author: Smith :

text:
    A. Backus, Jr., & Sons, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3777.
    Promulgated March 24, 1927.
    1. The claim of the petitioner to the deduction from the gross income of 1920 of $8,000 for traveling expenses incurred prior to 1915, and for the deduction of $6,200 for 11 years’ interest on an advance to the corporation of $10,000 in 1909, was properly disallowed by the Commissioner.
    2. Proper rates of depreciation upon depreciable assets for the years 1917 to 1921, inclusive, determined.

      Wm. A. Wessel, O. P. A., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes as follows:
    1917_ $519.62
    1918- 1, 030. 04
    1919_ 2, 451. 33
    1920- 10, 313.83
    1921_1_ 1,448. 89
    15, 769. 71
    The pioints in dispute are (1) the deductibility of certain traveling-expenses and interest charged upon the books in 1920, and (2) proper rates of depreciation upon depreciable assets for the years 1917 to 1921, inclusive.
    FINDINGS OP PACT.
    The petitioner is a Michigan corporation which was incorporated prior to 1900. Substantially all of the stock was owned by two brothers, Henry N. Backus and Newton D. Backus. About the year 1900, Henry N. Backus assigned all but two of his shares of stock to Newton D. Backus and Newton D. Backus had the management and control of the corporation from about 1900 to 1915, when Henry N. Backus reacquired his stock from his brother. During this period Henry N. Backus was in the employ of the corporation and personally expended money for traveling expenses in connection with the sale of the corporation’s products. He insisted upon the corporation reimbursing him for traveling expenses but the corporation refused to do so. In 1909 the corporation acquired certain real estate. Henry N. Backus personally paid $10,000 of the purchase price thereof.
    There was continual quarreling between Henry N. Backus and his brother with respect to the affairs of the corporation. When the former reacquired his shares of stock from the latter in 1915, he owned in excess of 50 per cent of the total stock and acquired con- / trol of the corporation. He then wanted to make entries on the books ' of the amounts that he claimed were due him. His brother strenuously objected to having such charges made. A number of conferences were had between the two brothers in 1915 and 1916 relative thereto. In 1917 the corporation instituted a suit against Newton D. Backus for an accounting, claiming that he had misappropriated some of the assets of the corporation. Immediately thereafter Newton D. Backus brought injunction proceedings against the officers and directors of the corporation to prevent them from making any changes in the corporation’s books of account. The two suits were carried through the courts and not tried until the year 1920. While the suits were being tried and before any decision had been rendered therein, Henry N. Backus purchased his brother’s shares of stock in the corporation and the suits were then discontinued. Subsequent to this settlement, and under date of August 31, 1920, a meeting of the directors of the petitioner corporation was held at which it was voted to charge upon the books of account as traveling expenses] an amount of $8,000, to reimburse Henry N. Backus for amounts] alleged to have been spent by him for traveling expenses prior tojj 1915, and $6,600 for 11 years’ interest upon $10,000 from 1909.

    In its income-tax return for 1920 the petitioner deducted from gross income the above-named amounts of $8,000 for traveling expenses and $6,600 for interest upon indebtedness. In auditing the return the respondent disallowed the deduction of the $8,000 for] traveling expenses, and $6,200 of the $6,600 claimed as interest paid ¡ on indebtedness.
    The petitioner’s books of account during all of the years 1915 to 1921, inclusive, were kept upon the accrual basis.
    In making his determinations of deficiencies for the taxable years involved, the respondent allowed depreciation at the following rates:
    Per cent.
    Buildings- 3
    Machinery and equipment_ 5
    Furniture and fixtures_ 10
    The machinery consisted of planing machines, saws, knitting machines, and other machinery peculiar to the petitioner’s business. The furniture and fixtures account included an iron safe of a value of $200, typewriters, adding machines, desks, chairs, files and things of that kind.
   OPINION.

Smith :

The petitioner alleges error on the part of the respondent in disallowing, as deductions from gross income for the year 1920, $8,000 for traveling expenses and $6,200 for interest upon an alleged indebtedness of • the corporation to Henry N. Backus of $10,000 from 1909. The answer of the respondent admits that, during the years of control by Newton H. Backus, Henry N. Backus personally expended money for traveling expenses in connection with the sale of the corporation’s products, but for want of information or knowledge sufficient to form belief as to the amount of such expenditures neither admits nor denies the amount thereof but calls for strict proof of such amount; it further admits “ that in 1909 land was acquired by the taxpayer at a cost of $15,000 of which amount said Henry N. Backus personally paid $10,000.”

At the time Henry N. Backus personally expended money for traveling expenses and advanced money for the acquisition of real estate, title to which was apparently taken in the name of the corporation, the corporation denied liability to him in respect of the traveling expenses and of the money advanced for the purchase of , the real estate. In 1915- Henry N. Backus acquired control of the corporation and a new board of directors and new officers were elected who were responsive to his will. No steps were immediately taken, however, to charge upon the books of account amounts alleged by Henry to be due to him. In 1920 Henry acquired practically 100 per cent of the stock of the corporation. It was then that there was placed upon the books an amount of $8,000 for traveling expenses for Henry and an amount of $6,600 for interest upon the $10,000 advanced by him in 1909 for the purchase of real estate. Although the answer of the Commissioner demanded strict proof of the amount of money spent for traveling expenses the evidence as to the amount . spent is entirely lacking. Neither is the Board advised as to the amount of traveling done nor is it in possession of any information which would enable it to approximate the amount spent. Further-jniore, there is no proof that the corporation was ever under any liability to pay interest upon the $10,000 advanced by Henry in ■ the purchase of real estate in 1909. With respect to the real estate transaction it appears that Henry thought the corporation should own certain real estate and his brother, who was in control of the corporation and of the corporation’s books of account, thought otherwise and refused to allow the corporation to pay more than $5,000 for the property. Henry, without any authority from the corporation or from his brother, advanced the money and acquired the property. We can not determine from the evidence that there was ever any liability on the part of the corporation to pay Henry N. Backus for traveling expenses or for interest upon the money invested. So far as the record-shows, the charges made upon the books of account in 1920 were simply a distribution to Henry N. Backus, who owned practically 100 per cent of the stock, of the profits or earnings of the corporation. Upon the record the dis-allowances made by the respondent must be affirmed.

With respect to proper rates for depreciation it appears that the revenue agent allowed depreciation at the following rates:

Per cent.
Buildings_ 4
Machinery and equipment_ 10
Furniture and fixtures_ 10

These were reduced by the Commissioner to the following percentages : 3 per cent, 5 per cent, and 8 per cent, respectively. At the hearing the petitioner conceded the correctness of the 3 per cent rate on buildings. The evidence indicates that depreciation uj)on machinery and equipment, and furniture and fixtures was sustained at the rate of 10 per cent per annum upon each class of assets. The deficiencies should be redetermined by allowing depreciation at the following rates:

Per cent.
Buildings_ 3
Machinery and equipment_ 10
Furniture and fixtures_ 10

Judgment will he entered on 15 days' notice, under Bule 50.


source: Caselaw Access Project

author: Trussell:

license: Public Domain

text:
    Appeal of Harry E. Williams. Appeal of L. H. Wilkins.
    Docket Nos. 4207, 4208.
    Promulgated March 24, 1927.
    Income. — Gain upon liquidation of a corporation.

      (Jamden R. MeAtee, Esq., for the petitioners.

      Joseph K. Moyer, Esq., for the Commissioner.
   Trussell:

Action for the redetermination of deficiencies asserted in a Commissioner’s letter dated March 21, 1925, against Harry E. Williams in the amount of $880.03 and L. H. Wilkins $728.70, both for the calendan year 1918.

The two appeals were consolidated for trial.

The Commissioner increased the taxable income of each of the petitioners by adding thereto alleged gains realized upon the liquidation of a corporation of which petitioners were stockholders.

The record contains evidence establishing the March 1, 1913, value of the shares of stock of the corporation in question, that such value was in excess of cost, and the market value as of March 1, 1918, as disclosed by a sale made during the latter days of February, 1918.

FINDINGS OF FACT.

The petitioners are residents of Elkton, Ky.

Bedford-Williams & Co. was organized in 1904 with an authorized capital of 100 shares of a par value of $50 each. From its organization until its dissolution the corporation was engaged in the business of selling dry goods in Elkton, a town of about 1,500 population. In February, 1913, there was declared and issued a stock dividend of 100 shares of the par value of $50 each, which was distributed proportionately among the stockholders and which made their stock holdings as follows;

Shares.
C. N. Bedford_ 80
John N. Williams_ 80
L. H. Wilkins_ 20
Harry E. Williams_:- 20

The March 1,1913, value of the shares of stock of this corporation was $88.94 per share.

From March 1, 1913, until the dissolution of the corporation, the outstanding capital stock was 200 shares of $50 per share each. In February, 1918, C. N. Bedford, who was one of the original stockholders, sold his 80 shares to John N. Williams for $15,000, the equivalent of $187.50 per share.

Bedford-Williams & Co. was dissolved on March 1, 1918. Its assets were distributed in kind and its business was continued by the remaining stockholders as a partnership. The gain realized by the petitioners by reason of the liquidation of the corporation was the difference between the March 1, 1913, value of $88.94 per share and the market value as established by the sale in February, 1918, of $187.50 per share.

