassessment for 1920 are not in controversy, but nothing in the record discloses that the taxpayer abandoned his contentions for such years.

It appears from the record that the taxpayer accounted for a portion of its operating income in a rental account and that at some time during the taxable year involved in this appeal it charged into such rental account an amount which it alleges represents certain notes in its assets which it ascertained to be worthless at the dates such entry or entries were made. There is no conclusive evidence of the date at which the alleged worthlessness of such notes was ascertained or of the reasons for charging their amount into the rental account instead of the profit and loss account. We are unable to make any findings of fact sufficiently Substantial to warrant interference with the determination from which this appeal was taken.

Judgment will be entered for the Commissioner.


author: Marquette :

text:
    Appeal of Mary A. Fitzgerald.
    Docket No. 810.
    Decided October 26, 1926.

      Held, that no part of the dividends involved herein is taxable at the rates prescribed for the year 1917.

      Herbert Seoville, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.

      This appeal is from the determination of a deficiency in income tax for the year 1917 in the amount of $10,431.74.
    FINDINGS OF FACT.
    The petitioner is an individual residing in New York City.
    During the years 1916 and 1917. the petitioner was the owner of 8,000 shares of the capital stock of the Delaware & Hudson Co. On December 27, 1916, at a meeting of the board of managers of that company, the following resolution was duly adopted:
    Resolved, That a dividend upon the outstanding $42,503,000 of Capital Stock of this Company, at the rate of nine (9) per cent upon the par value thereof, and amounting in the aggregate to $3,825,270 be, and the same hereby is, declared out of the surplus of the Company, but only in favor of those who shall be stockholders of record of the Company at the close of business upon the dates below specified, namely:
    Two and one-quarter (2⅛.) per cent upon the Capital Stock in favor only of the Stockholders of record upon February 26, 1917, and payable upon March 20, 1917.
    Two and one-quarter (2¼) per cent upon the Capital Stock in favor only of the Stockholders of record upon May 28, 1917, and payable upon June 20, 1917.
    Two and one-quarter (2½.) per cent upon the Capital Stock in favor only of the Stockholders of record upon August 28, 1917, and payable upon September 20, 1917.
    Two and one-quarter (2⅝) per cent upon the Capital Stock in favor only of the Stockholders of record upon November 27, 1917, and payable upon December 20, 1917.
    Resolved further, That in case of the issue of additional shares of stock in exchange for convertible securities or otherwise, the same shall be entitled to participate in dividends in the same manner as the present outstanding stock of the Company, to wit:
    The holders of record upon February 26, 1917, of such additional shares shall be entitled to a dividend of 2¼ % thereon payable upon March 20, 1917.
    The holders of record upon Blay 28, 1917, of such additional shares shall be entitled to a dividend of 2½% thereon payable upon June 20, 1917.
    The holders of record upon August 28, 1917, of such additional shares shall be entitled to a dividend of 2¼⅞ thereon payable upon September 20, 1917.
    The holders of record upon November 27, 1917, of such additional shares shall be entitled to a dividend of 2¾ % thereon payable upon December 20, 1917.
    . And that the several amounts which may be necessary to pay the same be and they are hereby appropriated for that purpose.
    During the year 1917 the petitioner was paid the amount of $27,000, as a dividend on her 3,000 shares of the capital stock of the Delaware & Hudson Co., pursuant to the resolution adopted by the board of managers of the company on December 27, 1916. In her income-tax return for the year 1917,'she reported the dividend so received as- having been paid from profits or surplus accumulated prior to the year 1917. The Commissioner, however," determined that

      $21,136.95 thereof was paid out of earnings or profits for the year 1917 and was therefore taxable at the rates prescribed by law for that year, and that there is a deficiency in tax for the year 1917 in the amount of $10,431.74.
   OPINION.

Marquette :

We have heretofore held that a distribution by a corporate dividend out of surplus occurs when the dividend is declared and not when it is paid. Appeal of A. H. Stange, 1 B. T. A. 810; Appeal of Harmon W. Hendricks, 4 B. T. A. 1257. The dividend herein was declared December 27, 1916, and it therefore constituted a distribution of surplus or profits at that time, regardless of the fact that payment was not made until a later date; and no part of the distribution could therefore have been made from earnings for the year 1917. It follows that the Commissioner erred in taxing any part of the dividends received by the petitioner at the 1917 rates.

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


text:
    Appeal of Maurice J. Curran.
    Docket No. 793.
    Decided October 26, 1926.

      Beld, that no part of the dividends involved herein is taxable at the rates prescribed for the year 1917.

      Georgs E. Oleary, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income tax for the year 1917 in the amount of $152,261.48.
    FINDINGS OP PACT.
    The taxpayer is an individual residing at Andover, Mass.
    On December 12,1916, the board of directors of the Gillette Safety Bazor Co. declared dividends on its common and preferred stock by the following resolutions:
    Voted to declare Quarterly dividend of 1-3/4% on the Common Stock of the Company, payable January 15, 1917, to stockholders of record at the close of business December 30, 1916.
    Voted to declare quarterly dividend of 1-3/4% on the Preferred Stock of the Company, payable January 15, 1917, to stockholders of record at the close of business December 30, 1916.
    The taxpayer was the owner of 22,730 shares of the common stock and 13,330 shares of the preferred stock of the Gillette Safety Bazor Co., and on January 15, 1917, he was paid, pursuant to the resolution of December 12, 1916, $39,777.50, as a dividend on his common stock and $23,275, as a dividend on his preferred stock.

      The Commissioner, upon audit of the taxpayer’s income-tax return for the year 1917, determined that $11,173.50 of the dividend on the common stock and all of the dividend on the preferred stock of the Gillette Safety Razor Co. received by taxpayer pursuant to the resolution of the board of directors passed on December 12, 1916, were distributed from profits or surplus accumulated during the year 1917 and were subject to the surtax rates prescribed by law for the year 1917. The Commissioner also made other additions to the taxpayer’s income, not material here, and determined that there is a deficiency in tax for the year 1917 in the amount of $152,261.48.
   OPINION.

Marquette :

The only issue herein is whether or not any part of the dividends declared by the directors of the Gillette Safety Razor Co. on December 12, 1916, and paid to the taxpayer on January 15, 1917, is taxable at the rates prescribed by law for the year 1917. In our opinion, the resolution of the board of directors passed on December 12, 1916, declaring the dividends in question, constituted a distribution to the stockholders at that time, regardless of the fact that payment was not made until the year 1917. Appeal of A. H. Stange, 1 B. T. A. 810. It follows that the distribution, having been made in the year 1916, could not have been from earnings for the year 1917, and that the Commissioner was in error in subjecting any part of the distribution to tax at the 1917 rates. Appeal of Harmon W. Hendricks, 4 B. T. A. 1257.

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


author: Maiiqixette :

text:
    Appeal of Mayer’s, Incorporated.
    Docket No. 3774.
    Decided October 26, 1926.
    Salaries paid to .officers of the taxpayer held reasonable in amount and properly deductible from gross income.

      Paul E, Shorb, Esq., for the petitioner.

      John W. Fisher, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1920 and 1921 in the amount of $8,184.89. Only so much of the deficiency is in controversy as arises from the disallowance of deductions claimed by the petitioner on account of salaries paid by it for those years.

