text:
    N. Levin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6444.
    Promulgated December 21, 1926.
    Subject to limitations of section 214(a) (11) (B) of tbe Revenue Act of 1921, tbe petitioner is entitled to deduct from gross income an amount contributed to a chartered religious corporation.

      J. S. Lamson, Esq., and Fred D. Bulloch, G. P. A., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax for the year 1922 in the amount of $55.09, which arises from alleged improper exemption for dependents and from an error in the computation of surtax. The petitioner does not dispute the facts alleged in the deficiency letter, but, as the basis of his appeal, alleges (1) that he was entitled to a deduction from his gross income for the taxable year in the amount of $1,000, which he contributed to a religious organization; (2) that for the year 1922 he was entitled to exemption for six dependents, instead of one, as claimed on the return; and, (3) that he erroneously duplicated an income item in the amount of $160 in making his return for the taxable year.
    FINDINGS OF FACT.
    The petitioner is an individual who resided in Santa Rosa, Calif., during the taxable year, where he was president of a corporation engaged in the operation of a tannery. During the year 1922 he was married and living with his wife, and his mother, residing in Poland, was chiefly dependent on him for support.
    During the year in question the petitioner contributed the amount of $1,000 to the Beth Levy Congregation, a chartered religious organization of the Jewish faith, located in Santa Rosa, no part of the net earnings of which inures to the benefit of any private stockholder or individual.
    The petitioner owned three dwelling houses during the taxable year. One of such houses was occupied by his cousin, a sick woman who paid no rent, another was used rent free by a business organiza-' tion in which the petitioner owned an interest, the third was rented to a tenant as a residence for $160 for the year. In his income-tax return for the year the petitioner, under “ Schedule B — Income from Rents and Royalties,” set forth the amount received, and claimed depreciation of $300 on buildings. In entering the items relating to the buildings on the face of his return, he entered $160 as income and erroneously claimed $140 as “Loss on property,” instead of claiming the depreciation sustained of $300.

      From time to time the petitioner sent remittances to his brother and other relatives in Poland, for the support of five orphaned nephews and nieces, in amounts not clearly disclosed by the record.
   OPINION.

Lansdon:

The evidence is conclusive that the petitioner was entitled, subject to the limitations of section 214(a) (11) (B) of the Eevenue Act of 1921, to deduct the amount of $1,000 from his gross income in his income-tax return for the year 1922 as a contribution to a religious organization, and that he is entitled to a deduction of $160 to cover depreciation of buildings in addition to the amount of $140 originally claimed under the erroneous title of loss on property. We are unable to determine from the evidence that the amounts which the petitioner remitted to Poland, as contributions to the support of the five orphan children of his brother, constituted the chief support of such children, or whether the entire amounts so remitted were used for the purposes alleged. We therefore disallow his claim for exemption on account of five additional dependents.

Judgment will he entered on 20 days’ notice, under Rule 50.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Appeal of Georgia Manufacturing Co.
    Docket No. 1718.
    Promulgated December 22, 1926.
    1. The petitioner was incorporated on October 28, 1915, to take over the assets and business of an existing partnership. On the same date the partners agreed to turn over all the assets of the partnership in exchange for all the authorized capital stock of the corporation. The corporation carried on the business from that date. Beal estate was transferred to the corporation by a deed dated January 29, 1916. Helé, that for the purpose of computing the invested capital the assets should be valued as of October 26, 1915.
    2. The plant account shown upon the books of the predecessor business at the date of incorporation stood at $120,000. The total assets of the partnership, including a surplus of approximately $100,000, were transferred to the corporation in exchange for capital stock of $120,000. The corporation assumed the liabilities of the partnership. The actual cash value of the assets transferred was in excess of the sum of the capital stock, the surplus, and liabilities of the business taken over. Held, that the petitioner is entitled to a paid-in surplus in the computation of invested capital, in addition to that shown on the partnership books of account, of the excess of the actual cash value of the assets over the sum of the par value of the stock, the surplus, and the liabilities shown on the books of account of the business at the date of transfer.

      J. R. Sherrod, Esq., and W. A. Southerland, Esq., for the petitioner.

      F. O. Graves, Esq., E. O. Lake, Esq., and A. H. Fast, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ended September 30, 1917, in the amount of $3,208.85.
    The Commissioner refused to allow a deduction for depreciation in excess of an amount based on the book value of depreciable assets, and held that the petitioner was not entitled, for invested, capital purposes, to a paid-in surplus which the petitioner had claimed in the amount of $318,453.95.
    FINDINGS OF FACT.
    1. The petitioner is a Georgia corporation with its principal office at Whitehall, and is engaged in the manufacture of cotton yarns. It was incorporated on October 26, 1915.
    2. The business was originally started in 1829. In 1834 it was acquired by ancestors of the present owners and has since been owned by the same family. About 1893 or 1894 the mill was burned and was soon replaced and has been in continuous operation since that time. The business was first incorporated in 1881 under a twenty-year limited charter, which was allowed to expire in 1902, but the business was continued without change of ownership.
    3. The property and plant had stood on the books for an indefinite period prior to 1915 at a figure of $120,000. There had been additions to the mill and other property since 1894, the mill having been increased from a capacity of approximately 8,300 spindles by about 3,300 spindles. In 1904 the dam in the river was heightened and thickened.
    4. The charter of the present corporation was granted on August 6, 1915. On August 26, 1915, the incorporators met, accepted the charter, organized, elected officers, and subscribed for the entire authorized issue of capital stock ($120,000), and agreed to pay therefor “the sum of $100 per share, to be paid in property to be taken at fair valuation, to wit: our respective interests in the property known now as The Georgia Manufacturing Company.” The subscribers to the capital stock were the heirs of James White, John R. White, a brother, and two sisters of James White. On January 29, 1916, these parties had another meeting and formally tendered to the corporation a deed conveying to it the property hereinafter described. The entire capital stock was issued in exchange for all property, real and personal. The corporation conducted the business from October 26, 1915, just as though the entire property had been formally conveyed to it on that date.

      5. The mill is located on the north bank of the North Oconee River, at Whitehall, Ga., about five miles southeast of Athens. The property conveyed to the corporation by the incorporators consisted of 407 acres of land lying on both sirles and extending under the river, including water rights, with all improvements thereon, including dam, race, mill and factory building, and all machinery and equipment, warehouse, boiler house, etc., a group of farm buildings, a store, church, grist mill, school, and 63 cottages.
    6. Of the 467 acres of land approximately 55 per cent was timbered and 45 per cent was cleared. The value of this land in October, 1915, and January, 1916, was $35 per acre, or $16,345. The dam, located about one-fourth or one-half mile above the mill, was built of massive rubble stone, 330 feet long, 14 feet high, and 3 foot crest and plank apron on upstream side, including also rubble masonry abutment walls. The canal was 2,100 feet long, with vertical face 8 feet high lined with rubble stone masonry walls. The factory building was of two stories, 55 by 386 feet, with rubble stone foundations varying from 5 feet to 25 feet deep, bride walls 24 inches, 16 inches, and 12 inches thick, and tar and gravel roof.
    7. The railroad station at Whitehall was approximately three-fourths of a mile from the mill. Some raw cotton used by the mill was purchased in the town of Athens and hauled by truck to the mill. A quantity of cotton was also purchased from farmers who delivered it at the mill. The location on the river is favorable on account of the humidity necessary in the manufacture of yarn. The labor is a good class of native white help.
    8. About 550 horsepower was required to operate the mill in 1915; 8,300 spindles being operated with 400 horsepower developed water power, and the remainder being operated by 150 horsepower of purchased hydro-electric power. The water power was not fully developed and used. The hydro-electric power was purchased from John R. White, who owned a mill farther down the same stream, which was generating more power than it needed. John R. White was also president and general manager and owner of a large interest in the petitioner. The hydro-electric power purchased was not metered and the charge made to the petitioner was less than the market price for the power. Since 1915 the petitioner has developed an additional 150 horsepower from the available water power by simply adding new runners on the water wheel and by putting in a small generator.
    9. There has never been any attempt to sell the property, no stock of the corporation was ever sold to outsiders, and none was sold for cash around 1915.