Order of redetermmation will be made upon 15 days’ notice, pursuant to Bule 50, and judgment entered in due course.


text:
    Joseph Joseph, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wells Fargo Bank & Union Trust Co., and Irving Gollober, Executors, Estate of Julius Gollober, Petitioners, v. Commissioner of Internal Revenue, Respondent. Irving Gollober, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3091-3093.
    Promulgated March 24, 1927.
    A corporation of which the petitioners were stockholders was legally dissolved in 1919 and the assets were received by the directors (who constituted the stockholders) as trustees in liquidation; in 1920 they sold the assets to a partnership (composed of the three principal stockholders) at their book value, receiving in payment therefor four promissory notes. Held, that the petitioners derived income measured by the difference between the cost of their shares and the book value at date of dissolution of the corporation.

      Camden R. MeAtee, Esq., for the petitioners.

      Bnce Toole, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income tax of the respective petitioners for the year 1920 in the respective amounts of $720.39, $7,819.88, and $542.14. The proceedings were consolidated for the purpose of hearing and decision. The only point in issue is whether petitioners derived income in the year 1920 from the dissolution of the Irving Gollober-Joseph Corporation. The original petition in the case of Julius Gollober was filed on April 4, 1925. Julius Gollober died April 27, 1925, and his appeal was revived in the name of his executors by proper pleadings.
    FINDINGS OF FACT.
    Joseph Joseph, Julius Gollober, and Irving Gollober were stockholders in the Irving Gollober-Joseph Corporation, incorporated under the laws of California. The stock of the corporation was owned as follows:
    Shares.
    Julius Gollober. 2,448
    Joseph Joseph— 1,400
    G. Eosencrantz. 1
    Irving Gollober. 1,150
    Ida Gollober_ 1
    Total_5,000
    At a stockholders’ meeting November 25, 1919, it was voted to dissolve the corporation, and the board of directors, consisting of the five stockholders, was instructed to employ counsel to file proceedings in the Superior Court in the State of California in and for the City and County of San Francisco to dissolve the corporation, to obtain a decree of dissolution of the corporation and to file the same with the Secretary of State in accordance with the law. The directors immediately took such steps and under date of December 30, 1919, a decree was entered by the court which sets forth the fact that a petition for the dissolution of a corporation was duly filed with it, signed and verified as prescribed by law, and being in all respects in conformity with Part III of Title VI of the Code of Civil Procedure of the State of California; that an order was entered directing that publication be made of petition in accordance with the law; that such publication was had, and then states:
    That all claims and demands against said corporation applicant having been fully satisfied and discharged—
    Now THEREFORE, it is hereby ordered, adjudged, declared and decreed, and this does order, adjudge, declare and decree that the said corporation applicant, the said Irving Gollober-Joseph Company, be and the same is hereby dissolved and declared dissolved.'
    It is hereby further ordered, adjudged, declared and decreed, and this does hereby further order, adjudge, declare and decree that the Board of Directors of said applicant are entitled to and are hereby authorized and empowered to settle all of the affairs of the said corporation, and to distribute and convey all of the property and assets of said corporation to its stockholders in proportion to their respective interests.
    Done in open court this 30th day of December, 1919.
    A copy of the decree was filed in the office of the Secretary of State of the State of California on December 31, 1919.
    On January 2, 1920, a meeting of the board of directors of the dissolved corporation was held, at which the president announced the receipt of a communication from Joseph Joseph, Julius Gollober, and Irving Gollober, copartners, under the name of Irving Gollober-Joseph Co., offering to purchase all of the assets of the corporation and agreeing, first, to assume all the liabilities of the corporation, and, second, to pay to the corporation in installments the value of the assets of the corporation to be determined by a trial balance or audit, less the amount of liabilities assumed by the copartnership, and to deliver to the corporation promissory notes for such sums and payable at such times as might be agreed upon. The offer was accepted by the directors. The balance sheet of the business on January 2, 1920, showed a surplus of $19,688.05. For the net assets purchased by and transferred to the partnership the partnership executed and gave to the dissolved corporation’s trustees in liquidation four notes, aggregating $19,688.05, all dated January 2, 1920, payable to the stockholders as “ Trustees in liquidation ” in the amounts and on the dates following:

      Dates payable: Amount.
    In 3 months_$9. 896. 02
    In 6 months_ 9, 896.01
    In 9 months_ 9, 896. 02
    December 31, 1920_ 50, 000.00
    Total of the 4 notes- 79, 688. 05
    During the year 1920 the partnership paid the first three of the above mentioned notes, aggregating $29,688.05, to the trustees, and the trustees in turn distributed in that year said amount to the stockholders. The fourth note for $50,000 with accumulated interest of $2,500 was liquidated on December 31, 1921, by crediting to the capital account of Joseph Joseph, Irving Gollober, and Julius Gollober $17,499.99, $17,499.99 and $17,500.02, respectively. The trusteeship of the trustees in liquidation was relinquished on the same date.
    In their income-tax returns for 1920 the petitioners did not return as income any part of the moneys received from the partnership. The respondent has amended their returns by adding to the gross income reported by Joseph Joseph $8,312.65, to that reported by Julius Gollober $14,547.15, and to that reported by Irving Gollober $6,828.25.
   OPINION.

Smith :

The respondent determined the deficiencies in income tax of the petitioners for the year 1920 upon the ground that the Irving Gollober-Joseph Corporation, of which the petitioners were the principal stockholders, was dissolved on January 2, 1920; that the assets of the corporation then passed directly to the stockholders as tenants in common of the property, and that the petitioners received taxable income in 1920 to the extent that the book value of their shares at the date of dissolution exceeded the par value of their shares. Appeals of E. C. Huffman 1 B. T. A. 52; John K. Greenwood, 1 B. T. A. 291; Buchmiller Estate, 1 B. T. A. 380. The petitioners originally contended that they realized no income in 1920 from the dissolution of the corporation for the reason that the assets of the corporation passed to the directors as trustees in liquidation and that the amounts of cash received by them from the sale of the corporate assets and distributed to the petitioners in 1920 were less than the par value of their shares of stock in the dissolved corporation, and that they could not be charged with income tax with respect to liquidating dividends until they had recovered in cash the par value of their shares. After the evidence showed that the corporation was dissolved in 1919, and not in 1920, the petitioners contended and now contend that any gain realized from the dissolution was income of the year 1919 and of no subsequent year. No contention is made by either the petitioners or the respondent that the par value of the shares of stock in the dissolved corporation held by the petitioners is the proper basis for computing any gain which may have been realized from the dissolution.

It has been ruled in numerous decisions by California courts that trustees simply have a poiver in trust and do not have the legal title to the assets, which title is vested in the stockholders immediately upon dissolution of the corporation. These conclusions of law have been reached in cases arising from the forfeiture of the corporate charter and resulting dissolution because of failure to comply with the corporate laws of the State with regard to paying license taxes and for other similar reasons.

Section 400 of the Civil Code of California, as amended by Stats. 1911, p. 880, provides:

Unless other persons are appointed by the court, the directors or managers of the affairs of a corporation at the time of its dissolution are trustees of the creditors and stockholders or members of the corporation dissolved, and have full powers to settle' the affairs of the corporation, collect and pay outstanding debts, sell the assets thereof in such manner as the court shall direct, and distribute the proceeds of such sales and all other assets to the stockholders. Such trustees shall have authority to sue for and recover the debts and property of the corporation, and shall be jointly and severally personally liable to its creditors and stockholders or members, to the extent of its property and effects that shall come into their hands.

In Rossi v. Caire, 174 Cal. 14; 161 Pac. 1161, the court said:

The directors of a corporation, before its dissolution, do not, by virtue of their office, hold or possess any title to or interest in the property of the corporation. The title is wholly vested in the corporation. The above statute providing that, upon forfeiture of the charter, the directors shall become trustees for the corporation and its stockholders to settle its affairs, does not purport to invest the trustees with any title to the property formerly belonging to the corporation. They get by the forfeiture nothing more than the statute gives them, and that is merely a power over the property, not the title. The corporation having ceased to exist, it is no longer capable of holding the title or the possession, the property belongs to the persons who were its stockholders at ftie time it ceased to be a corporation (Havemeyer v. Superior Court, 84 Cal. 362, 24 Pac. 121, 10 L. R. A. 627, 18 Am. St. Rep. 192), and the right of possession passes to the directors by force of the statute making them trustees to settle the corporate affairs, since such right must be necessary for that purpose.

In Crystal Pier Co. v. Schneider, 40 Cal. App. 819; 180 Pac. 948, after reference to the foregoing Rossi case, the court further said:

* * * After forfeiture of the charter the situation, then, is this: The title to all property that formerly belonged to the dead corporation is vested in those who were its stockholders at the time of its demise; the trustees to settle the affairs of the corporation have in their possession property belonging to those who were stockholders at the date of the dissolution; they are bound to settle the affairs of the former owner, the defunct corporation; they have all the power to deal with and dispose of the property that is necessary to accomplish this object.
The “trustees,” as the directors in office at the date of the forfeiture are designated by the statute, are the donees of a power in trust. Though the statute refers to the directors in office as “ trustees,” they are not trustees of a “ trust,” in any true sense of the term. In every true trust the legal title is vested in the trustee. Towers in trust differ from trusts in this, that in the case of such powers the legal title is vested, not in the trustee, but in a third person, but the donee of the power in trust can convey the title and dispose of the property to or for the beneficiaries.

In Jones v. Peck, 63 Cal. App. 397; 218 Pac. 1030, tbe court expressed tbe foregoing rules in one sentence as follows:

All of the property of a defunct corporation belongs to the persons who were its stockholders at the time it ceased to be a corporation, but the right of possession passes to the directors in office by force of the statutory provision which makes them trustees to settle the corporate affairs.