      FINDINGS OF FACT.
    The petitioner is a Maryland corporation organized in May, 191T, with a capital stock of $15,000, divided into 300 shares of the par value of $50 each, and it is and has been since its organization engaged in operating a department store at Baltimore, Md. During the years 1920 and 1921, 282 shares of the capital stock were owned by Mrs. Fannie Mayer; her sons, J. H. Mayer and L. H. Mayer, each owned 6 shares, and her son-in-law, A. D. Kaufman, owned 6 shares.
    During the years 1920 and 1921, J. H. Mayer was president of the corporation. He also acted as buyer for several of its departments and supervised the entire business. A. D. Kaufman and L. H. Mayer were, respectively, vice president and secretary-treasurer of the corporation, and each of them also acted as buyer for and manager of certain departments of the store. Mrs. Fannie Mayer, who had been familiar with the business for many years, it having been owned and operated by her husband as a sole proprietorship prior to the year 1917, was employed as manager of and buyer for the millinery department, and she assisted and counseled in the management of the entire store. Each of the persons named devoted his or her entire time to the business of the corporation.
    On March 15, 1920, at a special meeting of the board of directors of the corporation called for the purpose of fixing proper compensation for its officers for the year 1920, the following resolution was adopted:
    Upon motion of L. H. Mayer, seconded by A. D. Kaufman, it was unanimously agreed that the compensation of officers for the year 1920 be as follows:
    J. H. Mayer, President_$12,500
    A. D. Kaufman, Vice President_ 12, 500
    L. H. Mayer, Sec’y-Treas_ 12,500
    J. IT. Mayer, as president of the corporation and acting for it, agreed with Mrs. Fannie Mayer to pay her $12,500 for her services to the corporation during the year 1920.
    At a regular meeting of the board of directors of the corporation held on March 1, 1921, J. H. Mayer, A. D. Kaufman and L. H. Mayer were re-elected president, vice president, and secretary-treasurer, respectively, of the corporation, their “ compensation to remain as previous years basis until further notice.” J. H. Mayer, president, acting on behalf of the corporation, also contracted with Mrs. Fannie Mayer to pay her $12,500 for her services to the corporation during the year 1921.
    On December 1,1921, at a special meeting of the board of directors called for the purpose of adjusting salaries, the following resolution was adopted:

      Mr. J. H. Mayer, president of tlie company, presented to the board facts that the business of the current year did not show sufficient profits to justify the payment of salaries, tentatively agreed upon at the meeting held in March.
    It was therefore unanimously agreed that the officers one and all, waive their right to the bonus previously paid, and accept such additional compensation as the Board of Directors would feel justified in allowing.
    It is therefore agreed that the officers, in view of the fact that they had rendered a sufficient service in a very trying period of business history, should not be cut off entirely from the bonus paid, but the sum of $1,000 over the amount drawn, namely $8,500 for the calendar year 1921.
    Mrs. Fannie Mayer also agreed that her salary for the year 1921 should be reduced to $8,500.
    The books of the corporation were kept on the accrual basis. During the year 1920, J. H. Mayer, A. D. Kaufman, L. H. Mayer and Mrs. Fannie Mayer were each credited with salary at the rate of $625 per month, and on December 31, 1920, each was also credited with salary in the amount of $5,000. During the year 1921 each of the persons named was credited with salary in the amount of $12,500, in the same manner as for the year 1920. They did not, however, actually withdraw more than $8,500 each, and on March 31, 1922, entries were made on the corporation’s books carrying into effect the reduction in salaries agreed upon at the meeting of the board of directors held on December 1, 1921.
    J. H. Mayer, A. D. Kaufman, L. H. Mayer and Mrs. Fannie Mayer each reported in their respective income-tax returns for the year 1920 the amount of $12,500, as having been received as compensation from the petitioner corporation during that year. Each of the persons named reported in his or her income-tax return for the year 1921 the amount of $8,500, as having been received as compensation from the corporation during that year. The corporation, in its income and profits-tax return for the year 1920, deducted $50,000, as salaries or compensation paid to J. H. Mayer, A. D. Kaufman, L. H. Mayer and Mrs. Fannie Mayer, and, in its income and profits-tax return for the year 1921, it deducted $34,000, as salaries or compensation paid to them.
    The sales of the corporation during the year 1918 to 1921, inclusive, were as follows:
    Xears. Amounts.
    1918_$205,991.26
    1919_ 233,297.45
    1920 _ 307,288. 95
    1921_ 255,221.95
    The petitioner, in its income and profits-tax return for the year 1920, reported its net income as $16,238.90, and its invested capital as $42,842.04. The Commissioner, upon audit of the return, disallowed the salaries paid to J. H. Mayer, A. D. Kaufman, L. H. Mayer and Mrs. Fannie Mayer, in excess of $7,500, each, and, after making certain minor adjustments not material here, determined that the petitioner’s net income and invested capital for the year 1920 were $36,286.62 and $39,667.77, respectively.
    The petitioner, in its income and prófits-tax return for the year 1921, reported its net income as $1,869.88 and its invested capital as $53,370.18. The Commissioner disallowed salaries paid to J. H. Mayer, A. D. Kaufman, L. H. Mayer and Mrs. Fannie Mayer, in excess of $7,500 each, made certain other adjustments not in controversy here, and determined that the petitioner’s net income for the year 1921 was $6,037, and its invested capital $46,747.42.
   OPINION.

Maiiqixette :

There is nothing in the record herein to warrant the conclusion that the salaries paid by the petitioner to its officers and Mrs. Mayer were not justified by the condition of the business or that they were in reality nothing more than distribution of profits. The salaries were fixed in the early part of each year and they were not in proportion to the stockholdings of the several persons to whom they were paid. Each of the persons named devoted his or her entire time to the conduct of the business and was entitled to reasonable compensation for his or her services. The salaries paid for the year 1920 were certainly justified by the volume of business and profit for that year, since, after paying these salaries, the corporation still had'net earnings equal to about 40 per cent of its invested capital, and, in view of the success achieved in 1920, the directors were warranted, in March, 1921, in fixing the same salaries for the year 1921 as were paid in 1920. However, there was a depression in business and the salaries were found to be too large, when measured by the profits of the year, and the officers and Mrs. Mayer each voluntarily waived or remitted $4,000 thereof, although they were under no legal obligation to do so. We are of the opinion that the salaries annually paid by the corporation for the years in question were for personal services actually rendered by the persons to whom they were paid, and that they were reasonable in amount and should be allowed. Appeal of Union Dry Goods Co., 1 B. T. A. 833.

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


author: MoReis :

text:
    Appeal of Granville Coal Co.
    Docket No. 5126.
    Decided October 26, 1926.
    The deduction of a reserve of $5,000, set up as the estimated cost of reopening a mine, disallowed.

