author: Arundell:

text:
    The Arabol Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50489.
    Promulgated September 30, 1932.

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

      Bernard D. Eatcheoek, Esq., for the respondent.
   OPINION.

Arundell:

The deficiency involved in this proceeding is for income tax in the amount of $3,214.74 for 1928, which resulted, in part, from the disallowance of a claimed deduction of $24,000 paid out in compromise of a claim for excessive commissions charged for the sale of goods. Whether the amount is allowable as a deduction in the taxable year is the only question at issue.

In January, 1910, the petitioner, a New York corporation engaged in the business of manufacturing and selling adhesives and textile sizing, entered into a written agreement with the Chemische Werke Hansa, G. M. B. H., 'of Hemelingen, Germany, hereinafter to be called the German company, providing, among other things, for the organization under the laws of New York of a corporation to be known as the Amid Duron Company and the manufacture and sale by the petitioner for the Amid Duron Company of products under patents held by the German company. The corporation was formed. One-half of its capital stock was purchased by the German company and the remainder by the petitioner.

On February 11, 1910, the petitioner contracted with the Amid Duron Company to manufacture and sell its products, assume credit risks of customers, and keep its books and provide it with office room and equipment for the following commissions based upon sales of products of the Amid Duron Company: manufacturing, 12 per cent; selling products, 10 per cent; office facilities, 8 per cent; assuming credit risks of customers, 1 per cent. The provisions of the contract covering the commission payable on sales reads, in part, as follows:

The party of the first part agrees during the term of this agreement to use its best efforts and endeavors to sell the said goods, products and preparations, but all sales shall be made by the party of the first part at prices fixed by the party of the second part and only at such prices. For all such sales made by Uie party of the first part, the party of the second part agrees to pay a commission of 10% thereon; said commissions to be paid on the 10th day of each month for all goods delivered and paid for during the preceding months.

Thereafter the petitioner, in addition to the other commissions payable nnder the contract, charged the Amid Duron Company each month, and was paid, selling commissions equal to 10 per cent of the latter’s gross sales. The charges were made whether the goods were sold by petitioner’s salesmen or employees of the Amid Duron Company engaged in selling the products of both corporations.

During the latter part of 1927 the German company took the position that under the contract of February 11, 1910, the selling commission of 10 per cent was not to be charged on sales made by employees of the Amid Duron Company. Without asking for refund of any specific amount to the Amid Duron Company, the German company demanded that an adjustment be made for the excessive commissions charged during the five or six previous years, and threatened to litigate the matter unless the claim was paid. The petitioner estimated that the alleged excess payments amounted to about $43,000.

The petitioner referred the claim to its counsel, who advised against letting the claim go to suit and recommended that it be settled out of court. Later in 1927 the petitioner authorized its counsel to negotiate a compromise settlement. In 1928 the petitioner, without admitting liability in any amount, agreed to an adjustment of the claim, and pursuant thereto, on April 18, 1928, it paid the Amid Duron Company $24,000 in full satisfaction of the claim.

The parties differ only as to the manner in which the sum paid should be reflected in petitioner’s returns. The petitioner claims the right to deduct it in 1928. The respondent contends that the payment was for preexisting liabilities and that the amount should be excluded from gross income in the years in which the excessive commission charges were paid.

The evidence makes clear that the commissions were charged and paid on the theory that under the terms of the contract the petitioner was entitled to a selling commission of 10 per cent, regardless of whose employees sold the goods. The reports rendered annually by the Amid Duron Company to the German Company of its operations showed an expense item, characterized “ Service,” equal to 31 per cent of all sales of its products. These statements were approved in every instance by at least a majority of the directorate of the Amid Duron Company, which consisted of two men appointed by the German company and two designated by the petitioner. The German company appointed new directors every two or three years and during the war the Alien Property Custodian had representation on the board of directors.

Until late in 1927 all of the interested parties accepted the charges as being strictly in accordance with the contract. When claim was made that the amounts paid for sales were in excess of the commissions allowable under the agreement, the petitioner denied liability. The petitioner never receded from this position, but in 1928 agreed to settle the demand by a payment of $24,000.

The respondent took the same position in Trippensee Manufacturing Co., 15 B. T. A. 15. There a claim was filed against the petitioner in 1921 for alleged overcharges made in 1919, 1920 and 1921 under a contract for the manufacture of articles. The billings ivere made in accordance with the petitioner’s construction of the contract. After some discussion and negotiation the petitioner consented to adjust the claim and in 1921 credited the claimant’s account with the amount agreed upon. In holding the sum credited to be deductible in 1921, we remarked that “ The existence of a cause of action or facts upon which a claim for compensation may be asserted is not determinative of liability.”

In Price Iron & Steel Co. v. Burnet, 45 Fed. (2d) 921, the appellant during 1920 purchased and paid for scrap iron according to the grading then recognized. In 1924 the seller demanded from it a sum for wrongful classification of the material. The amount paid in 1925 in settlement of the claim was sought to be added to the costs of goods sold in 1920. In denying the asserted right, the court remarked:

What occurred in 1925 was an additional payment due to a mistake in classification and grading of the scrap iron, a liability which occurred in 1925, and not in 1920. It constituted a separate transaction growing out of the dealings of 1920. At most, it constituted an item which, if deductible at all, would belong to the return for 1925, and not for 1920, and could not, we think, relate back to the 1920 return in such manner as to be regarded as an additional part of the purchase price of the goods for that year.

The amount of $24,000 paid by the petitioner in 1928 in settlement of the claim is deductible from gross income in that year.

Decision will he entered under Bule SO.


source: Caselaw Access Project

author: Matthews:

license: Public Domain

text:
    Frank E. Best, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36746.
    Promulgated September 30, 1932.

      W. M. Whitney, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews:

The only question for our determination is whether the petitioner is taxable on the amount of $86,067.18 received by the company in the year 1923, this being the difference between the total amount which the company received from the sale of the stock and the 20 per cent commission. It is clear that the petitioner did not receive any of this amount in cash in 1923, or at any later date, and also that it was not available to him in that year. The respondent determined that under the agreement the company was acting as agent for the petitioner in selling the stock and was to retain 80 per cent of the proceeds as a loan, and that the substance of the transaction was that the proceeds from the. sale became income to the petitioner when received by the company.

Counsel for the petitioner enters into a rather lengthy argument in his brief as to the nature of the transaction and makes a great many contentions, some of which are inconsistent. His argument resolves itself, however, into two main contentions — first, that the acts of the parties show that the agreement between them provided for an exchange of stock for the promise of the company to issue promissory notes, which promise had no readily realizable market value, and not a sale by the company as agent for petitioner, and, second, which is really an alternative contention, that even if the agreement of January is one of agency, the oral agreement under which the stock was sold in February is a different agreement providing for an exchange of stock for the promise of the company to issue notes.

With regard to the petitioner’s first contention he argues that the corporate minutes in which the company is referred to as the “Agent ” are a mere word screen; that the intention of the parties and their acts show that the transaction was an exchange; and that this is borne out by the fact that the stock was endorsed over to the company; that it was represented to purchasers that the money from the sale of the stock was going into the company’s treasury; and that the petitioner did not have any control over the money after it was received by the company. The petitioner and the other two officers of the company testified that the transaction was intended to be an “ exchange,” but was called one of agency in the minutes on account of the fact that they were told by their attorney that the company could not purchase its own stock out of capital assets. Counsel cites a number of Washington cases to show that the company could have made such a purchase as was here contemplated, but we think this immaterial. It does not matter why they carried out the transaction in the manner they did. The minutes clearly state that the company was to act as agent and the acts of the parties show that this was their intention. In this regard it should be noted that the parties had been informed that the corporation could not sell its own stock; that the petitioner was not to exchange the stock for a definite suxn, but he agreed in advance that 80 per cent of the total proceeds should be retained by the company as a loan; and that the petitioner did not transfer a certificate for 100,000 shares, but as subscriptions were paid he transferred approximately enough shares to the company to fill the subscriptions and any shares subscribed but not paid for were later returned to him.

It seems to us that all these circumstances are indicative of the fact that the corporation was to act as agent for the petitioner and that they bear out the corporate minutes, rather than show an intention different from that expressed in the minutes as contended for by the petitioner.

It has been held by the courts and by this Board that receipt by an agent is receipt by the principal and that when the agent receives money or other property belonging to the principal it becomes income to the principal at that time. Maryland Casually Co. v. United States, 251 U. S. 342; Julia A. Strauss, 2 B. T. A. 598; L. & M. Holding Co., 3 B. T. A. 601; Estate of C. W. Crews, 8 B. T. A. 301; and F. H. Wilson, 12 B. T. A. 403.

The fact that by the terms creating the agency the principal agrees to allow the agent to retain the proceeds does not change the rule of law that receipt by the agent is receipt by the principal. It has been held many times that the assignment of future income does not relieve the assignor of tax liability. See Earl v. Lucas, 281 U. S. 111; Burnet v. Leininger, 285 U. S. 136; Rosenwald v. Commissioner, 33 Fed. (2d) 423, affirming in part 12 B. T. A. 350; Rensselaer & Saratoga R. R. Co. v. Irwin, 249 Fed. 726; certiorari denied, 246 U. S. 671; American Telegraph & Cable Co., 2 B. T. A. 991; and Samuel V. Woods, 5 B. T. A. 413.