Although it would appear from the above decisions of the California courts that the legal title to the assets of a corporation vests in the stockholders at the date of the dissolution of the corporation, this fact is not necessarily determinative of the question when income is realized by the stockholders of a corporation in a case such as the one at bar. The trustees in liquidation have a power in trust over all of the assets of a dissolved corporation. They have the absolute right of possession. All of the assets of the corporation may be used by the trustees in liquidation in paying the debts of the corporation so that the stockholders will never receive any portion of them. If, in the instant case, a large part of the assets of the corporation at the date of dissolution had been taken by the trustees in liquidation for the payment of the debts of the corporation, the stockholders clearly would never have derived any income therefrom either in 1919,1920, or in any subsequent year. Although the decree of dissolution entered by the court on December 30, 1919, stated that it satisfactorily appeared to the court from the petition for dissolution of the corporation, and the court found as a fact, that all claims and demands against the corporation applicant had been fully satisfied and discharged, the evidence of record shows that the corporation had large outstanding liabilities on December 30, 1919. The balance sheet as of January 2, 1920, the date when the assets were sold to the partnership, shows accounts payable of $30,475,95 and accrued Federal income and profits taxes for 1919 of $8,330.37. The stockholders as such did not receive the assets of the corporation for their own possession and enjoyment on December 30 or December 31, 1919. These assets were under the control of the five directors as trustees in liquidation until some time in January, 1920, when they sold them to the three principal stockholders as partners in consideration of the partners assuming all the liabilities of the corporation and the execution and delivery of four interest-bearing promissory notes to the trustees in liquidation, the face value of which amounted to the book value of the assets in excess of the liabilities other than capital stock. The trustees in liquidation were in this case all of the stockholders of the dissolved corporation.

We have no evidence that the cash value of the notes received by the stockholders of the corporation, as trustees in liquidation, were not equal to their face value. We therefore have a situation where the trustees in liquidation, who were also the stockholders and as such owned all of the stock of the corporation, received the notes of the three principal stockholders for the value of the assets in excess of liabilities and were in a position to distribute to themselves in 1920 property of a value equal to $79,688.05. In fact it was not necessary to make a distribution. The notes were made payable to the stockholders and they had both title and possession thereof. The mere fact that the trustees in liquidation did not immediately make some formal declaration or record that they were relinquishing their trusteeship appears to the Board to be immaterial. Such an act was useless because they were the only persons interested.

We think that from the standpoint of substance the petitioners derived their income from the dissolution of the corporation in the year 1920 when they received the notes of the three stockholders in an amount equal to the excess of the value of the assets over the liabilities of the corporation and assumed the corporation’s liabilities. Under the circumstances of this case, when this took place the former stockholders of the corporation owned and had in their possession, in lieu of the assets of the corporation, notes in the amount of $79,688.05 and their functions as trustees in liquidation were at an end, there being nothing further for them to do in that capacity.

Judgment will be entered for the respondent.

Phillips concurs in the result only.


author: Phillips :

text:
    Appeal of Union Credit Reporting Co.
    Docket No. 6068.
    Promulgated March 26, 1927.
    1. Assets acquired by a corporation prior to March 3, 19.17, in exchange for its capital stock are, under the Revenue Acts of 1918 and 1921, to be included in invested capital at their value on the date of acquisition. In the absence of any such evidence the action of the Commissioner is accepted.
    2. Where, subsequent to March 3, 1917, property was transferred to a corporation by an association in exchange for more than 50 per centum of the voting stock of the corporation and control of the corporation passed to the transferor, held, that the transferor retained an interest and control in such property of more than 50 per centum, and that, under section 331 of the Revenue Acts of 1918 and 1921, the property can be included in invested capital only in the amount of its cost to the transferor. There being no evidence thereof, the action of the Commissioner is followed.

      H. L. D. Stanford, Esq., and A. L. Miles, G. P. A., for tbe petitioner.

      Ellis W. Manning, Esq., for the Commissioner.
    The taxpayer appeals from the determination by the Commissioner of deficiencies in income and profits taxes of $1,247.53, $504.10, and $769.80 for the years 1919, 1920, and 1921, respectively. It alleges as error the refusal of the Commissioner “to allow as invested capital the full value of certain card index files, furniture and fixtures, etc., which were received by the corporation in exchange for stock.” The issues raised by the pleadings are the value of the property received for stock and whether the so-called “ card index files ” are tangible or intangible property.
    FINDINGS OK PACT.
    The taxpayer is a Maryland corporation with its principal office at Baltimore. It was incorporated in December, 1916. At a meeting of the board of directors held December 30,1916, there was presented to the meeting a proposition reading as follows:
    Baltimore, Md., December 30th, 1916.

    To The Union Ceedit Company (of Maryland)

      Baltimore, Md.

    Dear Sirs :
    I hereby offer to sell, assign and deliver to your Company as of January 2nd, 1917, the goodwill of the mercantile agency reporting and collection business of the Union Credit Company (of Delaware) as now conducted by said Company, and as acquired by me from said Company, including all cash in bank, any and all written or printed information, statistics, facts and circumstances now of record in its office relating to or affecting the business, capital, debt, solvency, credit, character, reputation, responsibilitj', commercial condition and standing of any and all individuals, Anns, associations and corporations engaged in or connected with any business, occupation, industry or employment; all its collection business for the recovery, enforcement and collection of accounts, bills, debts, and claims of all kinds; all filing cabinets, desks, chairs, tables, typewriters and all other office equipment, properties, rights, privileges, matters and things now used by it or which it may be entitled to use, in the conduct of its business; all outstanding indebtedness due it and contracts for reports and use of its collection system, which contracts you are to assume and fulfill in accordance with the terms thereof, and further you are to assume all outstanding indebtedness and liabilities of said Union Credit Company; all in consideration of the sum of $52,250, and in payment therefore I hereby agree to accept 400 shares of the full-paid and non-a»sossable common stock of your Company of the par valúe of $50. each and 645 shares of the full-paid and non-assessable six per cent, cumulative, preferred stock of your Company of the par value of $50. each.
    (Signed) Lotos E. Goodman.
    This proposition was accepted and the officers were directed to issue capital stock accordingly.
    The Union Credit Co. of Delaware, the predecessor corporation, had been engaged in business as a credit agency gathering information with reference to the business, integrity, credit, and standing of individuals and corporations, their past history, their present condition, and any other available information having reference to their financial responsibility or integrity and furnishing same to its subscribers by way of reports. This business Avas continued by the taxpayer.
    In May, 1918, the name of the taxpayer was changed to “ Union Credit Reporting Company.” At that time there was outstanding $35,000 par value of the 6 per cent cumulative preferred stock and $20,000 par value of the common stock, which Avas all of the authorized capital stock of the corporation. At the same time that the name Avas changed the common stock was increased from $20,000 par value to $41,000 par value.
    Under date of May 6,1918, the Retail Merchants Bureau of Baltimore submitted to the taxpayer the following proposition:
    The Retail Merchants Bureau, of the Merchants & Manufacturers Association, hereby subscribes for $21,000. par value of common stock of your Company, and in payment for said stock offers to turn over and transfer to your Company the following assets of the Retail Merchants Bureau, to wit:—
    (I-Iere follows a list of furniture consisting of desks, tables and chairs, filing cabinets, trays, baskets, typewriters, and other items.)
    Accumulated Information:
    Reports on 4,225 individuals, representing the results of special investigations on these parties.
    Reports on paying habits of 150,000 individuals, representing 450,000 accounts.
    All the foregoing assets to be turned over and transferred subject, however, to the assumption by your Company of an indebtedness of $7500.00, payable in five installments, without interest, of $1500.00 each, the first installment payable May 1st, 1920, and annually thereafter, but, however, to be payable only out of the profits, and after the dividends on the preferred stock shall have been paid.
    The taxpayer accepted such proposition and issued $21,000 par Amine of its common stock for such assets.
    The Retail Merchants Bureau was maintained under the auspices of the Merchants & Manufacturers Association of Baltimore, an organization of the merchants of that city in the nature of a chamber of commerce. Under the supervision of the Eetail Merchants Bureau, the retail merchants of the city had established an organization for collecting and disseminating among its members information with reference to credit risks. The credit organization was first begun in July, 1917, and six months was spent in collecting information from the various retail houses with respect to the accounts carried by them with customers. Such information included a report from each of such houses of the amount of credit extended to each customer, the paying habits of the customer, the date when last credit was extended, the date when the last payment was made and the amount of the balance due. All of this information was collected upon cards containing the name of the customer. In January, 1918, the credit organization of the Eetail Merchants Bureau first started to furnish such accumulated information to the members of the Bureau. The information was brought up to date as reports were called for by merchants. When requested the Bureau caused investigations to be made and furnished reports upon the history, family, and business connections and prospects of individuals or corporations applying to the members of the Bureau for credit. Copies of such reports were kept for future reference in connection with any other request for a report upon such person. At the time that these records of the Eetail Merchants Bureau were transferred to the taxpayer for its capital stock, the Bureau had in its files credit information with reference to 150,000 individuals and corporations, and complete reports on 4,225 individuals, representing the result of special investigations. The furniture and fixtures transferred by the Eetail Merchants Bureau to the taxpayer for stock in May, 1918, had cost $1,000.
    In May, 1918, immediately prior to the transfer to it of the assets of the credit organization of the Eetail Merchants Bureau, the taxpayer had in its files reports containing credit information upon 250,000 individuals and corporations.
    The certificate of incorporation of the taxpayer provides:
    Tlie preferred stock shall be without voting power, except as hereinafter provided, but if the corporation shall fail to declare and pay any semi-annual dividend thereon and such failure shall continue for a period of three months from the date at which said semi-annual dividend would have been payable' hereunder, then the holders of the preferred stock shall thereafter have the right to vote such stock and at any meeting of the corporation in like manner and with the same effect as the common stock is voted.
    At tlie time that $21,000 par value of the common stock of the taxpayer was issued to the Eetail Merchants Bureau for assets, as aforesaid, the preferred stock was not in arrears in the payment of dividends.
    The Commissioner computed the profits tax liability of the taxpayer for the years in question under section 302 of the Eevenue Acts of 1918 and 1921.
   OPINION.