      B. B. Pettus, Esq., and Wilton H. Wallace, Esq., for the petitioner.

      R. P. Smith, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency of $2,300 in income and profits taxes for the calendar year 1920. The questions presented are the deductibility of a reserve to cover the expense of reopening a mine and whether a loss was sustained by the petitioner in 1920, and, if so, the amount thereof.
    FINDINGS OF FACT.
    The petitioner is a West Virginia corporation organized in 1918 to take over the business and assets of a partnership of the same name, which had been in existence for about a year, and was engaged in the mining of coal on a 13-acre tract, known as the Dent Tract. Capital in the amount of $19,000 was paid in to the partnership and, shortly preceding the incorporation, Bierer, one of the partners, purchased Hartley’s one-third interest for $10,000. The opening entries on the books of the corporation show that stock in the amount of $50,000 par value was issued for the above assets, which were set up on the books at $50,000.
    In September, 1920, a creep or squeeze occurred in the petitioner’s mine. As one of the officers of the company had hopes of recovering further coal from the seam, efforts were made in 1921 to reopen the mine. A reserve of $5,000 was set up on the taxpayer’s books in 1920 as the estimated cost of doing the work. The amount of this reserve was deducted in the petitioner’s return for 1920, which deduction was disallowed by the Commissioner. In 1921, something over $3,000 of this amount was spent in an unsuccessful effort to reopen the mine.
    As a result of the cave-in, certain tracks and tools were lost and were never recovered. The movable property was subsequently offered for sale for $5,000. Some of it was sold as junk for $1,200. The remaining property was estimated to have a value of $2,500.
    Up to December 31, 1918, the books show total entries in plant and equipment account of $55,273.09. At the end of 1920, the books show a net amount in plant and equipment account of $38,122.63, which is also the amount shown on the 1920 return.
   OPINION.

MoReis :

We have already denied the deductibility of reserves, such as that involved in this appeal. Appeals of William J. Ostheimer, 1 B. T. A. 18; Richmond Light & R. R. Co., 4 B. T. A. 91; Pan-American Hide Co., 1 B. T. A. 1249; Uvalde Co., 1 B. T. A. 932; Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Thatcher Medicine Co., 3 B. T. A. 154; and Greenville Coal Co., 3 B. T. A. 1323. These decisions are controlling here.

The taxpayer is claiming a loss in the year 1920 of the difference between $38,122.63, the amount of the plant and equipment account carried on the books as of December 31, 1920, and the estimated salvage value of the property of $2,500, plus $1,200 received for the property which was sold. In view of the insufficiency of the evidence, we deem it unnecessary to pass upon the question whether a loss was sustained in the year 1920. We are unable, from the evidence before us, even though we determine that such a loss occurred, to determine the amount thereof. We do not know what the prior partnership paid for the assets which were subsequently transferred to the corporation. The only evidence we have, in this respect, is that $19,000 was paid in to the partnership. The corporation acquired those assets for capital stock of a par value of $50,000 and set them up on its books at that value. Shortly prior to incorporation, however, Bierer purchased a one-third interest in the partnership for $10,000, which would seem to indicate a value of $30,000 for the partnership as a going business. Because of the absence of such evidence as would enable us to determine the amount of such loss, the Commissioner’s action is sustained.

The deficiency for 1920 is $2,300. Order will he entered accordingly.


author: Muedocii :

text:
    Spark Hotel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7761.
    Decided October 26, 1926.
    The petitioner was not a personal service corporation within section 200 of the Eevenne Act of 1918.

      Arnold Markel, G. P. A., for the petitioner.

      J. F. Greaney, Esq., and J. Arthur Adams, Esq., for the respondent.
    This appeal was submitted to the Board upon petition and answer, and a stipulation of the facts. There was'no oral hearing or argument, and no briefs were filed. The taxes in controversy are income and excess-profits taxes for the calendar year 1919 in the amount of $1,855.74. The single question involved is whether the petitioner was, during the period in question, a personal service corporation, as defined in section 200 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner was incorporated in the State of New York on June 3,1913. Its principal office is at 182 St. Nicholas Avenue, New York, N. Y. The authorized capital stock of the corporation, all of which is issued and outstanding, consists of 50 shares of common stock, each share having a par value of $100. In 1919, Morris Spark owned one share and Annie Spark, his wife, owned the remaining 49 shares. Annie Spark was president and Morris Spark was secretary and treasurer. The directors were Annie Spark, Morris Spark and Jacob Spark. The corporation operated two hotels: The Grampion Hotel, New York, N. Y., a seven-story brick building containing 100 rooms, open all year, rooms rented by the day, month or year on the European plan, without meals; the La Reine Hotel, at Bradley Beach, N. J., a four-story frame building containing 120 rooms, open from June 15 to September 15, rooms rented by the day, week or season on the American plan, including meals. The former was operated on a leasehold, running for five years at an annual rental of $9,000, expiring in 1921. The latter was operated on a leasehold running for three years at an annual rental of $9,000, expiring in 1920. Additional rooms and cottages to take care of the overflow guests were rented at Bradley Beach, N. J., in 1919, for $2,608.50.
    Morris Spark spent his entire time in personally supervising the rooms and desk service. Annie Spark had charge of the dining-room and kitchen, and spent all of her time in personally supervising the dining room and the purchase and preparation of all foods.
    Employees of the company other than Morris Spark and Annie Spark were as follows:
    Grampion Hotel: La Heine Hotel:
    4 maids. 20 waitresses.
    2 elevator men. 10 kitchen help.
    1 engineer. 8 chamber-maids.
    5 bell-boys and porters.
    2 desk clerks.
    The details of operations during the year 1919 were as follows:
    INCOME:
    Room and board_$103, 243. 60
    Cigar stand income_ 1, 732. 90
    Miscellaneous income from concessions- 952.18
    Total income. 105,928.58

      Total income_ $105, 928.58
    Expenses :
    Salaries and wages_ $21,103. 58
    Provisions_ 25, 283. 00
    Restaurant_ 622. 69
    Cigar stand-1, 254. 82
    Coal_ 2. 835. 65
    Light_ 1, 069. S5
    Laundry_ 1,144. 48
    Furnishings_ 2, 878.15
    Advertising_ 52.50
    Postage_ 54.69
    Stationery and printing. 322.19
    Freight and express-227. 02
    Miscellaneous supplies_ 1, 498. 52
    Telephone-724. 60
    General expense-1, 337. 32
    Rent_ 20, 008. 50
    Insurance_ 151. 85
    Water_ 281.67
    Officers’ salaries-12, 000.00
    Repairs_ 4, 274.41
    Bad debts-140.93
    Total expenses_ 9S, 417.02
    Net taxable income as shown in deficiency letter- 7, 511. 56
    The balance sheets at the beginning and end of 1919 were as follows:

      January 1, 1919.

    Assets :
    Cash_,-$5,334.47
    Loans_ 1,268. 91
    Deposits_ 819. 78
    Due from guests- 61.48
    Furniture and fixtures- 2, 500. 00
    - $9, 984.64
    Liabilities :
    Accounts payable--- 1,877. 26
    Rent accrued- 1, 875. 00
    M. Spark- 1, 623.53
    - 5,375.79
    Capital :
    Capital stock- 5, 000.00
    Deficit-,- 391.15
    - 4,008.85

      December SI, 1919.

    Assets :
    Cash_$1, 713. 04
    Loans_ 1,112. 85
    Deposits_ 819.78
    Furniture and fixtures- 2,500.00
    M. Spark_ 9,754. 36
    15. 900.03

      Liabilities :
    Accounts payable. $108. 99
    Bent accrued_ 1,875. 00
    Salaries accrued. 1,771.40
    - $3, 755.39
    Capital :
    Capital stock 5,000.00
    Surplus-7,144. 64
    - 12,144. 64
   OPINION.