      10. The property had been kept in good repair prior to 1915 and the mill was running at 90 per cent of theoretical production in 1914, 1915, and 1916.
    11. The actual cash value of land, buildings, machinery and equipment carried on the books of account of the partnership at October 26,1915, was as follows:
    Land_ $16,345.00
    Buildings_ 82, 741. 53
    Machinery and equipment_ 69,476. 55
    Total_ 168, 563.08
    12.In 1925 the petitioner caused an appraisal to be made of the water power by a firm of engineers. The flow of the Oconee River, upon which the petitioner’s mill is located, was taken at 40 per cent of the flow at the United States Geological Survey Gauging Station on the Oconee River, Georgia, about 25 miles below the junction of the North Oconee and Middle Oconee Rivers. On this basis the stream of the petitioner’s mill was found capable of developing 550 horsepower for 10 hours, 312 days per year, 400 horsepower for 10 hours at night for 2.4 months in the year, with additional residual annual horsepower aggregating 5,130,100 horsepower. On October 26, 1915, the mill was actually using developed power of 400 horsepower for 10 hours, 312 days per year. The engineers classed this as class (1) power. The mill was also using 400 horsepower for 10 hours at night for an average of 2.4 months per year. This power was designated as class (2) power. One hundred fifty horsepower for 10 hours, 312 days in the year, which could have been developed with an expenditure of approximately $8,700, was classed as class 1-A power. These three classes of power, class (1), class 1-A, and class (2), designated as primary power, were assumed by the engineers to have a cash value on October 26, 1915, and also January 29, 1916, the date when the real estate was transferred to the petitioner, using the average cost of steam power and purchased hydro-electric power as a basis for comparison, as follows:
    Class (1) power_$112, 611.14
    Class 1-A power_ 39, 915. 71
    Class (2) power (night)- 25,557.14
    Total_ 178, 083. 99
    13.The value of class (3) power, referred to by the engineers, lay in converting it into hydro-electric power and selling it as “ dump power ” to the electric company in the town of Athens, at 3⅜ mills per K.W.H. Taking into consideration the development necessary to produce this power and the operating expenses, and designating the net expected profit from the sale of this class of power at 15 per cent, the engineers estimated that the cash value at October 26, 1915, and on January 29, 1916, was $35,816.87. The engineers therefore estimated the cash value at October 26, 1915, and January 29, 1916, of the water power acquired by the petitioner at $213,900.66. 14.Semi-annual statements of the condition of the petitioner at
    April 1 and October 1 of each of the years 1911 to 1915 were introduced in evidence. Statements of condition at April 1, 1911, and October 1,1915, are as follows:

    Cash dividends of 12 per centum per annum were paid upon capital stock or capital shares aggregating $120,000 for the years 1911 to 1915, inclusive.
    15. There are no books or records available prior to 1911. At the formation of the present corporation in 1915, the plant was placed on the books at a value of $120,000, no segregation being made as to the various classes of assets, which consisted of land, village buildings, mill buildings, machinery, and developed water-power site.
    16. In the computation of deductible depreciation for the year ended September 30, 1917, the Commissioner has taken 8 per cent of the plant value as shown by the books of account, $120,000, and has allowed the deduction of $9,600 for depreciation. He has disallowed the deduction of depreciation of assets of an alleged value in excess of $120,000.
    17. In computing the taxable net income for the fiscal year under review, the petitioner claimed deductions aggregating $1,929.50, representing expenditures for items of a capital nature, with respect to which deductions petitioner admits error.
   OPINION.

Smith:

In its petition the petitioner alleges that the deficiency determined by the Commissioner is predicated upon the following errors:

(1) That the Commissioner has failed to include as part of the invested capital of the petitioner the actual cash value of the plant, properties, and water power acquired at the date of organization in excess of the par value of the stock issued therefor.

(2) That the Commissioner has failed to allow depreciation based upon the actual value of the depreciable assets at date of acquisition.

There was a subsidiary question raised at the hearing, namely, whether the assets should be valued as of the date of incorporation, October 2G, 1915, or as of January 29, 1916, the date when the real property was deeded to the corporation.

The subsidiary question will be considered first. It is to be noted from the findings of fact that the incorporators, who were all of the persons who owned the assets of the partnership, subscribed for the entire capital stock on October 28, 1915, agreeing to pay therefor their interests in the business of the Georgia Manufacturing Co., the partnership. The corporation operated the business from the date of incorporation as though it had legal title to all of the assets of the partnership, including real estate. We therefore think that the corporation had equitable title from the date of incorporation and that, in a determination of the actual cash value of property paid in, the basic date for the determination of such value is October 26, 1915.

In this proceeding we have a situation where the petitioner was incorporated to take over a going business long before the enactment of any excess-profits tax law and under conditions which made it immaterial as to whether the authorized capital -stock provided for in its charter was large or small. For years the business had been owned and conducted by one family group, and when it was incorporated it became a close family corporation. The head of the family and the owner of by far the largest interest in the business died in 1915. Among the heirs of the latter was one minor child. For the purposes of administering the estate and as a convenience in its distribution, the business was incorporated and its capital stock issued to the heirs. It was immaterial, so far as the parties at interest were concerned, whether their respective interests were to be evidenced by a single share or a greater number of shares of capital stock, so long as their respective interests were not disturbed. The relation of value of the assets paid in to the corporation to the total authorized capital stock at no time was seriously considered. For years the properties had been carried on the books at a value of $120,000. When the petitioner came into being the same books of account were maintained without change and the properties continued to be carried at the same book value.

None of the capital stock of this petitioner was issued to outsiders; none was sold for cash in or about the year 1915. No offers to purchase the business and its properties had ever been received; there was no appraisal of the properties when acquired by this petitioner. Nothing else took place at or about the date of organization which would serve as a guiding light in an effort to determine the value of the properties at the basic date.

The taxing statute provides that there shall be included in the invested capital of a corporation:

(1) Actual casli paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation * * * at the time of such payment (but in ease such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: * * * (Section 207(a), Revenue Act of 1917).

The question for consideration is “ the actual cash value of tangible property paid in other than cash ” for stock or shares in the corporation. This corporation was organized subsequent to January 1, 1914. Accordingly, the provisions relative to the valuation of the assets prescribed by the parenthetical language does not apply to this case. The actual excess cash value of the tangible property paid in constitutes paid-in surplus.