Phillips :

The taxpayer, seeks to establish the value, for invested capital purposes, of certain files, furniture and fixtures acquired by it in exchange for its capital stock. A part of the stock was issued for assets in 1916 and another part in 1918.

We have no evidence of the amount or value of the assets transferred to the petitioner on December 80, 1916, by Goodman. The evidence in this respect relates to the value of the assets owned by the petitioner in May, 1918, at the time it acquired the credit records of the Retail Merchants Bureau.

Nor is the record more complete with respect to the assets acquired in 1918. Under section 331 of the Revenue Act of 1918 and the same section of the Revenue Act of 1921, the assets acquired by the petitioner from the Retail Merchants Bureau in May, 1918, can be included in invested capital only in the amount of the cost of such assets to the Bureau. All of the evidence relates to value and we have none concerning cost. Section 331 is as follows:

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided,, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation.

Prior to the acquisition of the credit-reporting business of the Retail Merchants Bureau, the petitioner had outstanding $20,000 par value of its common stock, the only stock having voting rights. In exchange for the assets transferred $21,000 par value in common stock was issued to the Retail Merchants Bureau. It is clear from the record, and especially from the minute book of the petitioner, that the object accomplished was to place the control of the petitioner in the Retail Merchants Bureau. By the ownership of a majority of the voting stock of the petitioner, the Bureau retained an interest and control in such property of more than 50 per centum, and the situation presented falls squarely within the wording and intent of section 331 of the Revenue Acts.

Decision will he entered for the Oom/missioner.


text:
    William Holden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5138.
    Promulgated March 26, 1927.
    In 1919 petitioner entered into a contract to sell a lease. The lease with an assignment thereof and payment therefor were deposited with a bank in escrow. The terms of the contract and escrow were performed within the year. After the contract to sell was made, petitioner stated to the purchaser that petitioner did not wish to realize the proceeds of the sale in 1919 and the purchaser instructed the escrow agent, in the presence of the petitioner, that payment of the proceeds was not to be made to petitioner until January 2, 1920. Held,, that profit from the sale was taxable income in 1919.

      Don T. Haynes, Esq., for the petitioner.

      George G. Witter, Esg., for the respondent.
    The petitioner appeals from the determination by the Commissioner of a deficiency of $6,947.44 in income tax for 1919, and as the basis of his appeal sets out in his petition allegations of error as follows:
    (1) The Commissioner has erred in holding that the sale of a certain oil lease by taxpayer to one C. W. Murchison was a completed transaction within the year 1919 and in including $50,000, profit from such sale, in taxpayer’s 1919 income.
    (2) The Commissioner has erred in disallowing taxpayer the right of paying out of community funds interest in the amount of $31,686, taxes in the amount of $13,423.26, and other deductions amounting to $22,367.06, all in connection with taxpayer’s separate property.
    Upon the hearing no sufficient evidence was introduced with respect to the second allegation of error.
    FINDINGS OF FACT.
    On or about November 22, 1919, the petitioner entered into a contract with one C. W. Murchison for the sale to said Murchison of an oil lease upon certain property in Wichita County, Texas, the material terms of which are as follows:
    Party of the second part [Murchison] agrees to place fifty-five thousand ($55,000) dollars in the City National Bank of Wichita Palls, to be paid to the party of the first part [Holden] upon examination and approval of the title by the attorneys of party of the second part.
    Party' of the first part agrees to execute an assignment and place together with this contract and above mentioned amount of money in the City National Bank of Wichita Palls, and further agrees to furnish party of the second part abstract of title to said land and allow him five days in which to examine same, and if at the end of five days .reasonable objections are found party of the second part agrees to allow first party reasonable length of time to remedy same.

      Slvould party of the second part fail or refuse to take said land after good and merchantable title has been shown the above mentioned amount of money is to be forfeited as liquidated damages.
    Should title of said land prove nonmerehantable, said fifty-five thousand dollars is to be returned to O. W. Murchison, and this contract is to be null and void. It is agreed that this contract should be closed within fifteen days from date of this instrument.
    This contract, together with the payment of $55,000, was deposited in the City National Bank of Wichita Falls on or about November 24, 1919. Either on that date or at some time shortly thereafter the petitioner stated to Murchison that he did not wish to realize the proceeds of the sale during 1919, and instructions were given to one of the bank’s officials by Murchison in the presence of petitioner that the amount of the deposit was not to be paid to petitioner before January 2,1920.
    The terms of the contract were fully carried out during 1919 and prior to December 31, 1919, Murchison accepted the assignment of the lease and recorded it.
    The Commissioner determined a profit of $31,000 from the transaction, which he included as income to the petitioner for 1919, and computed the deficiency accordingly.
   OPINION.

Phillips :

There is no dispute between the parties that the profit from the sale of the lease was $31,000. It is the contention of the petitioner, however, that such profit was not realized until 1920. The undisputed evidence is that the transaction was completed in 1919 and the assignment of the lease accepted by the purchaser and recorded. Because of the instructions issued to the bank, the payment was not made to petitioner until 1920, and it is his contention that no income was realized until that year. With this contention we can not agree.

The sale was completed in 1919. The purchase price was on deposit with the bank and despite the instructions given the bank to withhold payment, it is our opinion that it became available to the petitioner in that year. No one else had, or claimed to have, any interest in it. It was only because of instructions which had been issued to the bank at the instance of the petitioner that it was not paid. Had such instructions been a part of the contract there might have been some basis for a determination that the money was not received in 1919 by the petitioner, who reported his income upon a cash receipts basis. As to this we express no opinion. Here, however, was no contract or enforcible modification of the original contract; nothing more than an instruction (without consideration) at the request of the petitioner that payment be withheld.

Murchison had no claim to the money after he had accepted the assignment of the lease. The bank had no interest in it. The money was the petitioner’s to do with as he pleased. The fact that he had voluntarily instructed the bank, or caused Murchison to instruct the bank, that the money was not to be paid to him until January 2, 1920, is insufficient in our opinion to prevent the realization of income in the year in which the sale was consummated and the terms of the escrow performed. Thereafter, the bank was the agent of the petitioner only, and its possession of the money, free from any further obligation of the escrow agreement, was possession in the petitioner.

Decision will be entered for the Commissioner.


author: Steeni-iaobn :

text:
    White Eagle Brewing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7826.
    Promulgated March 26, 1927.
    1. Book entry of appreciation in value of capital assets (loos not establish right to invested capital. La Belle Iron Worles v. United States, 256 U. S. 377.
    2. The fact that property was bought because the seller wanted to make a quick sale does not prove that the value exceeded the price paid.

      Harry E. Snyder, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    Deficiencies aggregating $4,266.04 for the fiscal years ended June 30, 1920, 1921, and 1922. (1) The Commissioner reduced invested capital by the amount of an appreciation of plant value and also reduced the March 1, 1913, value by the same amount as a basis for depreciation. (2) The Commissioner applied straight-line depreciation upon cooperage from 19Í4 and thus reduced the base of depreciation for the years in question. (3) The Commissioner disallowed deductions for alleged expense of repairing cases. The findings of fact are those proposed by the petitioner, with the exception that one such proposed finding has been omitted as not supported by the evidence and another has been changed for the same reason.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation with principal office at 3755 South Racine Avenue, Chicago.
    In 1911, the petitioner purchased the present plant at 3755 South Racine Avenue, Chicago, for $100,000.
    Prior to March 1, 1913, the petitioner revalued the plant and property, placing on its books a value of $150,350.

      The Commissioner by agreement allowed the petitioner 15 per cent depreciation on floating cooperage for the fiscal years ending June 30, 1918, June 30, 1919, June 30, 1920, June 30, 1921, and June 30, 1922.
    The Commissioner reestablished the reserve for floating cooperage, by taking a 15 per cent rate for the fiscal years ending June 30, 1914, June 30, 1915, June 30, 1916, and June 30, 1917.
    The petitioner took as depreciation on floating cooperage for the fiscal year ending June 30, 1914, $1,078.83; June 30, 1915, $1,368.45.; June 30, 1916, $1,781.90; June 30, 1917, $1,781.90.
    Because the Commissioner reestablished a 15 per cent rate on floating cooperage for the fiscal years ending June 30, 1914, June 30, 1915, June 30, 1916, and June 30, 1917, the petitioner is deprived of depreciation in the fiscal years ending June 30, 1920, June 30, 1921, and June 30, 1922.
    The petitioner spent certain amounts in respect of cases, to wit, $405.36 for the fiscal year ending June 30, 1921, and $1,222.22 for the fiscal year ending June 30, 1922, which amounts were capitalized in the bottle and case account.
   OPINION.

Steeni-iaobn :

That a book entry recording an appreciation in the value of capital assets above their original cost does not justify the inclusion of the amount in invested capital is too well established to require more than the citation of La Belle Iron Works v. United States, 256 U. S. 377.