Muedocii :

If any corporation operating a hotel fulfills the requirements of a personal service corporation, as defined in section 200 of the Revenue Act of 1918, it is most exceptional, but certainly the present petitioner fails to fulfill those requirements. Appeal of Newam Theatre Corporation, 1 B. T. A. 887; Mountain View Sanitarium Co., 2 B. T. A. 417; Cotton Hotel Co. v. Bass, 7 Fed. (2d) 900.

Judgment will he entered for the Commissioner.


author: Lansdon:

text:
    Paris Cloak, Suit & Millinery House and Palais de Modes, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5500, 5502.
    Decided October 26, 1926.
    Affiliation under the provisions of section 240(b) of the Kevenue Act of 1921 determined.

      H. II. Tooley, C. P. A., for the petitioners.

      George E. Adams, Esq., for the respondent.
    The Commissioner has found deficiencies in income and profits taxes for the years 1920 and 1921 in the amounts of $1,502.05 and $2,177.39 as to the Paris Cloak, Suit & Millinery House, and for the year 1921 in the amount of $4,916.44 as to the Palais de Modes. The only issue is whether the petitioners and the New York Cloak & Suit House were affiliated during the taxable years. The appeals were consolidated for hearing and decision.
    FINDINGS OF FACT.
    The petitioners and the New York Cloak & Suit House are California corporations, resident in Los Angeles. During the taxable years the stockholders and stockholdings of the three corporations were as follows:

    The three stockholders are a family group in which J. J. Haggarty is the husband of B. M. Haggarty and the father of J. C. Haggarty. During the years 1920 and 1921, J. J. Haggarty was the president of each of the three corporations; J. C. Haggarty was secretary-treasurer of the New York Cloak & Suit House and the Paris Cloak, Suit & Millinery House, and vice president of the Palais de Modes; B. M. Haggarty was vice president of the New York Cloak & Suit House and the Paris Cloak, Suit & Millinery House, and secretary-treasurer of the Palais de Modes. The three corporations were operated as a single business unit, with all the accounts kept in one set of books and all operating funds deposited in a single bank account.
   OPINION.

Lansdon:

The petitioners were affiliated with the New York Cloak & Suit House during the taxable years. Appeals of Schloss Brothers Co., 1 B. T. A. 581; Wright Cake Co., 2 B. T. A. 58.

Judgment will be rendered for the petitioner's on 20 days’ notice, under Rule 50.


text:
    Georgia Grocery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5828.
    Decided October 26, 1926.

      L. R. Christie for the petitioner.

      Henry Ravenel, Esq., for the respondent.
   Smith:

This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ended June 30, 1920, and June 30, 1921, in the respective amounts of $613.68 and $219.57. The points involved in the proceeding are proper rates of depreciation on furniture and fixtures account and an alleged loss from obsolescence in the fiscal year ended June 30, 1920.

FINDINGS OF FACT.

Petitioner is a Georgia corporation engaged in the retail grocery business at Columbus. In its income-tax returns for the fiscal years ended June 80, 1920, and June 30, 1921, it deducted certain amounts for depreciation. On these tax returns the Commissioner disallowed a part of the deduction claimed for depreciation and computed depreciation at the rate of 5 per cent on the furniture and fixtures account and at the rate of 10 per cent on the Piggly Wiggly equipment account. He disallowed no deduction for obsolescence, since none was claimed in the return.

The equipment carried in the furniture and fixtures account was showcases, shelving, cash register, and such other equipment as usually goes with a retail grocery business. These fixtures were acquired all along from the year 1904 until the year 1913. The petitioner operates a number of Piggly Wiggly grocery stores. The first Piggly Wiggly equipment came into the possession of the company in the year 1911. This equipment was of substantially the same character as that carried in the furniture and fixtures account.

Judgment will be entered for the Commissioner.


author: TRAmmell :

text:
    Marguerite T. Whitcomb, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5854.
    Decided October 27, 1926.

      W. W. Spalding, Esg., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for 1918 in the amount of $1,042.89. It was stipulated that the material facts in this case are the same as the facts set forth in the findings of fact in the Appeal of Louise P. V. Whitcomb, 4 B. T. A. 80.
    FINDINGS OF FACT.
    The taxpayer is a nonresident alien and, during the taxable year here in question, resided in France. Taxpayer was the widow of Adolphe Whitcomb, deceased, son of A. C. Whitcomb.
    A. C. Whitcomb, deceased, left a will, the seventh clause of which is as follows:
    I give to my hereinafter named Executor Jerome Lincoln, of said San Francisco, all the rest of my property, real, personal or mixed, except what I may have in France, of every kind and nature, and not hereinbefore disposed of, after the payment of my debts, in Trust, nevertheless, to pay over to my said wife, Louise Palmyre Yion YHiitcomb, one third part of the interest thereof or income therefrom for and during her natural life, and the other two-thirds part to my two children born of her; one Adolphe born on or about the 23rd day of February 1880, and the other Charlotte Andree, born on or about the 4th day of December, 1882, with the reversion or remainder of the whole three third parts to the descendants per stirpes of the said two children, if any be alive at the time of the death of the said two children; and if none be alive at that time, to Harvard College in conformity with the provisions named or indicated in Section Six (6) of this will having reference to said Harvard College. * * *

    The foregoing provision of the will has been judicially construed as providing to the widow, Louise Palmyre Yion Whitcomb, an estate for life in one-third of the income of the trust, an estate for life to each of the two children in one-third of the income of the trust continuing to the death of the survivor and, because of the death of Adolphe Whitcomb, an estate for the life of Charlotte A. W. Lepic, in the share of Adolphe to his widow and his two children, share and share alike.
    The net income of the trust estate is distributable periodically to the beneficiaries and is so distributed.
    In preparing the fiduciary returns of the trust estate for the years 1917 to 1920, inclusive, the trustee included therein the income of the estate for the respective years and deducted therefrom expenses, including interest, taxes, and also the allowance provided by the statute for exhaustion, wear and tear on account of the depreciable assets belonging to the trust. The difference between the gross income and deductions so made was shown on the fiduciary returns as the net income of the trust and as the aggregate distributable net income of the beneficiaries, the share and interest of each beneficiary being stated.
    In preparing the income-tax returns of the beneficiaries of the trust for the years 1917 to 1920, inclusive, the trustee included therein as the distributive share of the net income of the trust of each of said beneficiaries, that proportion of the net income of the estate as shown by the fiduciary return which the interest of the beneficiary in the income bore to the total income, namely, one-third to Louise P. V. Whitcomb, one-third to Charlotte A. W. Lepic, and one-third of the remaining one-third to Marguerite T. Whitcomb.
    The Commissioner, in auditing the fiduciary returns of the trust, I allowed depreciation as a deduction in determining the net income of the trust for each of the years under consideration, but, in auditing j the returns for the several years of each of said beneficiaries, determined the distributable net income applicable to each of them as the! share of the net income of the trust to which she was entitled, excluding from the said computation the said deductions on account of depreciation, so that, in determining the deficiencies here in issue, the Commissioner increased the net income of the said parties as reported by the trustee for the several years, in the amounts stated below:
    Estate of Louise P. V. Whitcomb — By $8,158.32 for 1917; by $15,854.96 for 1918; by $13,779.43 for 1919; by $12,276.40 for 1920.
    Charlotte A. W. Lepic — By $8,158.32 for 1917; by $15,854.96 for 1918; by $13,779.43 for 1919; by $12,276.40 for 1920.
    Marguerite T. Whitcomb — By $4,593.14 for 1919; by $4,092.13 for 1920.
    The Commissioner, in auditing the fiduciary return of the trust for 1918, allowed depreciation as a deduction in determining the net income of the trust for that jusar; but, in auditing the return of the petitioner for 1918, determined her distributable net income as the share of the net income of the trust to which she was entitled, excluding from said computation said deduction on account of depreciation, so that, in determining the deficiency here in issue, the Commissioner increased the net income of petitioner for 1918, as reported by the trustee, in the amount of $5,264.98, which resulted in the additional tax liability asserted in the notice of deficiency.
   OPINION.