In the case of Samuel V. Woods, supra, where the taxpayer had ordered that his lessee pay part of rents and royalties owing to him directly to his wife and daughter, we held that the amounts so paid to the wife and daughter constituted taxable income to the taxpayer, saying:

* * * Such a voluntary act in anticipation oí actual receipt and before the income exists can only affect the income when it actually arises, and in our opinion it may properly be treated as coming to him and immediately disposed of. See Ormshy McKnight Mitchel, 1 B. T. A. 143.

The case of A. L. Voyer, 4 B. T. A. 1192, relied upon by the petitioner, is not determinative of the issue herein. In the Yofer case an attorney collected money owing to the taxpayer and refused to pay a part of it which he retained as security for his fee, the amount of which was in controversy. We held in that case that both parties had a claim to the amount retained by the agent and that the taxpayer had no right to receive the full amount, and since it ivas not known exactly how much he would receive, he was taxable on only the amount actually received from the agent in the taxable year. In the instant case the instrument creating the agency provides that the agent shall retain the proceeds as a loan. It was a voluntary act on the part of the petitioner, and the agent retained the proceeds with the consent of the principal. We do not think that the Voyer case is similar to the instant proceeding. See F. H. Wilson, supra.

As to the petitioner’s second contention, counsel argues that there were three agreements — one, that set forth in the minutes of January 2; the second, an oral agreement entered into in the latter part of January which covered sales made in February; and, third, the agreement set forth in the minutes of June 1 — and that the oral agreement of February was clearly an exchange. Counsel does not devote any argument to the agreement of June. We are, however, of the opinion that the stock was sold under one agreement. As we view the testimony, towards the end of January the officers found that they had sold only 23,600 shares of the 100,000 they had hoped to sell and they therefore agreed to continue selling the stock, but at an increased price, and they agreed that the bonus would be removed. They continued to sell it on the same subscription forms as they had in January, to make the same representations to purchasers and to treat the proceeds thereof on the company’s books in the same manner. The minutes of June 1 refer to the minutes of January 2 and indicate that the agreement of January was still in force and that the minutes of June were meant to continue that agreement. This seems to corroborate our position that the agreement under which the stock was sold in February was a continuation of the agreement set forth in the minutes of January 2. But, whether we consider this as one agreement or as three separate agreements, the terms are the same. The corporation was to sell stock belonging to the petitioner and to retain 80 per cent of the proceeds as a loan. The evidence does not sustain the petitioner’s contention that this was an exchange of stock for the promise to issue notes.

The respondent has taxed the entire net proceeds of the sales to the petitioner and there was no question raised at the first hearing as to the amount of profit taxable. A part of the stock was issued for patents and, in the absence of evidence as to the value of the patents, it is clear that the proceeds from the sale of this stock constitute taxable income in their entirety. However, the testimony in this case shows that a part of the stock was issued to the petitioner in payment of advances which he had made to the company and a part was purchased for cash. The amount which he had advanced to the company was $19,500, for which 26,000 shares of stock were issued to him. There is no evidence as to the amount of cash which he paid for the other shares, and the petitioner himself testified that he could not remember how much he paid for them. The amount of $86,067.18 should accordingly be reduced by $19,500 and the remaining amount of $66,567.18 is taxable to the petitioner.

Judgment will be entered vmder Bule 50


author: McMahon: Black,

text:
    Crocker First National Bank of San Francisco (Successor), First Federal Trust Company, and East Waterway Dock & Warehouse Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39874.
    Promulgated October 4, 1932.

      Walter G. Fox, Jr., Esq., for the petitioners.

      Eugene Meaoham, Esq., for the respondent.
   OPINION.

McMahon:

The petitioners in this case are the First Federal Trust Company, the East Waterway Dock & Warehouse Company and the Crocker First National Bank of San Francisco, a successor to the First National Bank of San Francisco. The First National Bank, the First Federal Trust Company, the East Waterway Dock & Warehouse Company and the Rogers Brown Transportation Company filed a consolidated return for the year 1923. For the years 1924 and 1925 the First Federal Trust Company filed individual returns and the other three filed consolidated returns. The respondent, however, ruled that all four companies were affiliated for all three years and computed their income-tax liability on a consolidated basis. The petitioners have not questioned this action, and we must accept it as correct. The Rogers Brown Transportation Company was dissolved before the institution of this proceeding before the Board, and it is not a party petitioner. The amount of the deficiency determined against it for 1924 has been paid.

The deficiency notice referred to in our findings of fact is sufficient to give us jurisdiction as to the Crocker First National Bank of San Francisco.

The deficiency notice, which is the basis for the petition in this proceeding, is not addressed to the First Federal Trust Company and the East Waterway Dock & Warehouse Company, and does not assert any deficiencies in tax or other liability against them. On the contrary in such deficiency notice it is indicated that the respondent found that those companies had net losses and it is stated that the overassessment of the First Federal Trust Company for the year 1924 would be made the subject of a separate communication. In this situation we must hold that the proceeding, in so far as it relates to the First Federal Trust Company and the East Waterway Dock & Warehouse Company, should be dismissed for lack of jurisdiction.

This holding is not contrary to that in Furniture Exhibition Building Co. et al., 24 B. T. A. 1279, and that in American Auto Trimming Co. v. Lucas, 37 Fed. (2d) 801. In those cases it did not clearly appear that the respondent was asserting in the deficiency letters only deficiencies against the parent corporations, to the exclusion of the subsidiaries, whereas in the instant proceeding it clearly appears that the deficiency letter purports to assert only deficiencies against the Crocker First National Bank, and does not purport to assert deficiencies against the other companies.

Those cases are also distinguishable in that they involved affiliated companies, whereas in the instant proceeding the Crocker First National Bank of San Francisco, which received the deficiency notice, was not affiliated with the First Federal Trust Company and the East Waterway Dock & Warehouse Company in the years 1924 and 1925. The Crocker First National Bank of San Francisco did not come into existence until January 1, 1926.

We now turn to the determination of the liability of the Crocker First National Bank of San Francisco. It is necessary in this regard to determine the tax liability of the First National Bank of San Francisco for the years 1924 and 1925, and incidentally to refer to the other companies affiliated with that company.

In this case the respondent, in determining the tax liabilities of the four companies for 1923, found that although there was an operating loss there was no net loss to be carried forward against income for the following years under the provisions of section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924, due to the fact that two of the corporations in the consolidated group had tax-exempt income in an amount in excess of the operating loss of the group.

SRAi cprapuodser aq^ jo uorpu srqq. spuapioo .iauopqifad eqj, erroneous, for the reason that in determining the operating loss the respondent disallowed a deduction of an amount of $400,000 representing the decline in value of stocks held by the First National Bank; that tax-exempt income may not be used to offset operating losses; and that in any event the tax-exempt income of one member of an affiliated group may not offset and wipe out the net loss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year. We will take up these contentions in the order in which they have just been stated.

The first contention of the petitioner is without merit. The only evidence of the worthlessness of the stocks in question is that the Comptroller of Currency directed the bank to write down the value of the stocks and that, pursuant to such instructions, they were written down on the books. We have repeatedly held that this is not sufficient evidence to establish the worthlessness or partial worthlessness of stocks. Prescott State Bank, 11 B. T. A. 147, and West Lafayette Bank, 12 B. T. A. 1356. Furthermore, mere decline in the value of stock is not allowable as a deductible loss. Harry C. Howard, 20 B. T. A. 207.

The second contention of the petitioner is that the net loss of a taxpayer can not be offset by tax-exempt income, since this in effect results in indirectly levying a tax on such income. Section 204 (a) of the Revenue Act of 1921 provides as follows:

That as used in this section the term “ net loss ” means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business) ; and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, * * *

Section 206 (f) of the Revenue Act of 1924 provides as follows:

If for the taxable year 1923 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1921, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.

It will thus be seen that, by the plain terms of the act, tax-exempt income is to he added to the gross income in determining a net loss. Warren Steam Pump Co., 23 B. T. A. 585; Orr & Sembower, 20 B. T. A. 605; Samuel G. Adams, 19 B. T. A. 781; and H. J. Schlesinger, 5 B. T. A. 943. The petitioner contends that this section is discriminatory and imposes a greater tax on those taxpayers who have tax-exempt income than on those who do not.

We do not agree with this contention. Congress has the power, in granting taxpayers the privilege of reducing the net income of one year by a net loss of another, to provide how such net loss shall be determined. The respondent did not err in holding that the tax-exempt income should be included in gross income in determining whether a net loss was sustained. General Securities Corp., 23 B. T. A. 130.