The evidence is not sufficient to establish that on March 1, 1913, the property had a value in excess of its cost in 1910. It appears that the property was bought from the prior owner because a quick sale was desired, but it was bought in an outright business transaction after an offer was made of $100,000 by the purchaser, its consideration for several days by the seller, and its final acceptance. The purchaser believed the property was worth more, and its accountant advised it in the following year to place an added value upon the books. The evidence that there was such added value is in our opinion entirely insufficient to prove the fact. We, therefore, sustain the respondent.

Upon the issues as to the depreciation of the so-called “floating cooperage,” by which is meant the barrels and boxes in the hands of customers, and the question of the alleged costs of repairs upon cases, the evidence is likewise insufficient. It consists entirely of the statement of an accountant who began the monthly and annual auditing of the petitioner’s books in 1920, and he had no direct knowledge of the facts as to the earlier depreciation or as to the actual repair of cases. He kjnew only tbat certain entries had been made and had examined the vouchers to see what the alleged repair expenditures purported to cover. What the facts were can not be determined from the record.

Upon all the issues raised the respondent is sustained.

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


author: Steiinhagen :

text:
    Chapin Laundry Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7650.
    Promulgated March 26, 1927.
    Exhaustion, wear and tear, and obsolescence of laundry machinery determined at a rate of 10 per cent.

      G. II. Pease, C. P. A., for the petitioner.

      W. H. Lcmder, Esq., for the respondent.
    The respondent determined a deficiency of $4T0.43 for 1921 by disallowing the petitioner’s deduction for depreciation of laundry machinery at a rate of 10 per cent and applying instead a rate of 8 per cent.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation engaged in the business of operating a laundry in Chicago.
    During the year 1921 it owned certain machinery such as a boiler, washers, extractors, ironers, starch cookers, and other apparatus which it used in the conduct of its business. The useful life of the individual items of this machinery varied in the main from eight to twelve years. A fair probable average useful life of all the machinery is ten years, and a reasonable allowance for exhaustion, wear and tear, including a reasonable allowance for obsolescence, is 10 per cent.
   OPINION.

Steiinhagen :

The evidence consisted of a complete list of the property in question and the statements of three witnesses in the laundry business, two of whom knew the specific property and the third who knew the classes of property, all of whom testified as to the life of each item. From this evidence we find that a reasonable allowance for exhaustion, wear and tear of petitioner’s' laundry machinery, including a reasonable allowance for obsolescence, is 10 per cent.

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


author: Sternhagen:

text:
    Balaban & Katz Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Tivoli Theatre Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5386, 7452.
    Promulgated March 26, 1927.
    The deduction for exhaustion, wear and tear, and obsolescence of modern moving picture theatres in Chicago determined to be a rate of 3 per cent.

      Edward ¡Sonnenschein, Esq., for the petitioners.

      J. W. Fisher, Esq., and L. O. Mitchell, Esq., for the respondent.
    These proceedings involve deficiencies of $10,894.28 for the calendar year 1922 in the case of Balaban & Katz Corporation, and and $20,192.85 for the calendar years 1921 and 1922 in the case of Tivoli Theatre Co., both arising from the action of the Commissioner in disallowing in part deductions for depreciation and obsolescence of theatre buildings.
    FINDINGS OF FACT.
    The petitioner, Balaban & Katz Corporation, is a Delaware corporation, with its principal office in Chicago, Ill. It operates the Chicago Theatre On State Street in the Loop district of Chicago. The theatre has a seating capacity of 4,200 persons and is located in one of the largest theatre-going populations in the country.
    The petitioner, Tivoli Theatre Co., is an Illinois corporation, with its principal office in Chicago. It operates the Tivoli Theatre at 63rd Street and Cottage Grove Avenue, Chicago. This theatre has a seating capacity of 3,700 persons and is in the center of a theatre-going population equivalent to a city of 750,000 persons.
    The business of these theatres is dependent to a very large extent on recurring trade, that is, the trade which returns week after week to see the pictures shown at these theatres. This trade is attracted by the comfort, convenience, service, and facilities offered, and by the location of the theatres.
    Both the Tivoli and the Chicago theatres are moving picture theatres. Their construction was begun in 1920 and completed in 1921. At the time they were built they were the largest theatres in Chicago and had incorporated in them all the improvements known to be desirable in the construction of moving picture theatres. Since that time, however, there have been developments which make the features of these theatres less desirable than those of new theatres being constructed which incorporate the improvements known at the present time.

      The trend since their completion has been toward theatres of somewhat larger seating capacities. The hold-out space or standing room space outside the theatre proper has been increased; the stage area has been increased; stage lifts, overhead ventilation and air washing and refrigeration equipment are regular equipmentthe sight lines are improved and the operating booth is located on a level with the screen to eliminate distortion. In the Chicago and Tivoli theatres the construction is such that the operating booth must be kept at the highest point in the theatre and can not be placed level with the screen. Ventilation is accomplished by means of a system underneath the seats and can not be changed to the overhead system, which is more satisfactory. The Tivoli has been equipped with a stage lift since its construction, but the Chicago has not been and can not be on account of the nature of the construction of the building. The mechanical equipment for the theatres is located beneath the auditorium rather than in a separate building as in theatres constructed in accordance with advanced ideas. Both these theatres have loose box chairs rather than stationary chairs. This feature is undesirable.
    The stage area in these theatres is small, and they can not be adapted to the presentation of “ legitimate shows.”
    At the present time there is in process of development what is known as third dimension motion pictures, which give the effect of having depth rather than being simply a flat surface. For showing such pictures a larger screen is needed and the operating booth must be on a level with the screen. The presence of mezzanine and balcony floors in these theatres prevents the changing of the booths, and such pictures could not be shown.
    Other factors which may have an effect on the future conduct of motion picture theatres are the broadcasting of motion pictures by radio, orchestration by means of radio, the showing of color pictures and speaking motion pictures.
    In 1908 the moving picture houses in Chicago were constructed without a stage and seated from 100 to 200 people. Later 300-seat houses were built. From 1912 on for a period of several years houses with a seating capacity from 600 to 1,000 were built. From 1914 to 1911 theatres with a capacity from 1,400 to 1,700 were being built. All of these were without stages. In 1917 a theatre having a seating capacity of 2,000 and having a stage was built in Chicago, which was the largest motion picture theatre known at that time.
    New theatres are being planned in the location of the Tivoli Theatre which have greater seating capacities, and other large theatres are being erected in the vicinity of both the Chicago and Tivoli theatres.

      The value of the land on which the Chicago Theatre is situated is constantly increasing.
    The Chicago Theatre is not showing to capacity houses.
    The expectant useful economic life of each of these theatres at the time of their completion was thirty-three and one-third years, and a reasonable allowance for exhaustion, wear and tear, including a reasonable allowance for obsolescence, is 3 per cent annually.
   OPINION.

Sternhagen:

The determination of a reasonable allowance for obsolescence to be included within the depreciation deduction necessarily involves an attempt to prophesy the future. This precludes any certainty, and the degree of soundness or accuracy with which the prophecy can be made depends upon whether the property and the business in which it is used has had sufficient past experience to form the basis of an estimate for the future. In the present case the problem is applied to two modern theatre buildings for the display of moving pictures. They were constructed in 1921 and are still generally regarded as up to date and attractive to the public as modern places of amusement. The petitioners, however, have introduced evidence substantial both in quantity and quality for the purpose of showing that, by reason of rapid and material changes in the construction of such theatres brought about by new mechanical devices and new demands of the public for comforts and conveniences, a look into the future can be made with reasonable assurance that these theatre buildings will be obsolete in twenty-five years at the latest. The respondent has measured the period of forty years. The evidence leaves no doubt that the period of physical exhaustion and wear and tear is substantially longer than either of these periods, and therefore the sole question involved is the period at obsolescence.

The difficulty in this problem is to steer a safe course between a period which sensible people would regard as unreasonably long, on the one hand, and on the other a period which represents a pessimistic guess. In the present instance it may fairly be said that the period estimated by each party can find some support in the evidence. The burden is upon the petitioners, and we are of opinion from the evidence that the period of twenty-five years for which they contend is shorter than is justified. After careful consideration we have concluded that a fair estimate of the probable life of these buildings before they become obsolete is thirty-three and one-third years from their construction, and that 3 per cent is an ample allowance annually to achieve the complete recovery of their capital cost.

Judgment will he entered on £0 days’ notice, under Rule 50.


author: Littleton:

text:
    W. W. Hanly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8516.
    Promulgated March 26, 1927.

      Ha/mj II. Bryer, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   Littleton:

The Commissioner determined deficiencies for the calendar years 1922 and 1923 in the amounts of $1,930.56 and $65.03, respectively. The only issue urged at the hearing and concerning which evidence was submitted is whether the petitioner is entitled to a deduction in the year 1922 of $2,500, representing the cost of 25 shares of the capital stock of Coale & Company purchased in 1920 and alleged to have become worthless in 1922. The Commissioner denied the deduction.

FINDINGS OF FACT.

Petitioner is a resident of Cumberland, Md. In 1920 he purchased 25 shares of the capital stock of Coale & Company, for which he paid $2,500. He was at no time during the existence of the corporation an officer or an employee thereof. Coale & Company was a broker and jobber of coal and it possessed no physical assets. It had $800,000 in common stock outstanding. In May, 1921, the corporation became financially involved and on May 11 of that year it was placed in the hands of receivers by the United States District Court for the Southern District of New York. The corporation was heavily in debt and claims of $3,000,000 were filed against it. The only source which the receivers had of obtaining any money to distribute to the creditors, after the expenses of the receivership, represented approximately $7,000 in cash on hand at the time and certain claims which the corporation had against others.