TRAmmell :

The decision in this case is governed by the decision in the Appeal of Louise P. V. Whitcomb, 4 B. T. A. 80.

Judgment will be entered for the Commissioner.


author: TRAmmell:

text:
    W. B. Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 677.
    Decided October 27, 1926.
    A taxpayer keeping his books of account on the basis of a fiscal year should file his first return under the Revenue Act of 1918, under section 226 of that Act.

      Isom J. Guillory, Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the period January 1 to August 31, 1918, in the amount of $16,322.10.
    FINDINGS OF FACT.
    The taxpayer is engaged in business in New Orleans, La. His books of account were kept on the basis of the fiscal year ended August 31, and were so kept during the years 1917 and 1918. They were regularly closed on this basis for the twelve-month periods ended August 31, 1917, and August 31, 1918.
    The taxpayer’s 1917 income-tax return was filed on the calendar year basis, as required by law and regulations in force for that year. The return was audited by the Commissioner on that basis and the taxpayer’s tax for 1917 was settled on the calendar year basis. In the audit of the return the income for the calendar year 1917 was fixed by the Commissioner by adding together eight-twelfths of the income disclosed by the taxpayer’s fiscal closing of August 31, 1917, and four-twelfths of the income disclosed by the taxpayer’s fiscal closing of its books of August 31,1918.
    The taxpayer did not obtain the approval of the Commissioner to change the basis of reporting income for tax purposes.
    The taxpayer’s net income for the fiscal year September 1, 1917, to August 31, 1918, was $86,995.21. Of this amount four-twelfths, or $28,998.41, was included by the Commissioner in the taxpayer’s return for the calendar year 1917. The Commissioner computed the taxpayer’s tax for the period beginning January 1, 1918, and ending August 31, 1918, by applying the 1918 income and surtax rates to the income of $86,995.21 and taking eight-twelfths of the result thus obtained as being the tax due for that eight-month period. This produces a tax of $18,190.32 and a deficiency of $16,322.10.
   OPINION.

TRAmmell:

The question involved in this proceeding is whether section 226 of the Revenue Act of 1918 has application in the computation of the tax due from the taxpayer upon his return for the period January 1,1918, to August 31, 1918, the date of the closing of the taxpayer’s books. The Commissioner has computed the tax under section 205, while the taxpayer contends that it should have been computed under section 226.

In the Appeal of Henry D. Weed, 2 B. T. A. 84, the Board had this identical question before it. In that case the taxpayer kept its books on the basis of a fiscal year ended May 31. He had made an income-tax return for 1917 in accordance with the Revenue Act of 1916, as amended by the Revenue Act of 1917. The taxpayer contended that his first return under the Revenue Act of 1918 should have been for a period of only five months, or from January 1 to May 30, 1918, and that the tax should have been computed in the manner provided in section 226, while the Commissioner contended, as he contends in this case, that section 205 (a) of the Revenue Act of 1918 was applicable. In that case we said:

We think that the Commissioner erred in ruling section 226 has no application to the case of the instant taxpayer. The Revenue Act of 1918 re-q Hired a taxpayer keeping his books of account on the basis of a fiscal year different from the calendar year to make returns upon the basis of such fiscal year. The taxpayer was compelled to change the basis of reporting net income from the calendar year to a fiscal year. * * * The accounting period for the making of the return was changed and by the provisions of section 212 of the statute section 226 was made applicable.

That decision was subsequently affirmed in the Appeal of Coghlin Electric Co., 3 B. T. A. 1071. The above appeals are decisive on the question here presented.

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


author: Trammell:

text:
    Appeal of Asbes-Tile Company, Inc.
    Docket No. 6404.
    Decided October 27, 1926.
    For lack of evidence, the action of the Commissioner in disallowing as a deduction certain amounts claimed by the taxpayer as compensation to officers is approved.

      Abraham I. Mayer, O. P. A., for the petitioner.

      Bruce A. Low, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax for 1919 and 1920 in the amounts of $384.81 and $2,050.72, respectively, and arises from the disallowance of part of the salaries paid officers of the taxpayer corporation.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation with its principal office at Brooklyn, and is engaged in the business of selling and applying asbestos, asphalt, and slate shingles, slate and tile roofing, and various kinds of roofing materials.
    The taxpayer was organized under the laws of New York in June, 1918, under the name of J. Levenson Co., Inc., with an authorized capital of $5,000, consisting of 50 shares of the par value of $100 each, of which 20 shares were issued and outstanding as follows:
    Sliares.
    Max B. Gollin_10
    Alexander Hirscli_ 9
    Joseph Levenson- 1
    20
    In June, 1919, the corporate name was changed to Asbes-Tile Co., Inc., and the authorized capital was increased to $15,000. In January, 1919, Daniel McKenzie became a stockholder, officer and director of J. Levenson Co., Inc., by the purchase of 11 shares of stock, and after the change of name and increase in capitalization Alexander Hirsch and Daniel McKenzie purchased additional stock. The stockholders of the corporation and the number of shares held by each were then as follows:
    Shares.
    Alexander Hirscli, director- 74

    Joseph Levenson, president and director- 1
    Daniel McKenzie, secretary, treasurer and director- 75
    Total_150
    At an informal meeting of the stockholders, officers, and directors held in January, 1919, it was agreed that Joseph Levenson and Daniel McKenzie should each receive for their services during the current year a commission at the rate of 15 per cent on all business brought in by each, but not in excess of $100 per week to each.
    In the early part of 1920 another informal meeting of the officers and directors of the company was held and the same arrangement with regard to compensation to be paid to Joseph Levenson and Daniel McKenzie was made as in the preceding year, except that the maximum allowance which each of them was to receive should not be in excess of $200 per week.
    The taxpayer in the preparation of its income and profits-tax return's for 1919 and 1920 used Form 1065 (partnership and personal service corporation) instead of Form 1120 (corporation). The amounts paid to and earned by Joseph Levenson and Daniel McKenzie were shown in Item 14 (compensation of members) in the return, and the profits of the corporation were shown in Schedule C, which is headed “Members’ Share of Income, etc.” The Commissioner has disallowed as a deduction that part of the compensation of Joseph Levenson and Daniel McKenzie shown in Schedule C of the return under the head of “ Members’ Share of Income.” The following is the amount reported under each item:
    Stockholders. Shares held. Time devoted. Item 14. Schedule C. J. Levenson.». D. McKenzie. A. Hirsch. 1919. J. Levenson_ D. McKenzie... A. Hirsch.. 150 Entire. EDtire. None.. Entire. Entire. None— $1,620.00 1,669.64 None. 3,289.64 4,150.00 6,181.07 10,331.07 $2,008.57 2,008.57 4,017.14 5,998.97 8,967.90 None. 9,968.87
    Both of the officers in question were men of about ten years’ experience in this line of work and they could have received from other concerns compensation equal to the amount agreed upon.
   OPINION.