It was recognized by the incorporators that the par value of the capital stock of the corporation was no real index of the fair value of the assets paid in to the corporation for such capital stock.

In the resolution of the board of directors adopted on October 26, 1915, it was provided:

The capital stock of said corporation shall be One Hundred and Twenty Thousand ($120,000.00) Dollars with tbe privilege of increasing the same to the sum of Five Hundred Thousand ($500,000.00) Dollars by a majority vote of the stockholders. Said stock to be divided into shares of One Hundred ($100.00) Dollars each. More than 10% of the amount of capital to be employed by them has been actually paid in.

For the purpose of determining the actual cash value of the property as of October 26, 1915, the petitioner caused an appraisal to be made of its property in 1925 by a firm of appraisal engineers. These engineers made a careful inventory of all of the property of the corporation then on hand which was paid in to the corporation in exchange for its shares of stock, and added thereto the tangible assets which had been discarded from the date of incorporation to the date that the appraisal was made. The inventory of these assets was carefully made. The engineers determined the reproduction cost of the assets and provided for liberal depreciation from the date of acquisition to the date of their acquisition by the partnership. A number of witnesses deposed as to the cost of construction of buildings, etc., in 1915, as to the condition of the buildings of the petitioner at the time of acquisition in 1915, and as to their estimates of the value of those properties. The appraisal was supplemented by oral testimony of the engineers who made the appraisal and who qualified as expert witnesses. The values are segregated in the appraisal as follows:

In the opinion of witnesses, including an officer of the corporation who had been with it and had been acquainted with the property since 1910, the valuations placed upon the assets by the appraisal engineers were extremely conservative. They gave it as their opinion, which we believe should be given great weight, that the actual cash value of the properties in 1915 was $168,563.08. The appraisal engineers did not attempt to value the water power. It was, however, valued by a different firm of engineers who specialized in making such valuations. The value arrived at in their appraisal has been determined by the saving over coal and electricity method.” The total value fixed by these engineers in their report is $213,900.66, and the petitioner asks that we accept this value for the purpose of determining the invested capital.

Although we have indicated in numerous decisions that the value of properties determined by retrospective appraisals upon the basis of cost of reproduction is of little value, standing alone and unsupported by other evidence, in determining the actual cash value of property at a given date, the estimates of value made by appraisal engineers fully qualified to express an opinion as to the actual cash value of the properties have some evidentiary value, and where, as in this case, they are supported by the testimony of witnesses who had a knowledge of the properties at the time paid in and for several years prior thereto, they are entitled to weight. The record of almost four hundred pages in this proceeding is replete with the story of the engineers who personally made the appraisal. It convinces us that the actual cash value of the land, buildings, machinery, and equipment constituting a part of the assets paid in to the corporation for its shares of stock was in excess of the par value of those shares, and we are of the opinion that the actual cash value of such assets was at least $168,563.08, the amount claimed. We therefore think that the petitioner is entitled to a paid-in surplus, in the computation of its invested capital, of the difference between the par value of its capital stock and the above-named amount, or $48,503.08.

We are further convinced that the water power had some cash value in excess of the value of the land underlying it. We are not, however, convinced that the water power had an actual cash value of $213,900.66, as contended by the petitioner. Various courts and public service commissions have found that it is impracticable to value a water power on any such basis as that used by the engineers employed by the petitioner. In passing upon an application for a transfer of certain property, the New Hampshire Public Service Commission found such a valuation impracticable. (3 N. H. P. S. C. 174.) The Commission states, at pages 821-822:

We feel that any attempt to establish a formula for determining the value of water power would prove as difficult as the establ.shment of a formula for fixing by mathematical process the exact value of an entire public utility plant.
The original cost of the water power, the cost of developing the same, the cost of similar powers in substantially similar locations, the amount of actual earnings in the past, and estimated earnings in the future, are undoubtedly all proper matters for consideration. But when a water power is an integral part of a utility property it is unnecessary and not ordinarily desirable to endeavor to fix an exact value for the same considered apart from the other portions of the property to be valued. Evidence of the character indicated should be considered, but in the end it will ordinarily be best to fix a value upon the entire property to be appraised rather than to attempt to dissect it, and fix an exact value on all its several parts.

Also, in the petition of Grafton County Electric Light & Power Co., (28 A. T. & T. Co. Com. L. 533, February 3, 1914) the New Hampshire Public Service Commission stated in part, in regard to the valuation of water power based upon a comparison of the cost of the energy produced by water with the cost of the same amount of power produced by the use of coal, as follows:

We can not admit that there is any compulsory method of determining the value of a water power, or of any other part of the plant of a public utility, except the method of considering all the available evidence, and, exercis'ng the best possible judgment in giving to each fact its due weight, determining, upon all the evidence, what that power is worth in the market. Its saving to the owner over some more expensive method of power production does not measure its selling price, or value, any more than the cosfc-of-reproduction method determines the value of physical structures, simply because, as a matter of fact, water powers are not valued and do not sell upon that basis. And the objection of the Supreme Court to the conjectural character of the cost-or-reproduetion method applies with equal force to the “ saving-over-eoal ” method of valuing water powers. It assumes, what is not proved, that power could be produced profitably by coal. And it assumes, what is not true, that a given amount of power produced by water, varying in amount as it will on even the best regulated streams, is equal in value to a like amount of power generated by steam, constant-and reliable at all times. Water power has value, if it produces energy at a sufficient saving over coal to offset the disadvantages attendant upon its variable production. But the entire saving over coal, calculated on the total annual production of power, and capitalized, certainly far exceeds the value of the power — what one would pay for it as a substitute for a steam plant.

The Board is unable to determine from the record the petitioner’s invested capital, and, in the circumstances in the case, the petitioner is entitled to have its liability to excess-profits tax for the fiscal year ended September 30, 1917, computed under the provisions of section 210 of the Revenue Act of 1917. In this case, the determination of the Commissioner with respect to proper comparatives will be accepted by the Board in its final determination of tax liability.

The Commissioner has allowed the petitioner depreciation for the taxable year under review of $9,600. This was at the rate of 8 per cent on the Commissioner’s valuation of $120,000 for all property, including the real estate. The petitioner contends that the depreciation should be computed upon the values placed upon the properties by the appraisers and allowed in the amount of $7,621.26 for the taxable year. We have carefully considered the values and rates contended for by the Commissioner and are of the opinion that the depreciation allowance should be in the amount of $7,621.26.

The petitioner erroneously deducted from gross income in its tax return the sum of $1,929.60, representing expenditures made during the taxable year for items of a capital nature. This amount should be restored to the taxable net income and any resulting deficiency shown to be due should be assessed accordingly.

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


author: Murdock:

text:
    Appeal of Marsh & Marsh, Inc.
    Docket No. 6064.
    Promulgated December 22, 1926.
    The petitioner bought a piece of property the actual cash value of which was not in excess of $25,000, and paid as the purchase price therefor the sum of $250 in cash and $250 per month, beginning on the first day of the next succeeding month, for 167 months. The total of these payments is $42,000. During the taxable years the petitioner was not entitled to deduct as interest any portion of the payments made during those years.

      John T. Kennedy, Esq., for the petitioner.