The petitioner contends further that in. any event the tax-exempt income of one member of an affiliated group may not offset and wipe out the net l'oss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year. The consolidated return for the year 1923 showed a net operating loss of $346,344.53, adjusted by the respondent to $147,903.06, all the companies affiliated having net operating losses except the First Federal Trust Company. The tax-exempt income of the First National Bank of San Francisco and the First Federal Trust Company for that year exceeded the amount of the consolidated net loss as adjusted by the respondent. However, it is claimed by the petitioner that the net operating loss of the First National Bank of San Francisco exceeded its own tax-exempt income; that it is entitled to deduct such excess from its net income in the succeeding year; and that such excess should not be offset by the tax-exempt income of the First Federal Trust Company. This claim is based upon the assumption that the respondent erred in disallowing the deduction of $400,000 representing alleged shrinkage in value of stock, which disallowance we have hereinabove approved. There is no evidence from which we can determine whether or not the net operating loss of the First National Bank of San Francisco for the year 1923 as adjusted by the Commissioner was in excess of its own tax-exempt income for that year. It only appears from the record that the disallowance of the deduction of $400,000 resulted in the reduction of the consolidated net operating loss from $346,344.53 to $147,903.06. Assuming that the net loss of the First National Bank of San Francisco was in excess of its own tax-exempt income, nevertheless we are of the opinion that the contention of the petitioner can not be sustained.

The petitioner cites our decision in Struthers-Ziegler Cooperage Co., 18 B. T. A. 537, in which we held that a corporation does not lose its indentity as a taxpayer ” when it becomes a member of an affiliated group. It contends that, since the net loss provision refers to a “ taxpayer,” the net income or net loss of each member should be computed separately, and that if one member has a net loss it should be carried forward against its income for the succeeding year or years and should not be eliminated by reason of the-fact that another member had income in an amount in excess of such loss.

Upon this point the court in Swift & Co. v. United States, 38 Fed. (2d) 365, decided by the Court of Claims, states as follows:

* * * The consolidated group, as such, is not a taxpayer but a tax computing unit, and the corporations which are members of the affiliated group for the year, or became members during the year, lose their separate identity while so affiliated only for the purpose of computation of the tax upon one income and one invested capital which is composed of the income and invested capital of such corporations combined, but, when it comes to the assessment and collection of the tax so computed, it is assessed against and collected from the several corporations constituting the affiliated group, in proportion to the net income properly assignable to each, unless there is an agreement among them as to a different apportionment. * * *
* sjc % 5*: sfc si5
* * * In the enactment of section 240, Congress was simply laying down the principle that where a group of companies constituted a single business unit, the net income, determined in accordance with the general principles of law should be combined, losses being offset against gains, and the rate of tax should he determined by the relation between such combined net income and the invested capital of the group as a whole, each corporation being at all times separately recognized and individually liable for its proportion of the tax according to the net income properly assignable to it.
It might be argued that the position we have taken herein as to the separateness of each member of the affiliated group as a taxpayer is not consistent when we refuse to give to one member of the affiliated group, who sustained a net loss in 1919, the benefit of this net loss as a deduction from 1918 income when the affiliated group in 1919, when combined, had a consolidated net income. The answer to this is that in such a case, for the purpose of computation, section 240 is a limitation of section 204 and that, in the computation under section 240, losses of one company must be offset against the income of the other companies before it can be determined whether there is a net loss of any company in 1919 which may be applied against its income for 1918. Obviously, if this were not done, the net loss which had been used to offset the income of the other companies in the consolidated group would be allowed again to reduce the income of the company whiofi sustained the loss when applying it to the income of the prior yecur, and we ihinlc Congress did not intend a double deduction of this character. [Italics supplied.]

In that case tRere was a consolidated gross loss in 1919 of $10,000 which was reduced to $8,000 by the net income of $2,000 of one of the members of the group. The court held that, since the net losses of the members sustaining such net losses may be said to have contributed to the extinguishment of the net income of one of the members, the consolidated net loss should be apportioned in the ratio of losses suffered. Thus far the facts in that case are similar to the facts in this proceeding. The only difference between that case and the instant proceeding is that in that case none of the members had any tax-exempt income to take into account in computing the consolidated net loss deductible in a suceeding year, whereas in the instant proceeding the net operating loss was offset by tax-exempt income of two of the members. This difference is immaterial. Kaiwiki Sugar Co., Ltd., 21 B. T. A. 997. See computation in that proceeding at page 998 as approved at page 1000. In every case the net loss to be carried forward must be “ an actual and true loss.” Warren Steam Pump Co., supra.

In Warren Steam Pump Co. the same question involved herein was considered, the petitioner therein contending that the provisions of section 206 (a) of the Revenue Act of 1926 were unconstitutional and also citing National Life Insurance Co. v. United States, 277 U. S. 508, as controlling. The Board, upon authority of Denman v. Slayton, 282 U. S. 514, and First National Bank of Chicago v. United States, 283 U. S. 142, held such provisions constitutional and stated:

We see no reason why Congress In granting this particular boon may not limit it so that the loss to he carried, forward is an actual and true loss, and not an artificial one which arises from the exclusion of certain nontaxable income. [Italics supplied.]

The status of affiliated corporations as a “ tax-computing unit ” is more clearly defined by the court in Woolford Realty Co. v. Rose, 53 Fed. (2d) 821, as follows:

* * * Because the income on which the tax shall be paid in the taxable year, though made up of the results of the business of each affiliate, is not the income of each individual taxpayer, but the income of the unit for that year, the Commissioner was right in allowing against the aggregate gross income of the business for that year the aggregate deductions applicable to that year. This treatment gives full effect to the purpose of the statute to allow affiliates to transact their business as freely as though they were one corporation acting through departments, with the assurance to the Government and the taxpayer alike that the taxes payable as the result of the business done by the taxable unit in that year will, without reference to the bookkeeping of the individual corporations, be paid upon the whole business done by the unit, taking into consideration all of the earnings and all of the deductions of the branches of the business, not separately but in the aggregate, just as though in that year there was no separate corporate structure, but one corporation maintaining many departments.

The above case was affirmed by the Supreme Court in Woolford, Realty Co. v. Rose, 286 U. S. 319, in which the Supreme Court also cites Swift & Co. v. United States, supra, with approval.

The Board, in the case of Samuel G. Adams, supra, determined the method to be used in the treatment of nontaxable income of the wife in the determination of the “ net loss ” of the husband to be deducted in the succeeding year as follows:

* * * In other words, the two [husband and wife] are treated as a unit for the purpose of determining taxable net income and we think a different course should not be pursued when we come to arrive at a “ net loss ” as applicable to the year for which the joint return was filed. To determine the “ net loss ” of an individual for 1921, it is necessary to fake into consideration not only the items of gross income specified in the statute, but also nontaxable income received by such individual. And the same method would obviously apply where a “ net loss ” is being determined on the basis of a joint return for one year which would be allowable as a deduction in computing net income on a joint return for the subsequent year. * * * Certainly, when it is considered that an election to file joint or separate returns gives to a husband and wife the privilege of adopting the method for a given year which is most advantageous to them, they should not -be allowed to use such joint return for the purpose of fixing taxable net income, which may be advantageous to them, and then be allowed to disregard the joint return when it would be less advantageous to determine the “ net loss ” on the basis of such joint return. We find no statutory provision that would require such a result. On the contrary, we are of the opinion that when these petitioners elected to file joint returns they thereby elected to have all determinations of income and losses (for tax purposes) determined on the basis of these joint returns.

If affiliated companies avail themselves of the privilege of filing a consolidated return, such group becomes a tax-computing unit and the members lose their separate identity, for the purpose of the computation of the tax. Since such group becomes a tax-computing unit upon filing a consolidated return, it seems to follow that they remain such tax-computing unit so long as consolidated returns are filed, whether the incomes involved are taxable or tax exempt. Kaiwiki Sugar Co., Ltd., supra. Cf. Samuel G. Adams, supra.

Therefore, since there was no actual and true consolidated net loss in the year 1923, the net loss of a member of the affiliated group for the year 1923, offset by tax-exempt income of its own or other members of the group, can not be carried forward and deducted from its net income in the succeeding year.

Reviewed by the Board.

The'proceeding will be dismissed as to the petitioners, First Federal Trust Company and East ~Waterway Dock <& Warehouse Company. Judgment will be entered for the respondent as to the Crocker First National Bank of San Francisco.

Van Fossan dissents.

Black,

dissenting: The petitioner in this case makes the following contention: “That the tax exempt income of one member of an affiliated group may not offset and wipe out the net loss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year.” I think this contention of petitioner is correct, and that it is error for the Board to hold the contrary.

An examination of the findings of fact will show that the respondent, in determining whether petitioner had a “ net loss ” for 1923 which it is entitled to carry forward and use as a deduction in 1924, does it on a consolidated basis, which I think is fundamentally wrong. In my judgment, on the authority of Woolford Realty Co. v. Rose, 286 U. S. 319, recently decided by the Supreme Court, there is no such thing as a “ consolidated net loss ” under the 1924 and prior Acts. The proper way, in my judgment, is to determine the net income, or the net loss, as the case may be, of each constituent corporation. If one corporation has a net loss and such net loss is used to wipe out the taxable net income of an affiliate, then the amount of net loss which it may carry forward into the ensuing year is correspondingly reduced.

This rule is necessary to prevent the net loss being used for deduction purposes twice, a thing Congress evidently did not intend. Swift & Co. v. United States, 38 Fed. (2d) 365, On that point I have no disagreement with the majority opinion, but where I do disagree is as to respondent’s use of tax-exempt interest in the instant case, which belonged to petitioner’s affiliate, the First Federal Trust Company.