Trammell:

There are two questions presented for decision. (1) Whether the amount agreed to be paid to the officers was reasonable compensation for services, and (2) whether it was paid or was an obligation incurred during the respective years.

The officers were to receive a commission of 15 per cent on the sales as compensation, but were not to draw out in excess of $100 per week each, in 1919, and $200 per week each, in 1920. We have no evidence as to the amount of sales made by either of the officers or the amount of commission they were entitled to. There is no evidence as to whether it equaled the amount they were permitted to draw out or not, nor is there any evidence as to the amounts actually drawn by the officers. The Commissioner has allowed as a deduction the amount shown by the return as the compensation of the members. We can not, on this evidence, find that the determination of the Commissioner was not correct, although the amount of the commission agreed to be paid the officers was reasonable compensation.

Jvdgment will be entered .for the Commissioner.


author: Trammell :

text:
    R. L. Crook and Estate of Mrs. R. L. Crook, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2646, 2647.
    Decided October 27, 1926.
    The valuation of stock and bonds determined by the Commissioner not shown by the evidence to have been incorrect.

      Pike IIall, Jr., Esq., for the petitioners.

      W. Prank Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for 1919, in the amount of $1,379.97 with respect to the estate of Mrs. R. L. Crook, and $609.39 with respect to R. L. Crook. The two appeals were consolidated.
    FINDINGS OF FACT.
    The taxpayer, R. L. Crook, and his wife, the decedent, whose estate is the other petitioner, were married and living together in Louisiana during 1919. During that year R. L. Crook was the owner of 50 per cent of the stock of the Pine Island Refining Co. That corporation sold its assets to the International Oil & Gas Corporation, a newly organized corporation having an authorized capital stock of $10,000,000, in exchange for $10,000 of first mortgage bonds and $25,000 in stock. During 1919 the Pine Island Oil & Refining Co. was liquidated and dissolved and distributed its assets to its stockholders, of which R. L. Crook received $5,000 of the mortgage bonds, $12,500 in stock, and $15,000 in cash. The interest on the bonds was payable semiannually and was regularly paid until 1923.
    Both R. L. Crook and his wife, in their returns for 1919, returned the bonds at a valuation of 85 cents on the dollar and the stock at no value. The Commissioner increased the valuation to par, resulting in the deficiencies. >
   OPINION.

Trammell :

The valuation of the stock and bonds is the only question involved in this appeal. That is purely a question of fact. The Commissioner determined that each was worth par at the- time received in liquidation. The burden of proof is upon the taxpayers to show that they did not have that value. This the taxpayers have failed to do. R. L. Crook testified that he made inquiry as to the value of the stock and bonds and wrote to the investment bankers in Chicago who underwrote the securities for the International Oil & Gas Corporation when it was organized, and that they advised that they did not have any market for them. Crook sold some of the stock in 1920 at less than par. He did not sell any of the bonds, although he undertook to do so. The evidence, however, does not indicate what efforts were made about the time the stock and bonds were received from the Pine Island Refining Co. in 1919. The Commissioner concedes that the stock and bonds became worthless subsequent to the time they were received by the taxpayers, but there is not sufficient evidence in the record to overcome the presumption of the correctness of the determination of the Commissioner as to the values at the time received.

Judgment will he entered for the Commissioner.


text:
    M. J. Hellmers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4680.
    Decided October 27, 1926.

      M. J. Hellmers pro se.

      Henry Ravenel, Esq., for the respondent.
   Trammell:

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $41.49. The deficiency arises through the action of the Commissioner in disallowing as an expense or loss $1,087.15, the amount paid in excess of the contract price of building a home.

FINDINGS OF FACT.

The taxpayer, during 1922, entered into a contract with a contractor to build a double house, one-half of which was for rental purposes. The contractor charged the taxpayer approximately $8,100 for the completed house. When completed the house was not worth in excess of $6,800.

The taxpayer took as a deduction in'his income-tax return the difference between $6,800 and the cost which he was required to pay the contractor.

Judgment will be entered for the Commissioner.


text:
    Louis Hausmann, Executor, Estate of Theresa R. Hausmann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5931.
    Decided October 27, 1926.

      John F. Hartmann, C. P. A., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
   Trammell :

This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $372.06. The deficiency arose from the action of the Commissioner in subjecting to the estate tax the value of a gift made to decedent’s grandson in 1921 on the ground that it was made in contemplation of death.

FINDINGS OF FACT.

The decedent died January 28, 1924, at the age of 79 years. Previous to her death she was in good health and went to the store, in which she was a large stockholder, every day until approximately thirty days before her death. The cause of her death was an injury received by her due to a fall. She was ill approximately thirty days after the fall.

On May 10,1921, the decedent gave to her grandson, Henry Haus-mann, 100 shares of stock in a corporation which operated a store in New Orleans. This grandson began working in the store as a clerk when he was 18 years of age and received a salary of $6 per week. He became dissatisfied with this salary. His father, grandmother, and uncle were the principal stockholders in the store. His father told him that he would be taken care of in the way of an interest in the business later on as he acquired more experience. Later he was given 5 shares of stock which, in the reorganization of the store, was exchanged for 50 shares.

The grandson of Mrs. Hausmann was frequently told that he would become a member of the firm. He was, however, dissatisfied with the small amount of stock given to him and frequently expressed his dissatisfaction. In the meantime his salary had increased gradually up to $25 per week in 1917. During that year he had a conference with his father, grandmother and uncle and told them that if something was not done he would leave because of the fact that he could have gotten from $5,000 to $7,500 a year from a competitive firm. Subsequently, the business was reorganized and Mrs. Hausmann’s grandson was made secretary-treasurer of the new firm of Hausmann, Inc. There was no agreement as to how much stock he was to receive in the new firm. He was given 5 shares of stock each by T. Haus-mann, Louis Hausmann, and Gabe Hausmann. When this amount of stock was given to him he expressed his dissatisfaction again, with the result that another conference was had and it was agreed that he was to be given more stock by his grandmother, Mrs. Theresa it. Hausmann. There was no agreement, however, as to the particular time this was to be done.

From December, 1917, until December, 1919, the grandson was serving in the naval forces of the United States and returned to the store in December, 1919. In May, 1921, his grandmother transferred to him the stock, consisting of 100 shares, which she had agreed to transfer before he entered the naval service in the latter part of 1917. The market value of the stock was $168.31 per share.

Judgment wül he entered on 15 days' notice, v/nder Rule 50.


author: Gkeen:

text:
    North McAlester Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6831.
    Decided October 27, 1926.
    Upon the evidence, hold, that the petitioner and the Craig Coal & Mining Co. were affiliated during the year 1919.