      F. O. Graves, Esq., for the Commissioner.

      This appeal is from the determination of a deficiency in income tax for the years 1919, 1920, and 1921, in the total amount of $1,253.46, of which approximately $900 is in dispute. The Commissioner disallowed certain deductions which the petitioner claimed in its return as payments of interest. The Commissioner by an amended answer alleged that invested capital for the calendar year 1919 was reduced by $504.82, representing the prorated amount of 1918 tax, whereas it should have been reduced by $1,194.55, representing the total tax liability for the year 1918. There was no testimony, but from the exhibits and stipulation we make the following
    FINDINGS OF FACT.
    On November 1, 1913, Carl A. Swanson and wife entered into a contract with the petitioner whereby they agreed to sell and it agreed to buy certain real estate in the City of Omaha, Nebr. This contract was in writing, was signed, sealed and acknowledged, and on December 17, 1913, was recorded. In it the petitioner agreed “ to pay to said Carl A. Swanson as the purchase price for the same the sum of $250.00 in cash which sum was paid on October 18, 1913, * * * and also to pay him the sum of $250.00 per month beginning on December 1, 1913, and continuing at the said rate on the first of each and every month thereafter for 167 months.”
    The contract also provided:
    The said payments being evidenced by 167 notes of $250.00 each bearing even date herewith, said notes to draw no interest until due, and to draw interest at the rate of 10% per annum from maturity until paid.
    * * * * * * *
    It is further agreed that the second party may at its option at any time after the expiration of 5 years from date hereof, pay any or all of said 167 notes not yet matured and shall be entitled to a discount on said notes in a sum equal to interest thereon at the rate of 4% per annum for the unexpired term for which said notes and each of them were to run.
    It is agreed that at any time one half (½) of said notes are paid, the said premises shall be conveyed to the second party upon demand and upon the execution by it of a mortgage on said premises securing the payment of the balance of said notes.
    This contract contained provisions for the protection of the seller in various cases of default, for the delivery of a deed upon the full payment of the purchase money, and a provision that the petitioner “ shall be entitled to the possession of said premises so long as the conditions of this agreement shall remain unbroken by it * * *."
    On November 1,1913, the actual cash value of the premises so purchased and sold was not in excess of $25,000. The petitioner during each taxable year in q'uestion charged off on its books, as interest, a portion of the monthly payments made in pursuance of the contract, and charged off the balance as principal.

      On June 12, 1922, Swanson and Ms wife conveyed the premises to the petitioner by a warranty deed which was duly recorded. This deed recited that the consideration -was $25,000 and that the conveyance was in pursuance of the recorded contract. Twenty-five dollars’ worth of revenue stamps were canceled on the deed.
    On its income-tax returns the petitioner deducted as interest the following:
    Bor 1919_$1, 443.38
    Bor 1920_ 1,270.08
    Bor 1921_ 1, 096. 56
    These deductions were disallowed by the Commissioner.
   OPINION.

Murdock:

The petitioner would have us decide that the purchase price or cost of this property was not $42,000, as determined by the Commissioner, but was less than that amount, and was, in fact, $25,000. If facts, these matters were capable of proof and the burden of proving them was upon the petitioner.

In the contract it was stated that the purchase price was $250 in cash on the day of sale and 167 monthly payments of $250 each beginning on the first of the next month thereafter. These payments total $42,000. There is nothing in this contract which would indicate that the parties intended or considered that a part of the $42,000 was to be interest; indeed, it would appear that they intended the contrary.

The method of bookkeeping is not conclusive as to the amount of the purchase price, or cost, for obvious reasons, nor is the consideration mentioned in a deed executed and delivered at a date later than the years here in question. If stamps in a proper amount were canceled on the deed, that would indicate that the cash consideration was not more than a certain amount. But what of indebtedness assumed? We do not hold that these facts are without probative value, but merely that, in the light of the other facts in the case, the presumption of the correctness of the Commissioner’s determination has not been overcome.

There is an old proverb, hackneyed and worn, but still true, to the effect that a bird in the hand is worth two in a bush. It may be applicable in this case. A cash customer may be able to secure goods at a lower price than that demanded from one who offers only part cash and the balance in future payments. We know that the actual cash value of the premises on November 1, 1913, was not in excess of $25,000. But what does that tell us about the purchase price to one who offers $250 cash and 167 equal monthly payments of $250? The parties to this sale may have considered that all, or none, or a part of the deferred payments was interest. When the seller did not receive all of the purchase money in cash he took a risk. How can we say what portion of the excess over $25,000 he considered reimbursement for taking this risk, and how much he considered interest for the use of his money? Appeal of Carl Lang, 3 B. T. A. 417. The petitioner had the burden of proving facts necessary to the conclusion he desires us to reach; these facts were capable of proof, but have not been proven. We decline to relieve the petitioner by guessing, and therefore decide that the determination of the Commissioner must stand.

The Commissioner by an amended answer alleged that the petitioner’s capital stock and surplus' at the beginning of the year 1919 was reduced by $504.82, representing the prorated amount of the 1918 tax, whereas it should have been reduced by $1,194.55, representing the total tax liability for the year 1918. There was no proof offered in regard to this contention, no reference was made to it in argument or in briefs, and so far as it is concerned we hold in favor of the petitioner.

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


author: Morris:

text:
    Appeal of Dalriada Realty Co., Inc.
    Docket No. 5275.
    Promulgated December 23, 1926.
    The sale oí real property by petitioner in 1920 held to be a sale on the installment plan. The income to be returned for the year 1920 from this transaction determined.

      E. W. Kemp, Jr., Esq., and G. W. McKnight, O. P. A., for the petitioner.

      J. W. Fisher, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $72,-106.89 for the year 1920, and an overassessment of $5,511.47 for the year 1921, which arise principally from the action of the Commissioner in holding that the sale of certain real property in the year 1920 constituted a completed sale in that year, in respect of which the petitioner realized a taxable gain, and not a sale of real property on the installment plan.
    FINDINGS OF FACT.
    The petitioner, a New York corporation with its principal office at New York City, was organized in 1919, for the purpose of taking over and operating the real estate holdings of Julius Fleischman.

      Among the properties taken over by the petitioner was an apartment house situated at 258 Riverside Drive, New York City, which, was known as the Peter Stuyvesant Building, at a cost of $575,00.0,' a part of which was liquidated by the petitioner assuming a first mortgage thereon in favor of the Metropolitan Life Insurance Co. in the sum of $443i)flQ.
    In 1920 the petitioner sold and transferred the Peter Stuyvesant Building to the 258 Riverside Drive Corporation, a corporation which had been formed for the purpose of taking over and operating the property and disposing of some of the apartments on the cooperative plan, and hereinafter referred to as the purchaser, for a consideration of $750,000, of which $58.50.0. was paid in cash in the year-1920, $53,500 was represented by 45 notes, secured by capital stock of the purchasing corporation of a par value of «$88,000 and six proprietary leases covering a like number of apartments already disposed of on the cooperative plan prior to the sale, $195,000 was represented by a purchase-money mortgage payable in 22 semiannual installments, beginning April 1, 1922, and the purchaser assumed the first mortgage of $443,000 in favor of the Metropolitan Life Insurance Co.
    The first payment due to the Metropolitan Life Insurance Co., after the sale was carried into effect, was met by the purchaser but it defaulted in the second and subsequent payments. The Harris Yought Co., managing agents of the property for the purchaser, was instructed by the Insurance Company to turn over to it, under the terms of the mortgage agreement, all the income thereafter received from the property. The sums so paid over to the Insurance Company were insufficient to pay the interest on the mortgage, and that company threatened to institute foreclosure proceedings.
    The general plan of disposing of the cooperative apartments was to sell to prospective tenants thereof capital stock of the purchaser of a par value equal to the value of the apartments they were to occupy. The stock and proprietary leases, the latter usually running for a term of 99 years, were to be delivered to the tenants upon completion of payment therefor. When difficulties arose through the purchaser’s default in its payments to the Insurance Company and the income from rentals of non-cooperative apartments failed to materialize in the substantial amounts which it had been represented to them could be expected, the tenants became dissatisfied with their purchases and threatened to bring legal proceedings to protect their interests. This led to negotiations between the tenants and Fleisch-man as a result of which the purchase-money mortgage given by the purchaser to the petitioner was reduced in September, 1922, from $182,571.42 to $100,000, the original amount thereof, $195,000, having been reduced by a cash payment of $12,428.58.