I think I can better illustrate the point 1 am endeavoring to stress by the use of a concrete illustration. Take corporations “A” and “ B,” which ate affiliated in 1923. Let us suppose corporation “A” has an operating loss of $50,000 in 1923 after the use of all items of ordinary income and deductions. Corporation “ B ” has a net income of $25,000 by the use of all items of ordinary income and deductions. I will admit that corporation “A,” in determining what “net loss” it shall carry forward and use 'as a deduction from its 1924 income, will have to reduce its “ net loss ” by the amount that was Used in wiping out the ordinary net income of its affiliate, “ B.” In such a c'ase corporation “A” would be entitled to carry forward into 1924 a “net loss ” of only $25,060, because $25,000 of its net loss had been used to wipe out that much taxable income of corporation “ B.” Suppose corporation “ B” in addition to its ordinary net income of $25,000, has tax-exempt income of $25,000. According to the contention made by respondent, and approved by the majority opinion, this $25,000 tax-exempt income of “ B ” should also be used to reduce the statutory “net loss” of “A” and “A” would not be entitled to carry forward any statutory “ net loss ” into 1924. I say this is wrong. Corporation “A” should have its statutory “ net loss ” reduced only by its own tax-exempt interest and nontaxable dividends plus the amount of its net loss which is used to wipe out the net income of its affiliate corporation,, “ B.”

In the instant case the First Federal Trust Conppany had a net income (ordinary income) for 1923 of $34,457.72, and to the extent that petitioner’s net loss for 1923 was used to wipe out this $34,457.72, it should be reduced in carrying forward into 1924, under the doctrine of Swift <& Go., supra. But the respondent’s use of $249,315.54, tax-exempt interest (not tax-exempt interest belonging to petitioner, but tax-exempt interest belonging to the First Federal Trust Company) in reducing petitioner’s “net loss” for 1923 was error, in my judgment.

The majority opinion cites, as authority for approving respondent’s action in this respect, Samuel G. Adams, 19 B. T. A. 781, but there is a substantial difference in the two situations. In the Samuel G-. Adams case the husband combined all the income of himself and wife on one single joint return and there was only one taxpayer, to wit, Samuel Q. Adams. But the situation is entirely different with affiliated corporations which file a consolidated return. Each corporation remains a separate taxpayer and its statutory net loss which it is entitled to carry forward to the next taxable year should be computed separately. The net loss of affiliated corporations may not be used as a consolidated net loss of the affiliated group. Delaware & Hudson Co., 26 B. T. A. 520.

The majority opinion also cites as authority for its holding on this point. Kaiwiki Sugar Co., Ltd., 21 B. T. A. 997. Admittedly this case does hold that the nontaxable dividends received by one corporation, having no net loss for the taxable year, may be used to reduce, the statutory net loss of an affiliated corporation, and in that respect would be a valid precedent for the majority opinion in the instant case. But in view of the recent decision of the Supreme Court in Woolford Realty Co. v. Rose, supra, I think our decision on the particular point herein discussed as decided in Kaiwiki Sugar Co., Ltd., supra, was wrong and should not be followed.

Tkammelu agrees with this dissent.


author: Sea well;

text:
    G. R. Kinney Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31397, 32980.
    Promulgated October 4, 1932.

      Paul Armitage, Esg., and Edward Holloway, Esg., for the petitioner.

      Harold Allen, Esg., and L. H. RusKbro.ok, Esg., for the respondent.
   OPINION.

Sea well;

In the petitions and amended petitions filed in these proceedings, various errors were assigned, but at the hearing a stipulation was submitted as to all of the issues raised in Docket No. 32980 except that relating to the allowability of certain good will for invested capital purposes. The agreements as reached are incorporated herein by reference and will be given due effect by the parties when a computation is made under Rule 50.

The issue as to invested capital arises in this manner: The petitioner is the successor to a chain-store shoe business which was started in 1894 as a partnership. From the one store with which the business began it had increased by 1917, when the petitioner was organized, to 48 stores. Each store was a separate partnership, though G. R. Kinney, the founder of the business, was a partner in each store arid each store was conducted under the same name. Many oi the individuals connected with the enterprise were partners in more than one store. In January, 1917, the business was incorporated under-the name of the petitioner and all assets, both tangible and intangible, were transferred to the petitioner. While the record does not specifically show the assumption of liabilities of the partnership by the petitioner, as we understand the situation such was the case; that is, there was a true instance of succession of the partnerships by a corporation in which all assets of the partnerships were transferred to the corporation and all liabilities of the partnerships were assumed by the corporation, and the corporation issued its stook to the partners for their several interests in the assets. While the amount of preferred stock authorized was in the amount of $1,500,000,' all of it was not issued upon,' organization of the petitioner, but a smaller amount at par represented by the net value of the tangible assets of the partnerships in the amount of $901,692.27. When the remaining preferred stock was issued does not appear and there is nothing in the record to show that other than the, foregoing amount was outstanding at March 3, 1917, Twenty-five thousand shares of common stock of no par value were issued for the intangible assets of the partnerships.

The controversy arises as to whether an amount may be included in invested capital and, if so, how much, on account of the acquisition of the good will of the partnerships through the issuance of common stock therefor. In the first place, it is suggested by the Commissioner-that even though the petitioner was organized on January 23, 1917, and stock at that time issued for the assets of the partnerships in accordance with an agreement between the partners and the petitioner, the transaction would be considered as having occurred after March 3, 1917, and therefore coming within the provisions of seotion 331 of the Revenue Acts of 1918 and 1921, since certain formal bills of sale for the transfer and conveyance of the property were not executed until July 1,1920. That is, the Commissioner suggests that no good will is allowable, since the conveyance of assets occurred after March 3, 1917. We can not agree with this contention. The corporation was not only organized on January 23, 1917, but stock was issued at that time for the assets of the partnerships, such issuance of stock being in conformity with agreements between the parties. The petitioner operated the business from the date of organization, through the years in controversy and exercised every evidence of full and complete ownership of the assets. G. R. Kinney, the founder and moving spirit in the business, died in 1919 and we have little evidence as to the reason for the delay in the execution of the bills of sale, but the record as a whole convinces us that such execution was merely a formal matter which was carried out to complete the record as to something which actually occurred at the date of the organization of the petitioner.

Since we are of the opinion that the transaction represented the acquisition of assets prior to March 3, 1917, in which common stock was issued for the intangible assets of the partnerships, our question as to the amount allowable in invested capital on account of the acquisition of intangibles is governed by section 326 (a) of the Eevenue Acts of 1918 and 1921, which reads in part as follows:

That as used in this title the term “invested capital” for any year means * * *:
$ $ ‡ 4 $ ‡ $
. (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.

In the first pl'ace, the Commissioner states in his brief that “ The evidence shows that the common stock issued for the intangibles was of no par value, therefore, not any amount could be included under subsection b.” This argument, however, overlooks section 325 (b) of the Eevenue Acts of 1918 and 1921, which provides that:

(b) For the purposes of this title, the par value of stock or shares shall, in the case of stock or shares issued at a nominal value or having no par value, be deemed to be the fair market value as of the date or dates of issue of such stock or shares.

Since we are satisfied that the stock had a fair market value, as will be shown below, the limitation under subsection (b) will be based upon such fair market value.

The question presented to which the evidence was largely directed was the limitation provided by subsection (a) (section 326, supra), namely, the cash value of the good will at the date paid in. It is contended by the petitioner that the good will had a value at the date of organization of at least $3,000,000. In the first place, various computations are made, based upon a capitalization of earnings, and these computations show amounts which the petitioner would have us adopt as the value of good will at the date of organization, ranging from $2,353,637 to $5,964,544.80. In making such computations the petitioner used 8 per cent as a fair return on net tangible assets and capitalized the excess of earnings over such return at various rates from 5 to 12 per cent. Various combinations of earnings were used, including the earnings for the five years set out in our. findings as well as the three years subsequent to the organization of the petitioner. The Commissioner objects to the computations on the ground of the capitalization rates, the use of net rather than gross tangibles, and the correctness of the figures used to show earnings and net tangible assets. In fact, the Commissioner says that instead of using the average earnings for the five years preceding incorporation of the petitioner and those of the three years succeeding its organization, as proposed in one of the petitioner’s computations, a more nearly correct result would be obtained by taking a 10-year period — five years before and five years after organization of the petitioner. While the petitioner earned substantial profits for the three years succeeding its organization, it sustained large losses in the fiscal year ended January 31, 1921, and the 11-month period ended December 31, 1921, and consequently, when a computation is made as suggested by the Commissioner, no excess earnings remain on which an intangible or good will value might be predicated. We have not set forth the earnings subsequent to the organization of the petitioner nor will we attempt to comment on all of the computations submitted, since we can not see that any useful purpose would be served thereby. Suffice it to say that we are not convinced that the large values computed by the petitioner are supported by the record. If we take the average annual earnings and average net tangible assets for the 5-year period preceding 1917, as compiled from statements prepared by George R. Kinney, as a basis for settlement with the partners, and compute a return of 8 per cent on net tangible assets and capitalize the excess earnings at 15 per cent, which is most favorable to the petitioner, a value for intangibles would be shown of only approximately $900,000. The foregoing rates are often used as an aid to fixing the value of intangibles where we are concerned with a very stable and long established concern. Here we have a well established business, but we can not overlook the fact that the greater part of tangible assets is represented by inventories which are subject to the rise and fall of commodity prices. In fact, during the period of rising prices during the war the petitioner showed large profits, whereas when prices declined after the war very substantial losses were sustained. Under such circumstances higher capitalization rates would seem to be justified, which in turn would mean a reduction in the intangible value as computed above.