The receivers had, among other accounts receivable, two large claims outstanding, one against the Swiss Government for $800,000, and one against one Harvey Miller for $100,000. They also had large claims against certain railroads. In 1921 and 1922 the receivers made every effort to collect the amounts due the company which was in their charge and considerable amounts were collected. In May, 1922, the Miller claim was settled for $175,000 and this settlement was approved in that month by the bankruptcy court. In November, 1922, the claim against the Swiss Government was settled for $100,000 and this settlement was approved in that month by the bankruptcy court.

Before the end of November, 1922, the receivers had little hope of collecting any additional amounts on railroad claims. Near the end of 1922 the receivers determined that they had collected about all they could and computed a dividend on the claims of the general creditors of 55 cents on the dollar, leaving nothing for the stockholders. At the end of 1922 the receivers well knew that the general creditors would not be paid in full. In 1922 the receivers succeeded in settling the remaining railroad claims for $100,000 which increased the total dividend paid the general creditors to 65 per cent of their claims.

The 25 shares of stock of Coale & Company owned by the petitioner were worthless at December 31, 1922, and the cost thereof was a proper deduction from gross income for that year.

Judgment will be entered for the petitioner on the issue raised after 15 days' notice, under Rule 50.


author: Green:

text:
    Archer L. Kent, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10821.
    Promulgated March 26, 1927.

      Archer L. Kent pro se.

      W. Frank Gibbs, Esq., for the respondent.
    This is an appeal from the determination of a deficiency in income tax for 1923 in the amount of $382.36. The question involved is whether or not dividends declared by a corporation in which the petitioner held stock were taxable to him in the year 1923 or the year 1924.
    FINDINGS OF FACT.
    The petitioner is an individual residing at 955 Central Avenue, Pawtucket, R. I. During the year 1923 he was a stockholder in the Narragansett Milling Co., of East Providence, R. I., which during that year declared dividends in the amount of $17,605.04 on the stock owned by him. Of this amount $7,464.79 was payable on December 31, 1923, and was unqualifiedly made subject to the petitioner’s demand on that date. This dividend was “mailed” to the petitioner by the Narragansett Milling Co. on December 31, 1923, but was not actually received by him until some time during January, 1924. He reported as income on his return for 1923 dividends in the amount of $10,140.25, representing dividends p&id prior to December 31, 1923, but failed to report the dividend of $7,464.79. The Commissioner in determining the deficiency here involved has increased income by that amount. The petitioner’s books are kept on a cash receipts and disbursements basis.
   OPINION.

Green:

The only question involved in this appeal is whether or not the dividend declared in 1923 payable on December 31 of that year, mailed to the stockholder on that date but received by him in 1924, should be included in the stockholder’s income for 1923 or the succeeding year, the stockholder’s books being kept on the cash receipts and disbursements basis. The parties hereto expressly stipulated that “ of the total dividends declared, the amount of $7,464. 79 was payable on December 31, 1923, and was unqualifiedly subject to the taxpayer’s demand on that date.”

Section 201(e) of the Revenue Act of 1921 reads as follows:

For the purposes of this Act, a taxable distribution made by a corporation to its shareholders or members shall be included in the gross income of the distributees as of the date when the cash or other property is unqualifiedly made subject to their demands.

Since, then, the dividend was stipulated to be unqualifiedly subject to the demand of the petitioner, he is clearly within the provision of the section of the statute quoted and the amount of such dividend should be included in the petitioner’s gross income for the year 1923.

Judgment will be entered for the 0orrmnissioner.


author: SteRniiagén:

text:
    Jacob Lederer, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5731.
    Promulgated March 26, 1927.
    Forgiveness of indebtedness for salary from a corporation to its officers, who were also its principal stockholders, not sufficiently established to justify its inclusion in corporate surplus as invested capital.

      Hugh W. McCulloch, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This proceeding involves a deficiency of $2,391.76 for the year 1920, arising from the action of the respondent in eliminating from invested capital certain amounts owed by petitioner to its officers and stockholders who are alleged to have forgiven and canceled the indebtedness.
    FINDINGS OK FACT.
    The petitioner is an Illinois corporation, with its principal office in Chicago, engaged in the business of buying and selling store and office furniture and fixtures for cash and on the installment plan. Its stockholders were Jacob Lederer, Frances Lederer, and Arnold M. Lederer, who owned 51 shares, 48 shares, and 1 share, respectively. Jacob Lederer and Francos Lederer were husband and wife, and Arnold Lederer was their son.
    Jacob Lederer was president of the petitioner and Frances Lederer was vice president. Their authorized salaries were $15,000 and $8,000 a year, respectively. They drew only a small portion of this, Jacob Lederer receiving in cash $50 a week, and Frances Lederer $25 to $35 a week. The balance of their salaries was accrued on the books. At December 31, 1919, the amount so accrued to the credit of Jacob Lederer was $30,758.4?, and the amount accrued to the credit of Frances Lederer was $18,519.62.
    There are recorded in the ledger of the petitioner entries purporting to have been made on November 30, 1920, as of January 1, 1920, balancing these credits. The accounts were ruled off and immediately below the rulings under date of January 1, 1921, the same amounts appear as credits on these accounts.
   OPINION.

SteRniiagén:

The petitioner contends that the amounts of the authorized but undrawn salaries of its two principal stockholders which were shown as credits upon their individual accounts at the end of 1919 were properly within the corporation’s invested capital for 1920, because some time in 1919 the indhdduals had in effect turned the amount back to the corporation by forgiving the indebtedness and thus eliminating the accounts payable. The evidence is, however, not sufficient to support the contention. The only witness was the son of the tiyo stockholders in question, who was also secretary of the corporation. lie testified that his parents had told him to tell the bookkeeper to make entries charging their accounts with the amounts of their accrued salaries and “ turn them to surplus.” Nothing, however, was done until, on November 30, 1920, an entry was made in each of the individual accounts balancing the account as of January 1, 1920. The amount of each such balance was carried into a credit entry of January 1, 1921, below the ruling of the account.

This evidence, in our opinion, is not sufficient to establish that the amounts in question were during the year 1920 a part of the corporation’s surplus. The petitioner urges that the failure of the bookkeeper to make the correct entry on or before January 1, 1920, should not preclude' its correct treatment in accordance with the fact of forgiveness of the indebtedness. But the evidence is confusing as to the fact of forgiveness. If the books are not reliable as to the dates of the entry, as petitioner contends, they are likewise not reliable as reflecting the forgiveness at all; and if we put aside the books we have nothing left but the statement of the son that his parents instructed the entry to be made. It is quite true that in a close corporation such as this the evidence of corporate action may not always be clearly made or nicely preserved, but the establishment of the forgiveness of an indebtedness requires some clear and direct evidence and not the mere expression of a vague intent by the creditors to a third person. The Commissioner is sustained. The Parisian, 2 B. T. A. 415.

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


author: Stbenhagen :

text:
    Florence L. Klein, Petitioner, v. Commissioner of Internal Revenue, Respondent. Minna K. Weissenbach, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4004, 4005, 6061, 6102, 10157.
    Promulgated March 26, 1927.
    In April, 1913, taxpayers by contract relinquished property rights in exchange for an annuity during their mother’s life, the value of which in April, 1913, was stipulated. Held,, that when actually received in each year the annual payment consists of the principal value of 1913 of such payment plus the discount, the latter being the gain taxable as income. The allocation would vary from year to year, the capital steadily getting smaller and the gain larger.

      Herbert G. Mayer, Esq., and Abraham Meyer, Esq., for the petitioners.