      In June, 1923, the purchaser, with the approval of the petitioner, liquidated the balance due on the unpaid notes on the above mortgage, at a discount of 5 per cent of said balance.
    The petitioner recorded this transaction upon its books of account as a sale of real property on the installment plan, that is, it did not immediately accrue as income the entire profit to be realized under the contract, but credited the amount thereof to an unrealized profit account, and thereafter accrued as income that proportion of each payment actually received which the total profit to be realized when payment is completed bears to the total contract price. The income from this transaction, which the petitioner reported in its return for the year 1920, was computed in the following manner:
    Selling price_$807,428. 58
    Cost_$575,000.00
    Less: Depreciation_ 69, 682. 98
    - 505,317.02
    Total profit_ 162,111.56
    Less: Profits on deferred payments- 119, 855.25
    Gross profit for 1920-42,256.31
    Deduct:
    Legal expenses of sale_ $2, 644. 83
    Lawyer’s Title & Trust Go_ 2, 082. S4
    Advertising_ 2, 615. 83
    Commission paid_ 15, 500. 00
    22,843. 50
    Net profit for 1920_ 19, 412. 81
    The Commissioner held that the sale of this property constituted a closed and completed transaction in the j^ear 1920, and that the entire profit constituted income for that year. The Commissioner computed the profit from the sale as follows:
    Selling price-$750, 000.00
    Add: Depreciation_ 69,682.98
    Total_ 819, 6S2. 98
    Deduct:
    Cost_$575,000.00
    Expense incident to sale_ 22, 843. 50
    597,843. 50
    Net profit for 1920_ 221, 839.48
    Accordingly, the Commissioner increased the net income reported by the petitioner in its return for the year 1920 by the amount of $202,426.67, representing the difference- in the net income from the sale as computed under the two methods.
   OPINION.

Morris:

The Commissioner has not asserted a deficiency in tax for the year 1921; on the contrary, he has determined that there is an overassessment for that year. Consequently, upon authority of the decisions of this Board in the Appeals of Cornelius Cotton Mills, 4 B. T. A. 255, and R. P. Hazzard Co., 4 B. T. A. 150, we have no jurisdiction as to that year.

Since the hearing of this appeal, Congress has enacted the Revenue Act of 1926, and in section 212 (d) thereof provision is made for installment sales and the rule to be applied in computing the income therefrom. By the provisions of section 1208 of the same Act, the provisions of section 212 (d) are to be retroactively applied in computing income under the Revenue Acts of 1918 and 1921, as well as other acts. Section 212 (d) provides as follows:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the ease * * * of a sale or other disposition of real property, if * * * the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of thes Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

The Commissioner has promulgated his regulations for the enforcement of the above provisions of the statute. These are embodied in articles 42 to 46, inclusive, of Regulations 69, and include, together with the rules laid down in the Act for computing-income from installment sales, a construction of the terms “ initial payments,” “ total contract price,” and “ purchase price.” There the Commissioner has ruled that in the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall not be considered as a part of the initial payments ” or of the “ total contract price,” but shall be included as a part of the “ purchase price.” While we express no opinion as to whether the rule laid down in the Commissioner’s regulations may be properly applied to and generally followed in all cases involving sales of real property on the installment plan, we believe that his construction of the terms “ initial payments,” “ total contract price,” and “ purchase price,” and the rule for computing the income from installment sales to be returned in any taxable year, as they are laid down in the regulations, are, when applied to the facts in this particular case, and considered in the light of the intent and purpose of the Congress in enacting the provisions of section 212 (d) of the Revenue Act of 1926, both equitable and legally sound.

The total contract price, in the transaction which we have under consideration, is the consideration named in the original agreement, to wit, $750,000, less the Insurance Company’s mortgage of $443,000, or $307,000; the initial payment, meaning the total payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale was made, is $58,500; and the purchase price is $750,000. Therefore, since the initial payment received by the petitioner during the year in which the sale was made is less than one-fourth of the purchase price, it is clear that the provisions of section 212(d) of the Revenue Act of 1926, and the regulations promulgated pursuant thereto, are applicable to the facts in this case, and the petitioner is entitled to return the income from the transaction in question on the installment basis.

This brings us to a consideration of the amount of the income which the petitioner should have returned in its return for the year 1920. The rule laid down in the statute is that the petitioner shall return as income from an installment sale that proportion of the installment payments actually received within the year which the total profit realized or to be realized when payment is completed bears to the total contract price. The total contract price, computed in the manner heretofore indicated, is $307,000. The total profit to be realized when payment is completed is $221,839.48, computed as follows:

Consideration named in contract_$750, 000.00
Deduct:
Cost of property_$575, 000.00
Less: Depreciation_ 60, 682.98
- $505, 317.02
Selling expenses- 22, 843. 50
- 528,160.52
Total profit to be realized_ 221, 839.48

The total profit of $221,839.48 is 72.2604 per cent of the total contract price of $307,000. The total payments received in the year 1920 is $58,500; therefore, the income from this transaction to be returned for the year 1920 is 72.2604 per cent of $58,500, or $42,272.33.

The agreement made in 1922 between the purchaser and the petitioner, which resulted in a reduction of $82,571.42 in the purchase-money mortgage, can have no bearing whatever on the computation of the income to be returned for the year 1920. The sale in 1920 was one transaction, and the agreement to reduce the purchase price made in 1922, though involving the same subject matter, was another transaction. The income to bo returned for the year 1920 must be computed in accordance with the terms of the original agreement, and that to be returned for the year 1922 and subsequently must be computed in accordance with the terms of the agreement had in 1922.

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

Milliken concurs in result only.


author: Trammell:

text:
    Louis Hymel Planting & Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2903.
    Promulgated December 23, 1926.
    Where a corporation filing returns on a calendar year basis is dissolved March 31, 1919, the return which included the income from January 1 to that date was a return for the year and it is entitled to the entire specific exemption of $3,000, but is entitled to a credit of only three-twelfths of the average invested capital, the invested capital being averaged over the entire twelvemonth period.