We have further the objection of the Commissioner to the accuracy of the figures which form the basis of all of the computations. Very incomplete records were maintained by George R. Kinney for the several partnerships and some of the records were lost. What the petitioner presented was secondary evidence in the form of annual statements which were prepared by Kinney as a basis for annual settlement with the partners. While we are not convinced of their absolute accuracy, we are of the opinion that whatever inaccuracies may exist therein would not materially alter a computation of the kind here proposed. In the next place, the Commissioner objects to the use of net, rather than gross, tangibles as a basis for the capitalization of earnings. As pointed out in Edwin Schiele Distilling Co., 3 B. T. A. 873, neither net nor gross tangibles may be unqualifiedly used where we are seeking to determine a proper return on tangible assets before allocating any excess earnings to intangibles. In other words, if in a given case a taxpayer has a large amount of borrowed capital on which it is paying interest at the rate of say 6 per cent, it would obviously be inaccurate to compute a return on either gross or net tangibles at a different rate, say 8 or 10 per cent, without making proper adjustment for the tangible assets which are represented by borrowed money. In the case at bar a substantial amount of borrowed capital is involved, as is evidenced by the differences between the amounts of the gross and net tangible assets, but we do not know the interest rate paid on borrowed money and therefore we are in no position to make the necessary adjustment as between a capitalization return on tangible assets and the income derived and interest paid on borrowed money. The most that we can say is that apparently the correct' result, on a capitalization basis and if we should use rates of 8 per cent and 15 per cent, would be an amount less than $900,000 as shown from the computation referred to above and more than approximately $600,000 which would follow in a similar computation by the use of gross rather than net tangibles.

We have referred to the figures submitted on a capitalization basis not only because of what might be indicated as to value by the use of such a method, but also because much of the opinion evidence has a similar foundation. In the first place, we have the opinion of E. H. Krom, president of the petitioner and who has been connected with the business since shortly after its organization in 1894. He placed a cash value on the good will at the date of organization of .the petitioner of $2,500,000, but an examination of his testimony would indicate that this expression of opinion is predicated to a large extent on the distribution of 25,000 shares of no par common stock to the partners on the basis of the earnings of the several stores. The method followed in distributing the common stock was to take the earnings of each store for 1916, deduct from such earnings a return of 8 per cent on the net tangible assets at the date of organization of the petitioner as the amount of dividends on the preferred stock, and then capitalize the remaining earnings at approximately 9.15 per cent. It is argued that the result reached, namely, a valuation of $2,500,000, is entitled to much weight because it was the result of bargaining among the partners where each was seeking to obtain the most possible for himself and at the same time not allow another to gain an undue advantage, and therefore a fair value was reached. We do not think such a result necessarily follows. The result may be equitable in the sense that each retains the same proportionate interest, but we can not say it necessarily fixes the cash value of the good will. The letter to the partners at the time of negotiations for the organization of the petitioner, a part of which we quoted in our findings, stated that the distribution of the common stock on the basis of earning capacity would enable each partner to receive an “ equitable distribution of the common stock,” but this is a long way from saying that the method used fixed the value of the intangibles for which the common stock was issued. Obviously, an equitable distribution could have been made with a smaller as well as with a larger number of shares. Krom testified that the common stock had a value in 1918 and 1919 equal to that in 1917, which he stated was $2,500,000, yet on the estate-tax return of G. K. Kinney, filed on August 10,1920, fixing the value of common stock held by Kinney at his death on June 17,1919, the value fixed was $5 per share. Krom signed the return as one of the executors. Of course he now says that such valuation was fixed without having given proper consideration to the value of the intangible assets for which the stock was issued, but where such a great disparity exists we can hardly be expected to accept the present statements of opinion at their face value without better explanation for the great variation between the two amounts.

Two further witnesses testified as to a cash value for the good will at the date of the organization of the petitioner of $2,500,000 to $3,000,000. Both witnesses had been familiar with the business for many years, but we are not convinced of the soundness of their valuations. One of them, Lord, based his valuation on a capitalization of the earnings of the partnerships for 1916 at 12*4 per cent, while the other predicated his valuation largely on an investigation which he made for a corporation with which he was connected for the purpose of a merger or consolidation with petitioner. Not only did the latter event occur in 1919, but also the investigation seems to have had for its main purpose a determination of what would be a fair ratio for an exchange of stock of the petitioner for stock of the corporation which the witness represented. Again, as we stated in regard to the testimony of Krom, what is an equitable basis for distributing stock among stockholders and what is a cash value for the assets back of the stock may represent such different considerations that the existence of one may not be helpful in proving the other. By the foregoing we do not mean that the testimony of the witnesses as to value is to be disregarded; on the contrary, we have considered it very carefully. From it, and the evidence offered as to the history of the business as reflected by its growth and substantial earning power, we are convinced there was a good will of substantial value which had been built up and for which the common stock was issued. In our opinion, its cash value is reasonably determinative in the amount of $600,000 and we so find.

But this does not dispose of our question as to the good will allowable for invested capital purposes. We have two further tests to be applied, one of which is the par value of stock issued for the intangibles in question. As we have heretofore stated, the stock was without par value and therefore this limitation would be applicable on the basis of fair market value of the stock issued therefor. (Section 325 (b) of the Revenue Acts of 1918 and 1921.) The stock in question was the 25,000 shares of no par common stock to which we have been referring in our previous discussion. It was unlisted and apparently the sales were confined to empoyees and stockholders of the petitioner. The first sale we have shown in the record is at $25 per share in 1919 and the same price prevailed through 1920. We have 'further the testimony that the stock was worth at least as much in 1919 as at the date of the organization of the petitioner, and the foregoing is further confirmed by evidence to the effect that the earnings of the petitioner continued to increase through 1917, 1918, and 1919. We have fixed a value for the intangibles for which the stock was issued of $600,000, which would reflect an asset valuation of slightly less than $25 per share. We are accordingly of the opinion that for the purpose of the limitation prescribed by subsection (b) the fair market value of common stock may be fixed at $25 per share.

We now come to apply the limitations provided by section 326 (a) (4), supra, and determine the amount of good will allowable as the smallest of the following amounts: (a) The actual cash value of the good will at the time paid in, which we have fixed at $600,000; (b) the par value (here fair market value) of the stock issued for such property, fixed for that purpose at $625,000; and (c) 25 per centum of the par value of the total stock of the petitioner outstanding on March 3, 1917, $381,675, that is, 25 per cent of ($901,700 [par value of preferred stock issued for tangible assets] plus $625,000 [fair market value of no-par common stock issued for intangible assets]). In determining the amount allowable under subsection (c) we have used as the par value of preferred stock outstanding the net tangible assets of the partnerships on January 23, 1917. Since there was no controversy as to the invested capital allowable on account of property paid in for preferred stock, no evidence was furnished as to the preferred stock issued other than that preferred stock was issued at a par value of $100 per share for the net tangible assets and the net tangible assets were shown to have been $901,692.27 at the date the petitioner was organized. Whether more preferred stock was issued between that date and March 3, 1917, we do not know. We do know that the amount issued as shown in our computation was issued at the organization of the petitioner and continued to remain outstanding through the years in controversy and we have accordingly determined the applicable limitation on that basis. In view of the foregoing, we are of the opinion that the good will allowable for invested capital purposes in the years covered by" Docket No. 32980 is in the amount of $381,675.

The remaining issue arises in Docket No. 31397 and relates to the proper treatment to be accorded a net loss sustained by the petitioner in the 11-month period ended December 31, 1921, in determining its tax liability for the calendar year 1922. The petitioner was affiliated with four other corporations and filed consolidated returns with them for both of the aforementioned periods. In the 11-month period, the petitioner sustained a loss in the amount of $998,194.21, which both parties have treated as, and we understand to represent, a net loss. In the same period, each of the other corporations realized net income, the total for the four corporations being $717,392.40, thus resulting in a consolidated net loss in the amount of $280,801.81. In 1922 each member of the affiliated group had net income, that of the petitioner amounting to $147,349.21. The evidence is not entirely clear as to how the fractional period ended December 31, 1921, arose, though in the original petition the following allegation appears:

Prior to tlie year in question the corporation was on a fiscal year basis ending January 31st of each year. Prior to January 31, 1921 this Taxpayer applied permission to change from a -fiscal year to a calendar year basis, which consent was granted. It filed its returns for the 11 months’ period, which showed operating loss of $335,557.23 and pursuant to Section 204-b of the Revenue Act of 1921 it carried said loss forward and deducted it from the net income of the taxable year 1922. The Commissioner has erroneously disallowed this deduction on the ground that the preceding period was not a full period of 12 months.

The following answer was made to the foregoing allegation:

Respondent denies that he erred in disallowing an alleged operating loss of $335,557.23 for a fractional period of the year 1921. Respondent admits that the petitioner changed its accounting system from the fiscal year to the calendar year basis.

A reference to the change in accounting periods does not appear in the amended petitions and amended answers. The record shows, however, that consolidated returns for the affiliated group were filed for the fiscal year ended January 31, 1921, the 11-month period ended December 31, 1921, and the calendar year 1922. No new corporations came into the group during the aforementioned period. We will accordingly proceed on the theory that the change which resulted in the filing of the return for the 11-month period ended December 31, 1921, was a voluntary change in accounting period in order that returns might thereafter be filed on a calendar year basis instead of on a fiscal year basis ending January 31.