      Chas. H. Garnett, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1919 in the amount of $4,090.04. The deficiency results from the denial to the taxpayer of affiliation with the Craig Coal & Mining Co., of McAlester, Okla.
    FINDINGS OF FACT.
    The petitioner is an Oklahoma corporation with its principal office at McAlester. It was organized January 28, 1914, with a capital stock of $50,000 par value, and is engaged in the business of mining coal. The Craig Coal & Mining Co., also a mining ■ company, was incorporated under the laws of Oklahoma on February 19,1917, with a capital stock of $55,000 par value.
    The corporations mentioned at all times had the same officers and occupied the same offices, and the employees of the North McAlester Coal Co. performed the necessary duties for both corporations. The expenses were not allocated but were arbitrarily divided.
    At the beginning of the taxable year the stockholdings were as follows:

    At the close of the taxable year the stock was held as follows:

    Of the group of stockholders as of the beginning of the year, Clyde Stewart and J. H. Stewart were father and son, while B. E. Jones and B. S. Jones were brothers-in-law. Of the group of stockholders as of the close of the year, W. E. Beaty and J. G. Davis were brothers-in-law.

      For two months, from February to April, 299½ shares of stock in the North McAlester Coal Co. belonging to W. E. Beaty stood in the name of one J. S. Puterbaugh and two of his employees as collateral for a loan. The transfer was made on the books of the corporation in order to give Puterbaugh the right to vote the stock in the event anything should happen to Beaty. No such contingency arose and when the loan was repaid in April the stock was canceled and new certificates issued to Beaty.
    The funds of the Craig Coal & Mining Co. were handled by and through the North McAlester Coal Co., the former company being credited by the latter with all moneys received and debited for a share of expenses and all sums advanced for payment of royalties or otherwise. In 1923 the assets of the Craig Coal & Mining Co. were sold for $4,000, which was paid to the North McAlester Coal Co., and the latter company charged off as a loss approximately $7,000 still due from the former.
   OPINION.

Gkeen:

Section 240(b) of the Revenue Act of 1918 reads as follows:

For the purpose of tills section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

That substantially all of the stock of the North McAlester Coal Co. and of the Craig Coal & Mining Co. was owned within a limited group of stockholders is beyond question. At the beginning of the taxable year, 464 out of 500 shares, or 92.8 per cent, of the stock in the North McAlester Coal Co. was owned by the same group of stockholders who owned 517 out of 550 shares, or 94 per cent, of the stock in the Craig Coal & Mining Co. During the year there were some changes in ownership, but such transfers were practically all made by owners of the stock at the beginning of the year to those who owned stock at the close of the year and the percentages of stock ownership were not materially changed. At the close of 1919 the stockholders owning all of the stock in the North McAlester Coal Co. owned 517 shares, or 94 per cent, of the stock in the Craig Coal & Mining Co. These being the facts, there is only one question to be determined, and that is, whether or not the proportions in- which the stock of the two corporations was held varied to such an extent that it can not be said that “ substantially all the stock ” was “ owned or controlled by the same interests.” We think not. The operation and management clearly indicate that the control; as well as the ownership, of the two corporations was in the same interests. The two companies occupied the same offices. Their offices were identical, and the employees of the North McAlester Coal Co. performed the services for the Craig Coal & Mining Co. The expenses for salaries and such like were not allocated but were arbitrarily divided. Such funds as the Craig Coal & Mining Co. had were handled through the other corporation and deficits in operations were made up by the latter. Finally, when the Craig Coal & Mining Co. was sold, the receipts were turned over to the North McAlester Coal Co. in toto and the account of the former corporation was charged off on its books.

From an examination of the stockholdings and of the management and operation of the two companies, it is evident that substantially all of the stock was owned and controlled by the same individuals, and as we said in the Appeal of Midland Refining Co., 2 B. T. A. 292:

It seems to follow, naturally, if a group of individuals owns or controls substantially all of tbe stock of both corporations, and if such ownership or control is by all exercised for one purpose, namely, the joint success of the corporations, that these individuals meet the requirements of the words “ the same interests.”

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


text:
    Empire Printing & Box Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7214.
    Decided October 27, 1926.
    The taxpayer is not entitled to a deduction in 1920 on account of breach of contract in that year.

      A. W. Glapp, Esg., for the petitioner.

      Ward Loveless, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $335.86.
    FINDINGS OF FACT.
    The taxpayer is a Georgia corporation with its principal office in Atlanta. During 1920 it entered into a contract with the Weston Paper & Manufacturing Co. of Dayton, Ohio, for straw paper to be delivered to the petitioner during the year 1920 at the price of $100 per ton. During the latter part of 1920 the taxpayer found itself overstocked with straw paper and the price had materially dropped. The taxpayer then refused to furnish the specifications for more paper and refused to carry out the terms of the contract with respect to the acceptance of paper in so far as 48.7675 tons undelivered on the contract were concerned. From the latter part of 1920 until 1923 the taxpayer was negotiating with the Weston Paper & Manufacturing Co. with respect to its breach of contract. In 1923 the taxpayer paid $730.13 in full settlement of the contract and accepted the paper which it had refused to accept in 1920. The taxpayer did not admit or deny liability for the breach but threatened to stand suit on the contract rather than to pay any amount. No suit, however, was brought against the taxpayer.
    The taxpayer’s books and records were kept upon the accrual basis. No entry was made with respect to any liability on the contract until 1923, nor was any reserve set up with respect thereto,
   OPINION.

Trammell :

The question involved in this proceeding is whether the taxpayer is entitled to a deduction in 1920 as an accrued liability on account of the breach of contract to take paper which it had agreed to take in that year. We have heretofore discussed the principle involved in the Appeal of New Process Cork Co., 3 B. T. A. 1339, and the Appeal of Bump Confectionery Co., 4 B. T. A. 50. In the latter case it is said:

We do not believe that the breach of contract, standing alone, under the circumstances here in question, furnishes the basis for an accrual of possible damages. With the breach there of course arises a cause of action by the injured party, which it may or may not see fit to pursue. Should it, for reasons of policy, or otherwise, not demand damages, the obligor may escape payment. Conceding that it may be proper to accrue any approximation, it is certainly essential that there be a recognized obligation to pay before one’s right to accrue arises, and a mere liability to suit is not sufficient. Where the liability is denied and the injured party takes no action to compel payment, there is no basis for an accrual, and any amount set up on the books to take care of this liability would be in the nature of a contingent reserve which, as we have held in the Appeal of Consolidated Asphalt Co. 1 B. T. A. 79, is not permitted under the Revenue Acts.
Petitioner places its reliance on the Appeal of Producers Fuel Co., 1 B. T. A. 202, but in that case there was an admission of liability within the taxable year and an actual accrual on the books. We believe the distinction vital and can not regard the Producer Fuel Co. Appeal as controlling. We have also pointed out in the Appeal of New Process Cork Co., 3 B. T. A. 1339, the inapplicability of the reasoning of the Supreme Court in the case of United States v. Anderson, 269 U. S. 422, to a situation such as is here present. There the court was dealing with the deductibility of munitions taxes, which were measured by the profits made from the sale of munitions within the taxable year. The court found that the amount was susceptible of definite ascertainment at the close of the year and was a proper accrual within the year.

While the taxpayer was liable for the breach of contract, it had refused to acknowledge its liability until 1923. In 1920 it had no means of knowing whether it would ever be called upon to pay damages or not. While the Weston Paper & Manufacturing Co. could have brought suit, it did not do so. It could have waived enforcing any liability and the taxpayer would not have been liable to pay out any money under the contract unless the other party thereto required it to do so. There might have been considerations which would have induced the other party to the contract not to enforce any liability. In this respect the liability was contingent and not definitely known in 1920.