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

      W. Franh Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1919 in the amount of $10,121.73. The deficiency arises on account of the action of the respondent in treating the return of the petitioner as a return for a fractional part of a year and in prorating the invested capital and the specific exemption instead of allowing the full amount of each.
    FINDINGS OF FACT.
    The petitioner was a corporation with its principal office at Central, La., prior to 1919 and up to March 31, 1919, when it liquidated its assets and dissolved. The petitioner filed a return for the calendar year 1919 on March 8, 1920, in which it reported no income and which contained the statement “ out of business January, 1919.” Upon an audit based on a revenue agent’s report, the respondent determined that the petitioner’s income for the three-month period from January 1, 1919, to March 31, 1919, was $31,-438.54, which was all the income received during the calendar year. Its invested capital was determined by the respondent to be $205,000. The respondent reduced the petitioner’s excess-profits credit by 75 per cent and likewise reduced the specific exemption of $3,000 by 75 per cent, upon the ground that the return was for a period of three months and not for the twelve-month period.
   OPINION.

Trammell:

The only question presented for decision in this case is whether the Commissioner erroneously computed the excess-profits credits and the specific exemption of $3,000. The petitioner contends that it should be allowed a credit of 8 per cent of the full $205,000 and the entire exemption of $3,000, since its return was for the full calendar year 1919, even though it had liquidated and dissolved on March 31, 1919. The Commissioner, on the other hand, contends that (lie return was for a fractional part of the year and that the excess-profits credit should be the same fractional part of the average invested capital for the year as the number of months for which the return was filed bears to the full calendar year.

The respondent introduced in evidence the corporation income and profits-tax return of the petitioner which was filed in the office of the collector of internal revenue on March 8, 1920, in which the petitioner reported no income for that year but merely stated “ out of business January 1, 1919.” Counsel for respondent stated at the hearing as follows: “It is further agreed that the taxpayer filed a corporation income profits tax return for the calendar year 1919 in which it stated it was out of business.”

The pertinent sections of the Revenue Act of 1918 involved are:

Sec. 312. That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year.
Sec. 305. That if a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months.
Sec. 326. (d) The invested capital for any period shall be the average invested capital for such period,-but in the ease of a corporation making a return for a fractional part of a year, it shall (except for the purpose of paragraph (2) of subdivision (a) of section 311) be the same fractional part of such average invested capital.

If the return involved in this case was for a three-month period, a fractional part of a year, the computation of the Commissioner of the excess-profits credit and exemption is correct. The statute is clear and unambiguous on this point.

Section 305 specifically states:

If a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, slirdl be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months.

Section 320 (d) states:

The invested capital for any period shall be the average invested capital for such period, but in the case of a corporation making a return for a frae-tional part of a year, it shall * * * be the same fractional part of such average invested capital.

Thus the question is squarely as to whether, when a corporation liquidates its assets and dissolves during a taxable year, its return for the year during which it dissolves is a return for the year or is a return for a fractional part of a year. A case involving this principle was presented to the Court of Claims in the case of Strong v. United States, 62 Ct. Cls. 67. That case, arose, however, under the Revenue Act of 1917 and not under the Revenue Act of 1918. We believe, however, that the reasoning of the court is applicable to the provisions of the Revenue Act of 1918. In that case the court held that a corporation which dissolved before the end of its taxable year was entitled to have its tax comp'uted on the basis of its full invested capital and full specific exemption. The facts and the issue decided in that case were stated by the court as follows:

Tbe facts are admitted. Prom these it appears that the partnership of Strong, Hewat & Co. originated in 1898 and was engaged in business until February 28, 1918, when it was dissolved. Upon the dissolution of the partnership a corporation was formed on March 1, 1918, under the name of Strong, Hewat & Co., Inc., which took over all the assets and liabilities of the old firm and continued its business. The partnership was required under the Revenue Act of 1917 and the regulations to file an excess profits tax return for the six months’ period ending February 28, 1918, the date of its dissolution. Its average invested capital for a year appeared to be $791,607.70. The Commissioner determined that one-half of that amount was the invested capital of the concern for the six months’ period, arriving at this conclusion by dividing the twelve months’ average into two parts, or, as stated by government counsel:
“ The Commissioner allowed one-half of the invested capital for the full year and one-half of the specific exemption of $6,000, since the return was filed for a six months’ period.”
Recovery is sought of the amount by which its excess profits tax, paid under the Commissioner’s ruling, exceeds the taxes it would be required to pay if computed on the basis of a specific deduction of $6,000 and an invested capital of $791,607.70, the question presented being whether the Commissioner’s action was correct. This depends on the construction to be given to the applicable statutes, viz: Sections 201, 203, and 207 of the Revenue Act of 1917, 40 Stat. 303.

Section 201 of tbe Revenue Act of 1917 levies certain stated percentages “of the amount of the net income in excess of the deduction (determined as hereinafter provided) * * The pertinent part of section 203 fixes the “ deduction ” as follows:

Sec. 203. That for the purpose of this title the deduction shall be as follows, except as otherwise in this title provided—
* * * * * * *
(b) In the case of a domestic partnership * * * the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) §6,000.

Section 207 defines invested capital. It contains the following pertinent language:

That as used in this title, the term “ invested capital ” for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly.

The court, in deciding in favor of the taxpayer, used the following language:

When the facts are found to be, as admitted here, that the average invested capital for the taxable year is a given sum, the language of the statute plainly prescribes the method to be pursued in computing the amount of taxes to bo paid, and where the amount of taxes due for an entire taxable year is involved the language of the statute furnishes a method that is clear and complete. It levies a tax to be “ paid for each taxable year ”; it speaks of invested capital “ for the year ” and prescribes deductions of a percentage of the invested capital “ for the taxable year.” There is no specific mention of parts of the year in this connection. The partners had in their business an average actual invested capital of $791,607.70 — not half of that sum, but all of it. When the concern went out of business it was required to make its returns and did so. If it could have waited until the end of its fiscal year and had then made its returns, having ceased business six months before, its reported net income for the year (as is suggested by its counsel) would have been exactly the same as that which was reported. The deductions would then have been on the annual basis.
* * * The Revenue Act of 1917 authorizes a specific deduction of $6,000 in the case of a domestic partnership’s net income, and we think it clear that this exemption, if allowable at all, must be the amount stated. The statute is the only authority for allowing it and the statute could have prescribed a lesser deduction when the returns were for part of the year, but it left the deduction at the stated figure and is not to be amended by engrafting on it by construction something that Congress did not express. The Government contends that the specific deduction for a full taxable year “ should be proportionate ” to the period for which the return is filed, and as indicating that any other theory results in unfairness it argues that, upon the dissolution of the partnership, a corporation was formed and continued the business that got the benefit in its return of the specific deduction authorized for corporations. It received this deduction, however, because the statute allowed it, and because it was a different entity from the partnership which preceded it. And with the further contention that the “ logical method ” for determining the tax for a fraction of the year is the one adopted by the Commissioner we are not concerned, beyond the question whether the logical method coincides with the statutory method. The latter method is the controlling one.

While the decision of the court related to the excess-profits tax of a domestic partnership, the decision is clearly applicable to corporations, the only difference being in the amount of specific exemption, which in the case of corporations is $3,000.