In the arguments of the parties as set out in their briefs no reference is made to the effect, if any, on the allowability of the net loss because of the fractional period involved. The contention advanced by the petitioner is that the consolidated net loss for the 11-month period “ should be set off against the net consolidated income of the succeeding period, without limitation.” This argument is, of course, answered contrary to the petitioner’s position by Woolford Realty Co. v. Rose, 286 U. S. 319; Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332; Swift & Co. v. United States, 38 Fed. (2d) 365; Delaware & Hudson Co. et al., 26 B. T. A. 520; and Saiolrs Brothers Co., 26 B. T. A. 100. The Commissioner says that he has “ computed the statutory net loss in accordance with the following rulings: G. C. M. 8132-IX-1 C. B.—287 and G. C. M. 8618-IX-2 C. B.—180 ” and that his “ method has been approved in the case of Commissioner v. Ben Ginsburg Co., 54 Fed. (2d) 238.” What, if anything, the Commissioner would allow on the basis of the foregoing rulings does not appear. While the deficiency notice makes no reference to net losses, and while there is nothing contained therein to indicate that anything has been carried forward to 1922 on account of the net loss sustained in the 11-month period ended December 31, 1921, it would appear from the above rulings that the Commissioner would now allow a part of the net loss sustained in the 11-month period in determining the petitioner’s tax liability for 1922. In any event, we think it clear from the authorities set out under a discussion of the petitioner’s position that, aside from the question arising because of the fractional period involved, the part of the unabsorbed net loss of the petitioner for the 11-month period ended December 31, 1921, in the amount of $280,801.81 which could be availed of by the petitioner in 1922 would be $147,349.21, its net income for 1922.

In view, however, of our consistent holding in many prior cases as to a net loss sustained in a fractional period, where such fractional period arises by reason of a voluntary change in accounting period, the petitioner may not avail itself, in determining its tax liability for 1922, of any of the net loss sustained in the 11-month period ended December 31, 1921. That is, the Board has consistently held that a fractional period occasioned by a voluntary change in accounting-period does not constitute a “ taxable year ” within the meaning of sections 200 and 204 (b) of the Revenue Act of 1921 and therefore a net loss sustained in such period may not be carried forward and deducted from the net income of the succeeding taxable year. Arthur Walker & Co., 4 B. T. A. 151; Dorsey Drug Co., 7 B. T. A. 229; Strain Brothers, Inc., 19 B. T. A. 601; and Stevenson Consolidated Oil Co., 23 B. T. A. 610. It accordingly follows that the claim of the petitioner for a deduction in 1922 on account of the net loss sustained in the 11-month period ended December 31, 1921, must be denied.

Judgment will he entered wider Rule 50.


author: Seawell :

text:
    Mary W. B. Curtis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54209.
    Promulgated October 4, 1932.

      Harris H. Glknan, Esg., for the petitioner.

      Maxwell H. Mahany, Esg., for the respondent.
   OPINION.

Seawell :

In determining the issue in this proceeding certain provisions of the Revenue Act of 1928 and of the General Laws of Massachusetts are involved, as hereinafter indicated.

The pertinent provision of the 1928 Revenue Act is as follows:

Sjsc, 22. (a) “ Gross income ” includes * * * gains or profits and income derived from any source whatever.

The General Laws of Massachusetts, chapter 191, section 15, under the heading “Rights of Surviving Husband or Wife,” provide in part as follows:

The surviving husband or wife of a deceased person, except as provided in section thirty-five or thirty-six of chapter two hundred and nine, within six months after the probate of the will of such deceased, may file in the registry of probate a writing signed by bim or by ber, waiving any provisions that may have been made in it for bim or for ber, or claiming such portion of the estate of the deceased as be or she would haye taken if the deceased bad died intestate, and be or she shall thereupon take the same portion of the property of the deceased, real and personal, that be or she would have taken if the deceased bad died intestate; except that if.be or she would thus take real and personal property to an amount exceeding ten thousand dollars in value, be or she shall receive in addition to that amount only the income during bis or ber life of the excess of bis or her share of such estate above that amount, the personal property to be held in trust and the real property vested in bim or ber for life, from the death of the deceased; and except that if the deceased leaves no kindred, he or she upon such waiver shall take the interest he or 'she would have taken if the deceased had died leaving kindred but no issue. If the real and personal property of the deceased which the surviving husband or widow takes under the foregoing provisions exceeds ten thousand dollars in value, the ten thousand dollars above given absolutely shall be paid out of that part of the personal property in which the husband or widow in interested; and if such part is insufficient the deficiency shall, upon the petition of any person interested, be paid from the sale or mortgage in fee, in the manner provided for the payment of debts or legacies, of that part of the real property in which he or she is interested. * * *

Under the title “Descent and Distribution of Beal and Personal Property,” section 1 of chapter 190 of aforesaid General Laws provides;

A surviving husband or wife shall, after the payment of the debts of the deceased and the charges of his last sickness and funeral and of the settlement of his estate, and subject to chapter one hundred and ninety six, be entitled to the following share in his real and personal property not disposed of by will:
(1) If the deceased leaves kindred and no issue, and it appears on determination by the probate court, as hereinafter provided, that the whole estate does not exceed five thousand dollars in value, the surviving husband or wife shall take the whole thereof; otherwise such survivor shall take five thousand dollars and one half of the remaining personal and one half of the remaining real property. * * *

In section 1 of chapter 189 of the General Laws of Massachusetts, it is provided that a wife shall, upon the death of her husband, hold her dower at common law in her deceased husband’s land, but to be so entitled she shall file her election and claim therefor in the registry of probate within six months after the date of the approval of the bond of the executor or administrator of the deceased. The courts have uniformly held that under the circumstances prevailing in this case, where the surviving husband or wife accepts the provisions of the will, the survivor is in the position of one who sells property to the estate and acquires the legal status of “ a. purchaser for a valuable consideration.” Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 160; and Allen v. Brandeis, 29 Fed. (2d) 363, and cases therein cited.

In the case at bar the petitioner, upon the death of her husband, did not exercise her statutory rights as authorized by the laws of Massachusetts, but instead took under her husband’s will, and therefore under the statutes and authorities cited above became a purchaser for value of what she received under the will. The petitioner’s husband left a substantial amount of property and the parties seem agreed that had the petitioner taken under the will what she would have been entitled to receive would have been $10,000 outright and the income from property having a value of $108,991.83. The petitioner was then approximately 45 years of age and had a life expectancy of 24.66 years. A return of 4 per cent on $108,991.83 amounts to $4,359.61 per year. On the basis of the foregoing facts the Commissioner determined that what the petitioner relinquished had a present value in 1915, the date of her husband’s death, of $70,412.52, that is, the present worth in 1915 of $4,359.67 to be received annually over a period of 24.66 years ($60,412.52) plus the statutory share of $10,000. In other words, the Commissioner says that the valuable consideration with which the petitioner purchased the right to receive income under her husband’s will had a value of $70,412.52, and that since under the agreed facts more than that amount had been paid to her prior to 1928 in the form of income by the trustees under the will of her husband, the entire amount of $7,397.92 received by her in 1928 constitutes taxable income to her.

The major contention advanced by the petitioner is stated in her brief as follows:

The petitioner is entitled to receive, as a purchaser for value, and, therefore, tax exempt, the amount of $4,359.67 annually, during the year 1928, and all other years up to and including the year of her death. This amount represents the agreed return of 4% upon the one half of the value of the net estate, as in the record computed, and is the exact amount of income to which the petitioner would be entitled had she waived the will and taken her interests under the statutes. The petitioner admits that all other income received by her annually, or paid to her by the trustee under the will of her deceased husband, was not paid in consideration of the release of her widow’s statutory rights, and that she is not a purchaser for value thereof.

We are unable to agree with the foregoing proposition. In fact, it is difficult to distinguish the situation here presented from that before the court in United States v. Bolster, supra. There as here the widow accepted the provision made for her under the will of her husband in lieu of her statutory interest, and the income in question was the income that was produced by the residue of the estate under a testamentary trust. That case as well as the case before us arose in Massachusetts. In considering the situation presented in the Bolster case, the court stated the question involved as follows:

Where a widow accepts the provisions of her husband’s will and is paid, annually, the entire income from his estate, in lieu of her statutory share of the corpus of the estate, are such annual payments taxable income to her, before or until the aggregate amount of such annual payments equals and exceeds the value of the property she relinquished by accepting the provisions of the will?