      W. II. Lcnoder, Esq., for the respondent.
    These proceedings, duly consolidated for hearing and disposition, involve deficiencies against Florence L. Klein of $400.56, $939.08, $1,021.68, and $716.36 for the calendar years 1917 to 1920, inclusive, and deficiencies against Minna K. Weissenbach of $150.00, $347.04, $801.67, $612.00, $360.42, $902.66, and $438.91 for the calendar years 1916 to 1922, inclusive. These deficiencies arise from the respondent’s determination that an amount of $5,000 received annually by each petitioner under contract was income. The petitioners urged also that a portion of these taxes was barred by the statute of limitations.
    FINDINGS OF FACT.
    The petitioners’ father died testate on December 28, 1912. By his will, among other provisions, he left $75,000 to each of his daughters, Florence L. Klein, Minna K. Weissenbach, and Cora K. Ullman. He left to his two sons, Edwin M. and Irving M. Klein, and his widow, Rosalinda Klein, all his stock in a corporation known as “L. Klein,” one-third to each. The will was proved and admitted to record in open court in the Probate Court of Cook County, Illinois, on January 2, 1913. The net estate amounted to $2,868,442.39, and included among the assets was stock of L. Klein, the corporation, valued at $1,500,000.
    The petitioners and their sister were not satisfied with the distribution provided by the will. On April 19, 1913, the following agreement was made by them with Irving M. and Edwin M. Klein:
    MEMORANDUM of Agreement, Made at Cliicago, Illinois, tliis 19th day of April, 1913, by and between Irving M. Klein and Edwin M. Klein, both of Chicago, Illinois, (hereinafter designated “First Parties”), and Minna K. Weissenbach, Cora K. Ullman, and Florence L. Klein, also of the City of Chicago, State of Illinois, (Hereinafter designated “Second Parties”),
    WITNESSETH 1
    Whereas, Leon Klein, of the City of Chicago, in the State of Illinois, departed this life on the 28th day of December, 1912, and left a Last Will and Testament, which Last Will and Testament has been duly admitted to probate, in the Probate Court of Cook County, in the State of Illinois; and
    Whereas, all of the parties to this agreement, together with the widow of said Leon Klein, were named as beneficiaries under the Last Will and Testament of said Leon Klein, deceased; and,
    Whereas, the parties hereto are desirous of making a division of that certain portion of the assets of the Estate devised to them under said Last Will and Testament, in a manner more equitable than is by the provisions of said Last Will provided; and,
    Whereas, it is the desire of all of the parties to this agreement, that the said Second Parties do not attempt to enforce any rights which they may claim to have to any part or portion of said Estate of Leon Klein, not devised to them;
    Now, Therefore, in consideration of One Dollar ($1.00) each to the other in hand paid, and in further consideration of the mutual love and affection of each of the parties hereto for the others, and in further consideration of the covenants and contracts hereinafter set out, said Parties hereto agree as follows:
    That all that portion of the estate of said Leon Klein, deceased, devised under and by virtue of the terms of his Last Will and Testament to all of the parties to this agreement, notwithstanding any of the provisions of said Last Will and Testament, and without reference to the division so attempted to be made under and by virtue of said Last Will and Testament, shall be divided and distributed by the Executors of said Last Will and Testament of said Leon Klein, deceased, as follows:
    1. Irving M. Klein, Four Hundred Ninety-nine (499) Shares of the capital stock of L. Klein, a corporation; also, One Hundred (100) shares of the capital stock of The 12th Street Store, a corporation.
    2. Edwin M. Klein, Four Hundred Ninety-nine (499) Shares of the capital stock of L. Klein, a corporation; also, One Hundred (100) shares of the capital stock of The 12th Street Store, a corporation.
    3. All cash on hand, stocks, bonds, mortgages and other evidences of indebtedness belonging to said estate and specifically set out in a Schedule hereto attached, marked Exhibit “A” and by specific reference thereto made a part hereof, with the same force and effect as if the same were specifically incorporated herein, together with all the increments by virtue of dividends and other earnings thereon computed from the day of the death of said Leon Klein, up to and including the date of the distribution as contemplated herein, shall be divided between Minna K. Weissenbach, Cora K. XJllman and Florence L. Klein, second parties hereto, share and share alike, and in addition thereto, the said First Parties, jointly and severally agree to pay to each of said Second Parties the sum of Five Thousand Dollars ($5000.) per annum, in semi-annual installments, during the term of the natural life of Rosalinda Klein, widow of said Leon Klein, deceased, and Mother of the parties to this agreement. In the event of the death of any of said Second Parties prior to the death of said Rosalinda Klein, then, the sum which said deceased person would have received under and by virtue of the terms hereof, shall be paid to her respective heirs, administrators, executors, legal representatives or assigns, for and during the same period.
    4. Said First Parties further agree that notwithstanding the distribution and setting apart to each of them of the One Hundred (100) shares of the capital stock of The Twelfth Street Store, a corporation, and which said stock is held by Rosalinda Klein, Irving N. Klein and Joseph Weissenbach, as Trustees under and by virtue of a certain Trust Agreement made and entered into of even date herewith, a copy of which said Trust Agreement being hereto attached, marked “ Exhibit B ” and made a part hereof, they will, contemporaneously with the execution of this Agreement, direct the said Trustees in writing to pay to each of said Second Parties, out of the dividends which they receive as such Trustees, which may be hereafter declared and paid on the said Two Hundred (200) Shares of the said stock of said The 12th Street Store, a corporation, the sum of Three Thousand Dollars ($3,000.00) per year, during the term of the natural life of said Rosalinda Klein, and that on and after the death of said Rosalinda Klein, said Trustees shall pay to said Second Parlies, share and share alike, all dividends which may thereafter be declared and paid on the said Two Hundred (200) Shares of the capital stock of said The 12th Street Store, a corporation, up to and including March 3, 1929. In the event of the death of any of the said Second Parties prior to said March 3rd, 1929, then, the dividends which such deceased person would have received under the terms hereof, shall bo paid to her heirs, executors, administrators or legal representatives.
    5. Said First Parties further agree, that they and each of them will sell to said Second Parties, in equal proportions, all of the said capital stock of said The 12th Street Store which they will receive as their distributive shares under and by virtue of the terms of this agreement, at the election of said Second Parties, or any or either of them, at any time between the date hereof and the Third day of March, 1929, and if any of said parties exercise her or their option to purchase her or their proportionate share or shares of said capital stock, then, the price to be paid therefor by said party or parties exercising her or their option, shall be the book value of said capital stock, to bo computed from the books of said The 12th Street Store, a corporation, at the date of the exercise of the option to purchase as herein given.
    6. It is further understood and agreed, that nothing herein contained shall be construed to mean that the entire Two Hundred (200) shares of stock must be purchased hereunder, but any one of said Second Parties hereto may purchase one-third of said Two Hundred Shares within the time and at the price hereinabove specified. '
    7. All of the parties hereto agree, that they will upon reasonable request by the Executors of the Estate of Leon Klein, deceased, sign all necessary receipts and vouchers for their distributive shares of the Estate of Leon Klein, deceased, pursuant to the terms of the Will of said Leon Klein, deceased, notwithstanding the distribution as herein agreed upon, and notwithstanding the agreement, herein, that the executors of said estate shall distribute said estate in accordance with the provisions of this agreement.
    8. And all the parties hereto, in consideration of the covenants herein contained, do hereby mutually release each other from any and all claims of any kind or character which they or any of them may have by reason of any matter or thing whatsoever, and upon the distribution of the portion of the estate of Leon Klein, deceased, devised to the parties hereto, that the said Estate of Leon Klein, deceased, and the Executors thereof, shall be released from all claims and demands of whatsoever nature.
    This agreement shall inure to and be binding upon the respective heirs, executors, administrators and assigns of the parties hereto.
    The expectancy of life of Rosalinda IClein was, on April 19, 1913, fifteen years, one month and nine days, as stipulated, and the value on that date of each petitioner’s right under the contract to receive $5,000 a year in semiannual installments during the life of Rosalinda Klein was $57,753.50, as stipulated.
    The income-tax return of Florence L. Klein for 1917 was filed on March 27, 1918; the return for 1918 was filed on March 15, 1919; the return for 1919 was filed on March 15, 1920; and the return for 1920 was filed on March 15, 1921. The notice of deficiency for the years 1917, 1918, and 1919, was mailed to this petitioner on April 9, 1925. The additional taxes for the years 1917,. 1918, and 1919, were assessed during September, 1921, and claims for abatement thereof have been filed. The notice of deficiency for the year 1920 was mailed on JuneTl, 1925.
    The income-tax return of Minna K. Weissenbach for 1916 was filed on February 20,1917; the return for 1917 was filed on April 29,1918; the return for 1918 was filed on April 15, 1919; the return for 1919 was filed on March 15, 1920; the return for ’1920 was filed on March 9, 1921; the return for 1921 was filed on March 15, 1922; the return for 1922 was filed on March 8, 1923. The notice of deficiency for the years 1916, 1917,1918, and 1919, was mailed to this petitioner on April 9, 1925. The additional.taxes for the years 1916, 1917, 1918, and 1919, were assessed during September, 1921, and claims for abatement thereof have been filed. The notice of deficiency for the years 1920 and 1921 was mailed on June 11, 1925. The notice of deficiency for the year 1922 was mailed October 27, 1925.
    No distraint proceedings or proceedings in court have been instituted for the collection of any of the taxes for these years, nor has either of the petitioners filed, a waiver as to these taxes with the Commissioner.
   OPINION.

Stbenhagen :

The statement of facts, none of which is in dispute, presents two questions for decision; first, what portion, if any, of the $5,000 received each year by each petitioner is income; and, second, whether any part of these taxes is barred by the statute of limitations.

The respondent has included the entire amount of $5,000 received by each petitioner each year under the contract in her income. The petitioners contend that none of the amount is income. In our opinion the truth lies between.

When Leon Klein died he transferred in fraesenti some part of his valuable estate to these petitioners. Whether this transfer was under the will or had been by descent in intestacy, its value was something which came to them by distribution of their father’s estate and not by way of income. The will was proved and admitted to record on January 2, 1913, after which petitioners might have contested it, Ill. Pub. Acts, 1871-2, p. 775; ch. 148, par. 7, Callaghan’s Ill. Stats. Blit something more than mere inequality of distribution would have been required to set it aside. Donnan v. Donnan, 236 Ill. 341; 86 N. E. 279; McGrady v. McGrady, 298 Ill. 129; 131 N. E. 251. Thereafter, by the contract of April 19, 1913, each petitioner converted this property into other property, thus realizing gain or loss of the difference between what under the contract she acquired and what she had from the estate (with proper adjustments for the value on March 1, 1913). These past values we are not concerned with, for presumably they were correctly taxed at that time. The significant fact now before us is that the value of what petitioners acquired by contract on April 19, 1913, became the capital basis for measuring any subsequent gain or loss in respect thereof.

The only amount in issue is the annual sum of $5,000. By stipulation, the value on April 19, 1913, of this annuity payable during the probable life of Rosalinda Klein is fixed at $57,753.50, which was to be paid to each in semi-annual installments for approximately fifteen years. It is not such a situation as arose in Irwin v. Gavit, 268 U. S. 161, where the annuity was received from a principal fund established under a will and without cost. See also Heiner v. Beatty, 17 Fed. (2d) 743, decided February 23, 1927. Here each annual - amount of $5,000 represents in part a return of the cost of April 19, 1913, and in part a gain. The amount of the gain is therefore properly to be included in each petitioner’s income each year, until the annual payments of principal aggregate $57,753.50.