For the foregoing reasons, it is our opinion that the taxpayer is not entitled to any deduction with respect to the breach of contract in 1920.

Judgment will be entered for the Oommis-sioner.


author: Tkammeli; :

text:
    R. C. Middleton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10845.
    Decided October 27, 1926.

      Held, that the debt with respect to which the petitioner claimed a deduction in his return was not ascertained to be worthless in 1922.

      Basil A. Wood, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for 1922 in the amount of $329.07. The deficiency arises on account of the action of the Commissioner in disallowing as a deduction a portion of a bad debt charged off by the taxpayer during the year 1922.
    FINDINGS OF FACT.
    The taxpayer, during 1908 and for several years subsequent thereto, was a stockholder and the president of the Cahaba Coal Co., a corporation engaged in the business of mining and selling coal in Alabama. The company was organized in 1908. It became indebted to the taxpayer on account of money paid out for the corporation and for money advanced to it, for all of which it gave the taxpayer its promissory notes aggregating $25,600. The taxpayer undertook to collect these notes from the corporation without success, and on September 3, 1913, the corporation passed a resolution acknowledging the debts and, not being in a position to pay them at that time, authorized the secretary to enter appearance for the corporation in a suit which the taxpayer was then about to bring and to confess judgment for the amount of the notes together with costs. A judgment was entered on September 5,1913.
    From 1913 until the taxable year 1922 and subsequently, the taxpayer undertook without success to collect the judgment or some part of it.
    The corporation on March 1, 1913, and until November 3, 1913, owned about 7,500 acres of mineral lands, together with mining equipment, certain accounts receivable, and one or more judgments against creditors, while at that time it was heavily indebted and without sufficient cash on hand to pay its debts.
    On November 3, 1913, a mortgage, which the Cahaba Coal Co. had given to the Title Guarantee & Trust Co., as trustee, to secure a bond issue, was foreclosed and all the property and assets of the corporation, with the exception of its stock of merchandise in the commissary and its bills or accounts receivable which were not included in the trust deed, was conveyed to the taxpayer as trustee, with the right to sell the property for the purpose of paying the bonds and debts of the corporation, including the debt owing to the taxpayer. The taxpayer made many efforts to sell the property from the date of the execution of the deed in November, 1913, up until August 3, 1921, without success. He had hopes of realizing something from a judgment which the corporation had against one Francis.
    Executions were issued prior to 1921 by the taxpayer on his judgment and they were returned unsatisfied because no goods, chattels or property of the corporation could be located.
    For a portion of the money loaned by the taxpayer to the corporation, the corporation issued stock to the taxpayer to secure the indebtedness which the taxpayer held for that purpose. In 1921 the taxpayer deeded all of the property which had been conveyed to him in trust back to the bondholders, which terminated the trust agreement which had existed up to that time.
    Up to and during 1922, the taxable year involved, and subsequent thereto, the taxpayer has made efforts to collect the indebtedness.
    In his income-tax return for 1921 the taxpayer claimed a deduction of $3,000 on account of the Cahaba judgment, and in his return for 1922 he originally claimed as a deduction $6,500. In his amended return for 1922 he claimed a deduction of $8,600, and in his 1923 return he claimed a $4,500 deduction on account of the Cahaba debt, but did not claim any deduction in respect to that debt in his returns for 1924 and 1925, although there still remained of the original sum $9,500.
   OPINION.

Tkammeli; :

The question presented is whether the taxpayer is entitled to the deduction of $8,600 which he charged off in 1922 with respect to the $25,600 debt due by the Cahaba Co.

We are not convinced from the evidence that the taxpayer ascertained the debt to be worthless in whole or in part in 1922. The circumstances which were known by the taxpayer in 1922 were known by him in 1921 or in prior years. Practically the same situation had existed since 1913 that existed in 1922, the only change being that the taxpayer turned back to the bondholders certain property that he held in trust for them and himself. His claim was inferior to the claim of the bondholders, but, if the bondholders had been able to realize anything on the property in excess of the amount due them, the taxpayer would have been entitled to have the difference applied on his debt. In any event, this transaction occurred in 1921 and there appears to be nothing that occurred in 1922 to indicate the worthlessness of the debt in that year.

Judgment will be entered for the Commissioner.


text:
    Martin Veneer Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4769.
    Decided October 27, 1926.
    Tbe deduction on account of loss by fire is allowable in the year during which the property was destroyed, although the amount of the loss was not ascertained until a subsequent year.

      William /S'. Pritchard, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1920 in the amount of $2,173.06. The deficiency results from the disallowance by the Commissioner of depreciation claimed by the taxpayer and the disallowance of a loss by fire.
    FINDINGS OF FACT.
    The taxpayer is an Alabama corporation, with its office at Rrewton. A part of its mills were located at Bluff Springs, Fla., on the Es-cambria River, twenty miles from where the office is located. It is engaged in the business of manufacturing lumber and veneer.
    The taxpayer operated a general store in connection with its mills at Bluff Springs. During the night of December 30, 1919, the store caught fire. During the progress of the fire a portion of the merchandise was salvaged. There was some fire and smoke where the building stood on January 1, 1920, but the building and merchandise were destroyed before midnight of December 31, 1919. The insurance was not adjusted until January, 1920. The taxpayer claimed the loss in its return for 1920. The Commissioner disallowed the loss for 1920. The total loss was $5,833.18. Insurance in the amount of $1,500 was paid January 28, 1920. The loss on account of the fire, not covered by insurance, was $4,333.18.
    The taxpayer in its return for 1920 took a lump sum deduction on account of depreciation of its property and plant in the amount of $2,985.70. ■
    The Commissioner disallowed certain deductions claimed by the taxpayer as expense. This amount was capitalized and it increased the taxpayer’s depreciation allowance by $117.16.
   OPINION.

Trammell :

With respect to the loss by fire, the question is, When was the loss sustained? The fire started on the night of December 30, 1919, and there was some fire and smoke on the premises where the building stood after midnight of December 31, but at that time the building had been destroyed. What remained after that time was of no value. It is true that the exact amount of the loss was not ascertained because the insurance had not been adjusted. It is not material when the amount of the loss was ascertained.

On the question of the amount of the deduction allowable on account of the exhaustion, wear and tear of assets, the evidence introduced was not sufficient to overcome the presumption of the correctness of the determination of the Commissioner.

Judgment will he entered for the Oom-missioner.


author: Teammeul:

text:
    Max M. Lowenstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8245.
    Decided October 27, 1926.

      Sydney J. Hayles, G. P. A., for the petitioner.

      Henry Ravenel, Esq., for the respondent.

      This is a proceeding for the redetermination of a deficiency in income tax in the amount of $147.25 for the calendar year 1922. The matter was submitted upon petition and answer, no testimony having been introduced.
   OPINION.

Teammeul:

The petition alleged that the taxpayer employed a chauffeur for business purposes and paid him $700 per year on account of such employment during the taxable year. The salary of the chauffeur was disallowed by the Commissioner upon the ground that it was not an ordinary and necessary business expense but was a personal living or family expense. ■

The answer of the Commissioner makes no admission of facts, except the jurisdictional allegations in the petition. In view of the fact that the material facts alleged in the petition were not sustained by evidence, the determination of the Commissioner must be approved.

Judgment will be entered for the Commissioner.