The above decision of the Court of Claims-was rendered on December 7, 1925, and there has been no appeal. On the contrary, under' date of April '2, 1926, the Commissioner promulgated T. D. 3848, which reads as follows:

T. D. 2689, approved April 1, 1918, is hereby revoked and article 20 of Regulations 41 is hereby amended to read as follows:
Art. 20. Computation of tax for period, less than IS months. — If a corporation or partnership at a$iy time, either because it has just designated a fiscal year as provided in sections 8 or 13 of the act of September 8, 1916 (see Income Tax Regulations, arts. 31 and 211), or for any other reason, makes a return for a period of less than 12 months, the deduction will be the full amount allowable for a period of 12 months, i. e., the deductions shall not be prorated in the proportion that the number of months for which the return is made bears to 12 months.

In lieu of section 203 of the Revenue Act of 1917, the Revenue Act of 1918 contains sections 311 and 312 under which the “ credits ” are determined. Section 312 is as follows:

Seo. 312. That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year.

In place of section 207 of the Revenue Act of 1917, the Revenue Act of 1918 has section 326, subdivision (d) of which is quoted above.

The Revenue Act of 1917 contains no provision corresponding to subdivision (d) of section 326 relating to returns made for a fractional part of a year. However, the above language which specifically provides that in the case of a return for a fractional part of a year the invested capital shall be the same fractional part of such average invested capital, does not apply to the situation presented in this case, unless it be held that the return was for a fractional part of a year.

The question of what is a fractional part of a year and what is a return for a year was presented in the case of Bankers' Trust Co. v. Bowers, 295 Fed. 89, decided by the Circuit Court of Appeals, Second Circuit. In that case one John Glackner died April 4, 1921. On March 15,1922, his executors filed two income-tax returns, one reporting the net income of decedent during the calendar year 1921, and the other the net income received by the plaintiffs as executors during the same calendar year, and the tax on each return was computed on the basis of the return being for a full calendar year. An additional tax on each return was assessed under the provisions of section 226 (c) of the Revenue Act of 1921, and it was this additional tax which was sought to be recovered in that suit. The District Court held that the taxpayers were not entitled to recover, but the Circuit Co'urt of Appeals reversed the District Court, holding that section 226 was not applicable to the returns filed.

Section 226 of the Revenue Act of 1921 is as follows:

RETURNS FOR A PERIOD OF LESS THAN TWELVE MONTHS.
Sec. 226. (a) That if a taxpayer, witli the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
(b) In all cases where a separate return is made for a part of a taxable year the net income shall be computed on the basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included.
(c) In the case of a return for a period of less than one year the net income shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in such period; and the tax shall be such part of a tax computed on such annual basis as the number of months in such period is of twelve months.

The real question which was before the court in that case was whether the returns required to be filed for Glackner and his estate were returns for a full taxable year or returns for a period of less than one year. In passing on this question the court said:

In the view we take, it will be unnecessary to consider the constitutional questions presented; this, for the reason that section 226, subdivision (c) provides solely for the placing of income on an annual basis and for computation of the tax thereon in the case of a return for a period of less than one year where the change is made voluntarily by the taxpayer or pursuant to an order of the commissioner. The fundamental scheme of title 2 of the Eevenue Act is for a tax upon the net income of the taxpayer during an accounting period of 12 successive months. This general accounting period seems to be a predetermined measure to be applied to a taxpayer as income, and is not affected by his death or change of status within the period. The tax is imposed upon the entire net income for such period, and the return of such income constitutes his return for the period of 12 full months, even though he may have lived only a portion thereof. The exception to this is where a voluntary change is made in the accounting period by the taxpayer, or where it becomes involuntary in so far as the taxpayer is concerned by the commissioner’s declaring the taxable period terminated under section 250 (g) * * *.

The court further said:

Thus it will be observed that, except where a voluntary change is made, the accounting period is 12 months, which becomes the taxable year * * *.
* * * The time of receipt of income or the ability to receive income has no bearing upon the accounting period. A taxpayer may receive his income for the year on the first day of the year. He may become a nonresident alien during the year, without property in or income from any source in the United States. As an alien, he may have come to this country during the first taxable year, and be may have attained bis majority or become incompetent during the year. When during the year bis status changes, and be becomes a taxpayer, or ceases to be one, is immaterial. If he received taxable income during any part of that year, and kept bis books on a calendar year basis, a return is required of all such income derived from or received within the 12 months of such calendar year, and the return is for a period of 12 months.

The court held that a return was for a fractional part of a year only when the taxpayer makes a short-period return on account of a voluntary change in his accounting period, or where the taxable period is terminated by the Commissioner under the provisions of section 250 (g). All other returns were held to be returns for a full year.

While this case involved returns of an individual and his estate, the reasoning is equally applicable to corporations. If section 220 is not applicable to the case of an individual taxpayer who dies before the expiration of his taxable year, section 232 does not make section 226 applicable to the case of a corporate taxpayer which ceased to exist before the expiration of its taxable year.

The Bankers’ Trust Co. case was decided under the Revenue Act of 1921, but the pertinent provisions of the Revenue Act of 1918 are the same in so far as the determination of whether the petitioner’s return in the present case was a return for a full taxable year or a fractional part of a year is involved.

While the corporation was dissolved on March 31, 1919, it was not required to file its return until the end of its taxable year, which in this case was the calendar year. Section 227 of the Revenue Act of 1918 reads in part as follows:

(a) That returns shall be made on or before the fifteenth day of the third month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the fifteenth day of March.

Section 200 of the Revenue Act of 1918 reads in part as follows:

The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December.

The Revenue Act of 1918 contains no provision requiring a corporation to file a return at any other time than as provided in section 227, excepting under the provisions of section 226 or section 250 (g). It could have waited until the end of the twelve-month period and until the fifteenth day of the third month thereafter to file its return.

In view of the foregoing, it is our opinion that the petitioner’s return, in which was included the income for the period from January 1 to March 31, 1919, the date of its dissolution, was not a return for a fractional part of a year but was for a full taxable year of twelve months, and that it is entitled to the full specific exemption of $3,0.00.

With respect to the excess-profits credit the statute provides for a credit of 8 per cent of the average invested capital for the taxable period. The taxable period being the twelve-month period for which the return was filed, the invested capital must be averaged over the twelve-month period. This is not inconsistent with the decision in the case of Strong v. United States, supra. There the average invested capital for the year was admitted. The court said:

When the facts are found to he, as admitted here, that the average invested capital for the taxable year is a given sum, the language of 'the statute plainly prescribes the method to be pursued in computing the amount of taxes * * #.

The question of invested capital was not involved in the Bankers’ Trust Co. case, but since the taxable year is twelve months, as the court there held, the statute plainly provides that it is over that period that the invested capital is to be averaged. There are two provisions of the statute by virtue of which invested capital may be reduced. The first is the provision that the invested capital for any period shall be the average invested capital for such period, and the second is that in the case of returns for a fractional part of a year the invested capital shall be the same fractional part of such average invested capital. The latter provision has no application here because the return was not for a fractional part of a year but for a full year, but the first provision must be given effect. In the case of the specific exemption of $3,000, there is only one provision of the statute by which it may be reduced, and that has application only in the case of a return for a fractional part of a year. The burden of proof is on the petitioner to show that the determination of the Commissioner is incorrect. That determination is not shown to be incorrect, although we hold that the return was not for a fractional part of a year. No evidence was introduced that the assets were not entirely distributed when the corporation was dissolved.

The Louisiana statutes (Act 267 of 1914, sec. 30) provide as follows:

All corporations, whether they expire by limitation or are otherwise dissolved, shall be continued as bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them to liquidate their affairs, to dispose of and convey their property and to divide their capital, but not for the purpose of continuing the business for which they were established.