The court further stated that “During the years in dispute the annual payments received by Sarah A. Davenport [the widow] did not exceed the value of her statutory share in the corpus of the estate at the fair market value of the property at the time of its acquisition.” The court held that since the payments received prior to and during the years in dispute were less in total amount than the value of the statutory interest relinquished, the amounts received, were not taxable. Obviously, under the petitioner’s theory it would be unnecessary to compare total receipts with the value of the statutory interest in order to determine what is taxable, but the amount exempt would be a fixed amount continuing each year so long as the widow might live. We can find no authority for such a position and we are convinced that it is clearly opposed to the principle laid down in the Bolster case. See also Warner v. Walsh, supra; Allen v. Brandeis, supra, and Butterworth et al., Trustees, 23 B. T. A. 838. A comparison of the value of the statutory share with the total payments received certainly contemplates placing a value on such statutory interest as a starting point, filo objection is made to the accuracy of the Commissioner’s computations under the method employed to arrive at the value of the statutory interest, but the objection seems to be to the method, with the counter suggestion that it is unnecessary to arrive at a lump-sum value of the surrendered interest. Since we are of the opinion, as indicated above, that a determination of the receipts under the will which are taxable to the petitioner makes necessary a valuation of the statutory interest relinquished, and since the method employed by the Commissioner has long been sanctioned (Simpson v. United States, 252 U. S. 547), we are of the opinion that the Commissioner properly determined the value of such statutory interest in the amount of $70,412.52, and that no authority exists for the exemption from income tax, throughout the life of the petitioner, of the agreed return on the statutory interest relinquished.

The alternative position of the petitioner is stated in her brief as follows:

The petitioner further contends that should this Board determine, contrary to the petitioner’s contentions, that the annual income to which she was entitled under the Massachusetts Statutes, should be capitalized upon the basis of a theoretical expectancy of life in order to determine a lump sum value for the widow’s statutory interests at the date of her husband’s death in 1915, then the Board should find that the payments made to the widow in each year since the date of the death of her husband were in part a return to her of capital, represented by her statutory interests, and in part a payment of income, and that all of said principal will not be repaid to her until the termination of her expectancy of life.

Again we are unable to agree. What the Commissioner did was to treat all amounts received as a return of capital until the amounts received equaled the value of the statutory interest relinquished, and to consider all amounts received in excess of the value of the statutory interest as taxable income to the petitioner. The foregoing is in accordance with the rule laid down in the Warner, Bolster, and Brandeis cases heretofore referred to. Nor do we think it can be said that the case of Commissioner v. Moore Corp., 42 Fed. (2d) 186 (affirming John C. Moore Corp., 15 B. T. A. 1140), can be taken .as a repudiation of the doctrine laid down in the Warner case and later followed in the Bolster and Brcmdeis cases. What the court did was to comment favorably on the rule laid down by the Board in Klein et al., 6 B. T. A. 617 (which was similar to that followed by the Board in the Moore Corp. case), and then said:

As*respondent does not complain of the adoption of the Klein case rule rather than what for it would be the more advantageous Walsh [Warner v. Walsh, supra] case rule, it is unnecessary in this ease to determine which of these two is to be finally adopted by this court, or whether indeed a third rule not as yet considered by the Board or by a court is to be preferred.

The third rule referred to was somewhat similar to that applied by the Board in the Klein case, and, after a further extended discussion of the three rules, the court specifically stated that it was not necessary to decide, and that it would not .decide, which rule should be adopted. Further, we think it significant that the same court (Circuit Court of Appeals for the Second Circuit), though not the same judges, decided the case of Logan v. Commissioner, 42 Fed. (2d) 193, shortly prior to the decision in the Moore Gorp. case, and in making its decision, which involved a somewhat similar question of apportionment, the Warner, Bolster and Brandeis cases were cited as authority for the proposition adopted, namely, that all amounts there received should be treated as a return of capital until the capital value in question was completely returned and thereafter any excess would be considered income. The Logan case was affirmed in Burnet v. Logan, 283 U. S. 404, and in rendering its opinion the court said, with respect to one situation involved, that the taxpayer “ properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture ” and, with respect to another, that “ If a sum equal to the value thus ascertained had been invested in an annuity contract, payments thereunder would have been free from income tax until the owner had recouped his capital investment.”

We are of the opinion that similar reasoning requires that all payments received by the petitioner under her husband’s will should be considered as a return of capital until the value of the statutory interest which she relinquished in order to receive these payments is recouped, and, since such value had been recovered prior to 1928, the action of the Commissioner in considering the amounts received in 1928 as taxable income is sustained.

Judgment will he entered for the respondent.


author: Steenhagen:

text:
    Norfolk National Bank of Commerce & Trusts, Petitioner, v. Commissioner of Internal Revenue, Respondent. Norfolk National Bank of Commerce & Trusts, Successor to the Norfolk National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48367, 48368.
    Promulgated October 4, 1932.

      Louis E. Epiegler, Esq., N. Norman Ma/yer, Esq., and J. A. 1). Parrish, O. P. A., for the petitioner.

      E. L. Oorbin, Esq., for the respondent.
   OPINION.

Steenhagen:

In these proceedings the petitioner assails the respondent’s determination of deficiencies in income tax of $2,il9.35 for 1925 in Docket No. 48367, and $964.66 for 1924 and $2,502.39 for 1925 in Docket No. 48368. The taxpayers, in their returns for those years, had reported the receipt of certain specified amounts as interest on obligations of a state, territory, or political subdivision thereof which they regarded as not included in statutory gross income, but as exempt under sections 233 (a) and 213 (b) (4) of the Revenue Acts of 1924 and 1926, set forth in the margin. The Commissioner determined that the amounts were interest on the obligations of private corporations and therefore not exempt, and accordingly included them in the taxpayers’ statutory gross income. The issue to be determined is whether the obligations held by the taxpayers upon which the interest was received were within the exempt provision of the statutes.

The case was presented upon an agreed statement of facts, which included the several ordinances, resolutions and contracts which are the background of the interest in question. Since none of the facts are in dispute, and there is no other evidence, there is no occasion to burden this report with specific findings much of which would be quotations of documentary provisions. The significant facts can be summarized. In the “ Robertson Act ” of March 15, 1920, amended March 21, 1924, the Commonwealth of Virginia provided that the Highway Commission might borrow money for roadbuilding from private citizens without interest. The city of Norfolk and the County of Isle of Wight, in order to encourage the lending of private capital for such highway improvement, resolved to pay interest at 6 per cent upon loans made to the Highway Commission for certain roads in their vicinity. The Ridge Route Corporation was organized and under an agreement with the Highway Commission and another with the city of Norfolk loaned $260,000 at 6 per cent, the principal to be paid by the Highway Commission and the interest by the city. Similarly the Peninsula Corporation loaned $100,000. In Isle of Wight County, an organized group of individual citizens similarly loaned $74,000. These contracts were then assigned to the Norfolk Trust Company as trustee, and that company collected the interest from the city and the county, and issued its several checks, which were among others received by the present petitioner.

The precise legal relation of the petitioner to these loans and payments is in confusion in the stipulation. While the several stipulated contracts clearly indicate that the loans were made to the Highway Commission by the two corporations above named and the group of citizens, of whom the petitioner was not one, it is also expressly stipulated that in each of the three instances a group of banks including the- petitioner advanced the said amounts “ to the State Highway Commission.” In this the stipulation is so manifestly inconsistent that both statements can not be accepted as fact, and the categorical statement must be read in the light of the documents surrounding the transactions. It would be to,o incongruous for belief that the petitioner and other banks should have advanced the money directly to the Highway Commission, while at the same time corporations and groups were especially organized and all the legal rights and obligations involved in the loan should be fixed not with the lenders, but with these others. A simple loan by A to B, with C’s promise to pay interest to A, would not necessitate the intervention of X and the assignment to T trustee. The use of a devious device must be assumed to rest on substantial reason and not on utter futility. It is explained by counsel (although not in the evidence) as a method of avoiding the inconvenience to the Highway Commission of dealing separately with each individual lender. Thus, given substance, the corporations and groups can not at the same time be ignored as a mere form.. It was only because before the law they stood as separate entities that they were organized and given a function in the arrangement. The conclusion is inescapable that the contracts correctly testify that the loans were in law made by the corporations and the group, irrespective of the means whereby they acquired the money to lend, and that the promise of the Highway Commission to repay the principal and of the political subdivisions to pay the interest were made to them and not to the petitioners.

Looking further into the documents, we find that the assignments made to the trustee indicate that the corporations must have issued notes or bonds, for the obligation of the trustee to distribute inures to the holders of these bonds, there being no reference whatever to any obligation of the trustee to lenders to the Highway Commission. This obviously is because the trustee itself stood in the shoes of the original lender as well as the obligor on the bonds or notes. Thus, whatever obligations there were of the Commonwealth, the county, and the city ran in favor first of the corporations and group and then to their assignee, the trustee. To the Commonwealth and its subdivisions these petitioners were strangers, even if we read the evidence as indicating that they in the first instance provided the funds or credit which ultimately reached the Highway Commission.

In the absence of evidence, we perhaps ought not to surmise the factual steps of the arrangement; but should hold the omission against the petitioner who has the burden. But it seems plain that for reasons of their own, the petitioners dealt not with the Commonwealth and its subdivisions, but with the corporations and the group, for which in turn the trustee was substituted. This is as close as the petitioners apparently ever got to the Commonwealth, or its subdivisions.

The effect of petitioner’s argument is the one so frequently presented in tax cases, namely, that the intervening corporations and group were mere forms, that the substance of the transaction was a loan by petitioners themselves to the Commonwealth, with correlative promises to pay principal and interest to them, which amounted to the obligations exempted by the statute, and that substance should control over form. There is, however, no stronger reason here for treating the legal facts as fictitious than in numerous other cases where the argument has been rejected, with tax results sometimes one way and sometimes another. United States v. Phellis, 257 U. S. 156; Chandler Shipbuilding Co., 22 B. T. A. 5; E. H. Nielsen Co., 26 B. T. A. 223.