The petitioners contend that no part of the annual payments of $5,000 is income until after they aggregate $57,753.50; and the argument is sought to be pointed by the fact that Rosalinda Klein’s life was necessarily uncertain and that her early death might have meant the failure of their realizing the $57,758.50. Platt v. Bowers, 13 Fed. (2d) 951; Warner v. Walsh, 15 Fed. (2d) 367, are cited. The argument is in our opinion unsound. The amount of $57,753.50 is presumably arrived at by discounting the annual payments to a present basis on April 19, 1913, and thus assuming that the prospect of receiving $5,000 in each future year was of a lower value in 1913. When actually received in each year the $5,000 consists of the principal value of 1913 of such payment, plus the discount, the latter being the gain taxable as income. The allocation would vary from year to year, the capital steadily getting smaller and the gain larger. This is readily computable by reference to discount tables and the parties are directed to present the allocation for each year.

The decision of Platt v. Bowers, supra, involves a contract the terms of which are not clearly stated, and the learned court seems to have regarded the present value of serial payments as equal to the face amount payable in the future. The decision in Warner v. Walsh, supra, is based upon the assumption that section 4 of the Revenue Act of 1916 and section 213 (b) (2) of the Revenue Act of 1918 require that all annuity payments under an insurance contract must be treated as capital until the purchase price is recovered. This seems to us to read into those statutes something not fairly within their terms. They provide only that so much of each payment as is a return of cost shall not be taxed as income; but this is a long way from saying that each payment is a return of cost in its entirety until cost is recovered. The statutes provide neither that the first payments are all income nor that they are all return of cost; but they indicate rather that each payment is partly one and partly the other, and that the income part is all that is to be included in gross income. This is consistent with the normal theory of purchased annuities, and seems to us to be fairer than to regard the first payments as wholly tax free and the latter payments as wholly taxable. The theory of apportionment is applicable to periodic payments just as it is to the ascertainment of gain in the sale of lots in a subdivided tract of land, of retail goods purchased in bulk, and other situations under the statute.

Since the foregoing decision would subject to tax a portion of each ’annual amount of $5,000 received from 1916 to 1922 in so far as they are involved in this proceeding, it is necessary to consider the petitioner’s contention that the alleged deficiencies for the years up to and including 1919 must be disallowed because collection thereof is outlawed by the limitation provisions of the several statutes involved. Counsel for both parties were expressly requested to submit briefs on this question. At the request of both parties extension of time for filing such briefs was granted. Subsequently additional extensions were refused because there had not been a sufficient show of diligence. At the appointed time the brief of counsel for petitioners was filed, but none has been filed in behalf of respondent. We thus have but the argument of one side to consider. Whether we are to assume that the respondent concedes that the statute bars the deficiencies or that he leaves the question to be investigated by the Board without the assistance of counsel is not clear. We reject the latter alternative. It is the duty of counsel to ascertain the considerations and authorities supporting one side or the other and of the Board to judge.

If the Board’s refusal to grant further extensions of time is relied upon it should be said that periods fixed for procedure are to be taken seriously and there is no justification for waiting as in this case until the approximate time of expiration in reliance upon a further extension.

The argument of the petitioners in support of the view that the deficiencies for the years 1916, 1917, 1918, and 1919 are barred by the limitation provisions of the statute and therefore must be disallowed, is persuasive, and judgment should go in their favor for those years. We therefore so decide.

There is no deficiency for 1916, 1917, 1918, and 1919. For 1920, 1921, and 1922 the $5,000 annual payments should be allocated as between taxable income and nontaxable return of cost in accordance with the computation submitted by the parties as hereinbefore stated.

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

Artjndell, Marquette, Smith, and Trussell dissent.


author: Marquette:

text:
    Warner L. Colvert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9170.
    Promulgated March 26, 1927.
    1. The debt herein was properly ascertained to be worthless and charged off in the taxable year, and constituted a deduction from gross income.
    2. A taxpayer on the cash receipts and disbursements basis may not deduct from gross income the amount of a note given for an antecedent obligation, where it is not shown that the note was accepted as payment.

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

      Bruce A. Low, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income taxes for the years 1920 and 1921, in the amounts of $1,563.06 and $1,642.27, respectively.

      BINDINGS OP PACT.
    The petitioner is an individual residing at McAlester, OMa. During the years 1920 and 1921, he was engaged in the -business oí manufacturing ice cream at that place.
    Prior to the year 1913, the petitioner loaned to his brother, George Colvert, $1,000, for which he received George Colvert’s promissory note. In the year 1913, he loaned George Colvert the further amount of $2,200, and, the note for $1,000 not having been paid, George Colvert executed and delivered to the petitioner a promissory note for $3,200, and the $1,000 note was then destroyed. George Colvert was about that time suffering from tuberculosis of the glands of the neck and in the hope of benefiting his health he moved to Fort Stockton, Tex., where he invested $14,000 in irrigated land. He lived at Fort Stockton until the year 1919, at which time, his farming venture having proved unprofitable, he sold his land for $2,000 cash and $6,000 in vendor’s lien notes and returned to McAlester. On his return to McAlester he worked for the petitioner on the construction of an addition that was then being built to the petitioner’s ice cream factory, and subsequently worked for another brother at Ardmore, Okla. The petitioner and George Colvert agreed that the value of the services performed by George Colvert for the petitioner should be credited on the note for $3,200 which George Colvert had given the petitioner. The value of the services was fixed at $1,000 and that amount was credited on the note in full satisfaction of accrued interest, although the interest actually accrued exceeded that amount. George Colvert was, in the years 1919 and 1920, still in bad health and had a family dependent upon him for support, and had no property or income other than the vendor’s lien notes mentioned and the salary he was receiving from his brother at Ardmore. In the year 1920 the person who purchased the Texas land from George Colvert failed and, due to some sort of foreclosure proceedings apparently brought by an irrigation company, George Colvert lost the security for his vendor’s lien notes. As George Colvert had no other property and was not able to pay the note in question, the petitioner determined that it was worthless and he claimed that amount as a deduction in computing his net income for 1920. The respondent disallowed the deduction. The note was never paid by George Colvert. The petitioner did not keep any personal books of account.
    During the years 1919, 1920, and 1921, petitioner employed his brother, John D. Colvert, as foreman and assistant manager of his ice cream factory. The services performed by John D. Colvert were valuable to the petitioner and in the latter part of the year 1921 it was agreed by the petitioner and John D- Colvert that the petitioner should pay John D. Colvert extra compensation for his services. The petitioner thereupon executed and delivered to John D. Colvert a promissory note for $7,000, payable on demand and bearing interest from date. The petitioner paid to John D. Colvert on said note $4,000, either in December, 1921, or January, 1922, and the note was paid in full in the year 1922. The petitioner claimed said amount of $7,000 as a deduction from gross income for the year 1921. The respondent disallowed the deduction.
   OPINION.

Marquette:

The first question presented herein is whether the petitioner, in computing his net income for the year 1920, is entitled to deduct as a bad debt the amount of $3,200 represented by the note given to him by George Colvert in the year 1913. The respondent contends that the note became barred by the Texas statute of limitations in the year 1917, and that it was, therefore, worthless in that year. The petitioner, however, insists that, even if the note ■was barred by the Texas statute, George Colvert moved to Oklahoma in the year 1919 and that the payment of interest in Oklahoma revived the debt.

It is not necessary for us, in deciding whether the amount of the note in question is a proper deduction from the petitioner’s gross income for the year 1920, to go into the question of whether the note was barred by the laws of Texas or revived under the laws of Oklahoma. The availability of the statute of limitations as a defense to an action on a note is not in itself proof that the note is in fact worthless. Appeal of Leo Stein, 4 B. T. A. 1016. The evidence here shows that George Colvert returned to Oklahoma in the year 1919 and that he recognized his debt to the petitioner, at least as a moral obligation, by working for the petitioner and having the value of his services credited on the note. At that time he held vendor’s lien notes in the amount of $6,000 from which the petitioner might reasonably expect he would in the future receive sufficient money to discharge his obligation. However, the vendor’s lien notes became worthless in the year 1920, the security behind them having been destroyed, and it became apparent to the petitioner at that time that in all probability the note in question would never be paid. The petitioner thereupon determined that the note was worthless and claimed the amount thereof as a deduction in 1920. We are of the opinion that the deduction should be allowed.

In regard to the deduction in the amount of $7,000 claimed by the petitioner in the year 1921, we are not satisfied from the evidence that the note executed and delivered by the petitioner to John D. Colvert was accepted by John D. Colvert as payment for the services he had rendered. Under the law as laid down by the Supreme Court of Oklahoma, a promissory note given for a prior indebtedness is not in itself proof of the payment^of indebtedness. Whether or not a note is given and accepted in satisfaction of a preexisting debt is a question of fact to be determined from the evidence. Ohio Cultivator Co. v. Duncan, 67 Okla., 58; 168 Pac. 1002.

The evidence herein does not show to our satisfaction that the note in question was given to or accepted by John D. Colvert in satisfaction of the debt due him from the petitioner.

It is also urged by the petitioner that if we do not hold that the note of John D. Colvert was given and accepted in full satisfaction of the amount due from the petitioner to John D. Colvert, that we should nevertheless find that $4,000 was actually paid in the year 1921, which should be allowed as a deduction in that year. The petitioner testified that $4,000 was paid by him in December, 1921, or January, 1922, but he did not definitely fix either date. The respondent has determined that no part of the money was paid in the year 1921, and in the absence of satisfactory evidence to show that payment was made in that year we will not disturb the respondent’s determination.

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

Trussell dissents.