In the absence of evidence that the assets were not distributed and that the determination of the Commissioner was erroneous as to the amount of the invested capital when averaged over the taxable year, we affirm his determination in that respect. When the invested capital is averaged for the twelve-month period for which the return was filed, since there is no evidence that there were assets on hand after the dissolution which were not distributed, the same result is reached with respect to the average invested capital for the taxable year as was reached by the Commissioner, and the average invested capital for the entire period of twelve months would be three-twelfths of $205,000, or $51,250, as determined by the Commissioner.

Judgment will be entered on 10 days’ notice, under Bule 60.


text:
    Appeal of Sinsheimer Bros., Inc.
    Docket No. 6498.
    Promulgated December 23, 1926.
    Inventory methods used consistently and uniformly for many years that reflect taxpayer’s income accurately should not be disturbed by arbitrary adjustments that result in distortion of actual income.

      Edward McCarthy, Jr., Esq., for the petitioner.

      Bruce A. Low, Esq., for the Commissioner.
    This is an appeal from the determination by the Commissioner of a deficiency in income and profits taxes for the year 1920, in the amount of $2,918.08, arising out of his action in revaluing the inventory upon a basis different from that used by the petitioner.
    FINDINGS OF FACT.
    Petitioner, a California corporation with its principal office at San Luis Obispo, is, and was during the year in question, engaged in the general merchandise business a,nd the buying and selling of beans and grain.
    The general merchandise business and the business of buying and selling beans and grain were conducted as separate departments of the petitioner’s business. Separate books of original entry were maintained for each department.
    For the years 1918 to 1921, inclusive, the petitioner valued the inventories of the general merchandise department at book cost, which was 110 per cent of actual cost, less 30 per cent. For all years prior to 1920, the petitioner valued the inventories of the bean and grain department upon the basis of market. In 1920 it elected to value its bean and grain inventory upon the basis of cost or market, whichever is lower, and since total market was lower than total cost, the inventory reported in the return for that year was valued upon the basis of market. From the total of the bean and grain inventory as so valued, the petitioner deducted the sum of $1,397.09, representing the estimated charges for storage, weighing, reconditioning, and sacking, and loss from shrinkage in weight. A deduction of similar character, in the amount of $2,558.31, was made from the total bean and grain inventory for the year 1921, which was valued on the same basis as that for the year 1920.
    The petitioner’s inventories were valued by L. F. Sinsheimer, secretary of the company, in collaboration with other executive officers. Sinsheimer’s experience in the business carried on by the petitioner extended over a period of thirty-five years. Realizing that the operations of the business had resulted in a loss for the year 1920, Sinsheimer, in taking the bean and grain inventory, set up in parallel columns on the inventory sheets the market value and average cost of the several grades and varieties of beans and grains, for the purpose of determining the amount of the loss for the year reflected in the bean and grain inventory. The average costs shown in the inventory sheets have been accepted by the Commissioner as actual costs for inventory purposes.
    The Commissioner has revalued the inventories for the years 1918 to 1921, inclusive, and in doing so has valued the general merchandise inventories upon the basis of actual cost, and the bean and grain inventories upon the basis of figures which are alleged to have been actual costs. The inventories reported in the returns and as adjusted by the Commissioner, and the increase in the Commissioner’s valuations over the petitioner’s, for each year, are as follows:

   OPINION.

Morris:

The petitioner concedes that the adjustment made by the Commissioner in the general merchandise inventory at the close of the year 1920 results in a restatement of that inventory at actual cost, and that the adjustment is, therefore, proper. It disputes the correctness of the adjustment made by the Commissioner in the bean and grain inventory, and contends that its net income for the year 1920 has been overstated in the deficiency letter, because of the use of the adjusted inventory.

Prior to the year 1920 it was the petitioner’s practice to value its bean and grain inventory upon the basis of market. For the year 1920 it elected to value its inventory upon the basis of market, since the total of the inventory valued at market was lower than the total thereof when valued at cost; and, so far as the basis of valuation is concerned, this constituted no change from the basis adopted for prior years. The 1919 bean and grain inventory, which was also the opening bean and grain inventory of the year 1920, was valued on the basis of market, and this is true of the bean and grain inventory at the close of the year 1920.

Therefore, the bean and grain inventories at the beginning and close of the year 1920 were uniformly and consistently valued by the petitioner upon the same basis. The Commissioner rejected the petitioner’s inventory valuations and redetermined the inventories upon an alleged cost basis. But an examination of the Commissioner’s computations discloses the fact that in reality he has valued the opening inventory upon the same basis and in the same amount as that of the petitioner, while the closing inventory has been valued upon the basis of average cost figures which were placed in the inventory sheets by the petitioner for the purposes of comparison. The Commissioner’s opening inventory is valued at market; his closing inventory is valued at average cost.

The adjustment which the Commissioner has made in the bean and grain inventory for the year 1920 results in a distortion of the income of that year, as well as of the year immediately following, because of his failure to treat the opening and closing inventories upon a uniform and consistent basis. No better illustration of this could be had than that afforded by comparison of the results obtained through the use of the petitioner’s inventories and those resulting through the use of the Commissioner’s inventories. According to the computations of both parties, the combined result of operations for the two years 1920 and 1921 is a net loss of approximately $21,000. Using the petitioner’s inventories, a net loss is shown for both years in the approximate amounts of $8,000 and $19,000, respectively; while the results obtained through the use of the Commissioner’s inventories are a net profit of approximately $21,000 for the year 1920, and a net loss of approximately $48,000 for the vear 1921.

The inventory practice of the petitioner is undoubtedly faulty, but it can not be said that net income has not been clearly and correctly stated in the return because of the use of those inventories. The opening and closing inventories of the year 1920 have been determined by the petitioner according to a uniform basis of valuation. The error in the basis of valuation is present in both inventories, thus preventing any distortion in the net income for that year. On the other hand, the Commissioner, by accepting petitioner’s opening inventory for the year 1920 and restating the bean and grain inventory, at the close of the same year, at cost, has retained the error in the petitioner’s basis of valuation so far as it affects the opening inventory and eliminated it as it affects the closing inventory. The result necessarily is a distorted net income.

We were confronted with a like situation in the Appeals of The Thomas Shoe Co., 1 B. T. A. 124, and The Buss Co., 2 B. T. A. 266, and what we said in our decisions in those cases is equally applicable to the facts in this. In the first mentioned case, we held that “ Even if the entire practice of the taxpayer had been erroneous, * * * the Commissioner clearly erred in insisting upon a change in method at the close of the year without making and allowing a compensatory change at the beginning ”; and, in the last mentioned case, we stated : “ However faulty the taxpayer’s inventory method was, we believe that greater weight should be given to consistency than to any particular method of inventorying or basis of valuation so long as the method or basis used substantially reflects the income.” And in both cases we held that “ What the inventory practice is, is of some importance; that the practice should be uniform is of the highest importance.”

The value of the general merchandise inventory is $67,018.85, and the value of the bean and grain inventory is $37,897.09. The total value of petitioner’s inventories at the close of the year 1920 is $104,910.94, and the net income for 1920 should be redetermined accordingly.

Judgment will he entered), upon 10 days’ notice, under Bule 50.