That Congress intended this result is implicit in the provision of section 213 (b) (4) that “ every person owning any of the obligations or securities enumerated in clause (A), (B) or (C) shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom * * This seems to us

clearly to confine the exemption to the interest on such obligations as on their face can be listed in accordance with this requirement as those of state or political subdivision. It must perforce exclude obligations of private obligors, even although such obligations are expressly or impliedly payable from funds derived from the state or municipality. Furthermore, the provision being for tax exemption, it may not be loosely applied to income not clearly within its terms, Bank of Commerce v. Tennessee, 161 U. S. 134, 146; Riverdale Co-operative Creamery Assn. v. Commissioner, 48 Fed. (2d) 711.

Petitioner seeks to bring the situation within the constitutional argument that the Federal Government may not by taxation burden or interfere with the exercise by a state of its governmental functions. But there is nothing in the record to establish- such a burden or interference, and it may not be assumed, Willcuts v. Bunn, 282 U. S. 216. The application of the doctrine goes no further than the holders of the state or municipal obligations and stops short of the holders of private obligations even although they be economically related to the state’s operations. The exemption, if such there be, may be available to the corporations and the group, and may in turn be avail•able to the Trust Company of Norfolk, trustee, each as holder of the state and municipal obligations. It does not, however, reach the petitioner.

Judgment will be entered for the respondent.

       Sec. 233. (a) In the case of a corporation subject to the tax imposed by section 230 the term “ gross income ” means the gross income as defined in sections 213 and 217, except that mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid .for reinsurance.
      Sec. 213. For the purposes of this title, except as otherwise provided in section 233— * * * * '* * * *
      (b) The tern ** gross income ” does not include the following items, which shall be exempt from taxation, under this title:
      * *' * * * * *
      (4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Eederal Earm Loan Act, or under the provisions of such Act as amended; or (C) the obligations of the united States or its possessions. Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C) shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require. In the case of obligations of the united States issued after September 1, 1017 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income taxes.


author: Smith :

text:
    Jere R. Downing, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elvina P. Downing, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47884, 47885.
    Promulgated October 5, 1932.

      Howe P. Goohran, Esq., for the petitioners.

      J. G. Gibbs, Esq., for the respondent.
   OPINION.

Smith :

The constitutionality of section 280 has been definitely established b3r the decision of the Supreme Court in Phillips v. Commissioner, 283 U. S. 589.

The petitioners contend that they are not transferees of the estate of Jeremiah Roberts Downing, that the said estate was distributed to the trustees, and that the “ trust ” and “ estate ” were distinct legal entities, citing St. Louis Union Trust Co. et al., Trustees, 21 B. T. A. 76. Technically, there is a distinction and it was so held in the cited case, but here the respondent has asserted liability against these petitioners as transferees of the assets of the trust estate established by the decedent’s will, and explained that the amount proposed for assessment was the amount of the deficiency, plus interest, determined in the proceedings in Docket No. 13492. The petitioners have not been misled as to the liability asserted. The facts show that each petitioner received assets in excess of the deficiencies which had been determined against the trust estate in a proceeding to which Jere R. Downing, acting for himself as trustee and for himself and Elvina P. Downing as beneficiaries, was a party. The respondent has sustained the burden of proving that the petitioners are transferees of the assets of the entity primarily liable for the tax in question.

The petitioners further contend that the Board had no jurisdiction of the proceeding in Docket No. 13492, that bur determination there was a nullity, and that their liability is barred by the statute of limitations. The respondent concedes that if our determination in Docket No. 13492 was a nullity, the statute has run. The petitioners argue that the trustees of the decedent’s estate had been discharged and were without authority to institute the prior proceedings. The facts of record merely establish the allowance of their first and final account; the petitioners have not shown that the trustees were legally discharged, although such is to be inferred from the provisions of section 22 of chapter 206 of the Revised Laws of Massachusetts, which provide for the final accounting and discharge of trustees and other fiduciaries, but which make no provision for subsequent action by such fiduciaries in any respect. Assuming, but not deciding, that the trustees had been discharged, no notice of their discharge had been given to the Commissioner as is required by section 281 of the Revenue Act of 1926 (see Charles M. Howell, 21 B. T. A. 757), and under section 3467 of the Revised Statutes they continued personally liable for the tax (see Edmund H. Fleming, 9 B. T. A. 419), and, in any event, neither the tax nor the petitioners’ (in Docket No. 13492) liability therefor was extinguished prior to the running of the statute of limitations. The Board had jurisdiction of the proceeding at Docket No. 13492, instituted by the persons receiving the deficiency notice and responsible for the settlement of the tax obligations of the trust estate. Cf. Charles Hallock Whitehead, 24 B. T. A. 1111, 1113; J. A. Kemp, 20 B. T. A. 875; Sears, Roebuck & Co. Employees' Savings & Profit Sharing Pension Fund, 17 B. T. A. 22 (reversed on other grounds, 45 Fed. (2d) 506). The jurisdiction of the Board being thus invoked without contest by the proper parties, one of whom is now at bar, we conceive of no reason for now denying that we had jurisdiction, and these petitioners can not now deny that jurisdiction which was invoked in their behalf. See United States v. Wolf Run Coal Co. (U. S. Dist. Ct., N. Dist. Ohio, E. Div.), 313 C. C. H. 8258, 8261. Cf. Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123; Commissioner v. New York Trust Co., 54 Fed. (2d) 463; Pittsburgh Terminal Coal Corp. v. Heiner, 56 Fed. (2d) 1072.

The notices to these petitioners were timely and their liability as transferees for the asserted tax is not barred by the statute of limitations.

Judgment will be entered for the respondent.


author: Smith:

text:
    Liberty Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50538.
    Promulgated October 6, 1932.

      A. G. Eldred, Esq., for the petitioner.

      E. B. Schlosser, Esq., for the respondent.
   OPINION.

Smith:

The Commissioner determined a deficiency of $683.65 in petitioner’s income tax for 1928. The only question is whether the petitioner, having filed an original return on the accrual basis, should have its tax liability computed upon an amended return filed on the installment sales basis. The proceeding was submitted upon the following stipulation:

1. The Liberty Realty Corporation is a corporation organized under the laws of the Commonwealth of Pennsylvania on the 2Sth day of February, 1928.
2. The petitioner purchased a parcel of land in Warren, Pennsylvania, subdivided the same, erected buildings upon various parts of the subdivision and .pportioned the cost to each lot and improvement.
3. The petitioner sold a number of the subdivisions with the improvements thereon during the year 1928, and payment in each sale being less than forty per cent of the agreed selling price and the balance in each sale secured by a mortgage upon the particular subdivision sold.
4. The petitioner made a profit on each of the subdivisions sold, the amount of such profit not being in dispute.
5. The books of the petitioner were kept on the accrual basis but in such a manner that the profit on each sale could be computed therefrom on the installment sales basis.
6. On March 14, 1929, the petitioner filed an income tax return for the calendar year 1928 on Form 1120, and included therein as income the total profits on each transaction.
7. At the time of making the return the corporation was not cognizant of the provisions of the Revenue Act of 1928 which permitted a taxpayer to report income on either accrual or installment basis.
8. On January 24, 1930, the petitioner filed an amended return reporting the income on the installment basis, which return shows a loss for the year 1928. The respondent refused to accept the amended return, and determined the deficiency hereon on a completed sales basis.
9. The question involved is whether or not under the above facts the taxpayer may report its income for the year 1928 on the installment basis.
10. If the Board determines that the taxpayer may under the above facts amend its return and report its income on the installment sales basis, the Board shall find an overpayment in the sum of $1,101.89.
11. If the Board determines under the above facts that the taxpayer may not amend its return and report its income on an installment sales basis, the Board shall find a deficiency of $683.65.

The stipulation shows that at the time petitioner’s original 1928 return was filed (March 14, 1929), “the corporation was not cognizant ” of section 44 of the Eevenue Act of 1928, which permitted the filing of this petitioner’s return for 1928 upon either accrual or installment basis. Apparently, the privilege of reporting income on either basis was discovered and an amended return filed on January 24, 1930, which petitioner insists should be accepted by the respondent and its tax liability computed therefrom. The legislative history of the provisions of the Eevenue Act of 1928 respecting installment sales indicates that, even Under the retroactive provisions of section 705, a taxpayer was required to make an election as to the use of the accrual or installment sales basis, upon an original return. (See Conference Eeport No. 1882, 70th Cong., 1st sess., pp. 24, 25, in re Amendment 215.)

The petitioner having elected on its original return to use the • accrual basis of reporting its income, and there being nothing in the record to show that its income would be more clearly or correctly reflected upon the installment sales basis, we hold that its tax liability for 1928 has been properly computed upon the accrual basis. Cf. H. A. Dunham, 13 B. T. A. 582; Renier Music House, Inc., 15 B. T. A. 241; Johnson Realty Trust, 21 B. T. A. 1333; Hood & Wheeler Furniture Co., 22 B. T. A. 158; John Wanamaker Philadelphia et al., 22 B. T. A. 487, 503.

Judgment will be entered for the respondent.