author: Smith

text:
    Appeal of THE BAKER & TAYLOR CO.
    Docket No. 3849.
    Submitted July 8, 1925.
    Decided November 18, 1926.
    Upon organization, the taxpayer issued its entire capital stock of $40,000 and $400,000 income bonds and assumed the liabilities of a going business for the assets less $61,976.21 undivided profits of such business. The income bonds were redeemed before maturity. The books of account never showed the bonds as a liability or an asset to balance such liability. When the bonds were redeemed the surplus was charged with the amount paid in redemption. Held, that the taxpayer is not entitled to restore to surplus any part of the $400,000 paid for bond redemption in computing invested capital.

      Joseph B. Miller and 'William E. Bussell, Esqs., for the taxpayer.

      Ellis W. Manning, Esg., for the Commissioner.
    Before James, Littleton, Smith and Teussell.
    This appeal is from the determination of a deficiency in income and profits tax for the fiscal year ended March 81, 1921, in the amount of $292.72. The point in issue is the right of the taxpayer to restore to surplus and include in invested capital any part of $400,000 paid out in redemption of income bonds and charged off to surplus at the time the payments were made.
    FINDINGS OP PACT.
    The taxpayer is a Connecticut corporation with its principal office in New York City. It is a wholesale dealer in books. It was organized on February 22, 1906, for the purpose of taking over the assets and business theretofore owned and conducted by a corporation of the same name, the charter of which had expired by limitation on February 16, 1906. ■ ■
    At a special meeting of the board of directors of the taxpayer corporation, held on June 22, 1906, the following resolutions were adopted:
    Whereas, Nelson Taylor of So. Norwalk, Conn., has agreed to assign and transfer, and has assigned and transferred to this corporation an undivided 9/10 interest or share in the business and assets of Baker & Taylor Company, a corporation dissolved pursuant to the laws of Connecticut on the 16th day of February, 1906, in exchange for 360 shares of the capital stock of this corporation, of the par value of $100 each, and 36 of its income bonds, part of the proposed issue of 40 such bonds of $10,000 each in the form annexed hereto, bearing date April 1st, 1906, and drawing interest from said date at the rate of 6⅞ per annum, and upon the agreement of this corporation to pay over to him, the said Nelson Taylor, 9/10 of the net profits of said business for the year ended March 31, 1906, at the close of business on said March 31, 1906, or as soon thereafter as said net profits shall be determined, and to assume and pay the indebtedness incurred in connection with said assets and business and remaining unpaid and outstanding, and
    Whereas, the said undivided 9/10 share in said business and assets is worth in excess of $40,000.00 and is reasonably worth the said stock, bonds and the said 9/10 shares of the profits of said business for the year ending March 31st, 1906;
    Now, therefore, be it resolved, that the proper officers of this corporation be, and they hereby are authorized to issue to said Nelson Taylor, or such person as he may designate, 360 shares of the capital stock of this corporation of the par value of $100 each, and 36 of its said income bonds, and to pay over to the said Nelson Taylor 9/10 of the net profit of said business for the year ending March 31st, 1906, at the close of business or as soon thereafter as the amount of said profits shall be determined; and
    Whereas, Herbert S. Baker of Bast Orange, N. J., has agreed to assign and transfer, and has assigned and transferred to this corporation an undivided 1/10 interest or share in the business and assets of Baker & Taylor Company, a corporation dissolved pursuant to the laws of Connecticut on the 16th day of February, 1906, in exchange for 40 shares of the capital stock of the corporation of the par value of $100 each, and 4 of its income bonds, part of the proposed issue of 40 such bonds of $10,000.00 each in the form annexed hereto, bearing date April 1st, 1906, and drawing interest from said date at the rate of 6% per annum, and upon the agreement of this corporation to pay over to him, the said Herbert S. Baker, 1/10 of the net profits of said business for the year ended March 31, 1906, at the close of business on said March 31, 1906, or as soon thereafter as said net profits shall be determined, and to assume and pay the indebtedness incurred in connection with said assets and business and remaining unpaid and outstanding.
    Now, therefore, be it resolved, that the proper officers of this corporation be, and they hereby are authorized to issue to said Herbert S. Baker, or such person as he may designate, 40 shares of the capital stock of this corporation of par value of $100 each, and 4 of its said income bonds, and to pay over to the said Herbert S. Baker 1/10 of the net profit of said business for the yelar ending March 31st, 1906, at tire close of business or as soon thereafter as the amount of said profits shall be determined; and
    Be it further resolved that this corporation assume and pay all indebtedness incurred in connection with said business and assets remaining unpaid and outstanding.
    Capital stock of an aggregate par value of $40,000 and bonds of an aggregate par value of $400,000 were issued by the taxpayer, in accordance with the terms of the foregoing resolutions, to the stockholders of the predecessor company. The assets and business were taken over as of April 1,1906.
    The following balance sheet reflects the condition of the business at April 1, 1906, and shows the value at that date of all the assets, exclusive of good will, taken over by this taxpayer :
    Assets:
    Notes and accounts receivable-$166,199. 88
    Cash_ 22, 788. 39

    Inventories_ 131, 410. 75
    Postage stamps_ 683. 35
    Mxtures_ 3, 500. 00
    Personal accounts___ 703.54
    Unexpired insurance_ 533.30
    Total. 325, 819.21
    Liabilities:
    Notes and accounts payable. 222, 801. 01
    Copyright unpaid_ 1, 000.00
    Sundry accounts_ 41.77
    Capital-40, 000.00
    Undivided profits-61,976.43
    Total_ 325, 819.21
    The assets and liabilities listed above were entered on the taxpayer’s books at the amounts shown. The undivided profits which, under the provisions of the resolutions quoted above, the taxpayer was obliged to distribute to the stockholders of the predecessor company were included among the liabilities. The bonds of an aggregate par value of $400,000, which the taxpayer issued in part payment for the assets and business, were not set up as a liability of the corporation on the books. Neither was the good will set up as an asset.

      The bonds were what are commonly known as “ income bonds.” All of them matured April 1, 1916. The material portions of the bonds were as follows:
    Know all men by these presents, That The Baker & Taylor Company, a corporation organized under the laws of Connecticut, in the year 1906, is indebted to Nelson Taylor or assigns, in the sum of Ten thousand ($10,000.00) dollars, and for value received promises to pay the same at its office in the City of New York on the 1st day of April in the year 1916, with interest thereon from the date hereof at the rate of six per cent. (6%) per annum, payable annually on the first day of April in each and every year. Said principal sum and said interest thereon are to be paid only from the net earnings of the said The Baker & Taylor Company, ascertained and declared by its Board of Directors to be applicable to such payments of principal and interest after appropriating to the capital account of said corporation such portion of said net earnings as the said Board of Directors may deem advisable. In the event that the accumulated net earnings of the said The Baker & Taylor Company are insufficient to pay the principal hereof at maturity or any unpaid interest due thereon, then this obligation shall be paid from said net earnings as when and as soon as said net earnings are ascertained and declared by its Board of Directors. This bond may be redeemed in whole or in part by The Baker & Taylor Company at its option at any time before the maturity hereof, by the payment to the holder hereof of the full principal sum or such portion thereof as may be required to pay the part or portion of said bond redeemed, together with interest due thereon, or by depositing with the Treasurer of the said The Baker & Taylor Company to the credit of the holder hereof, the said sum required to redeem said bonds in whole or in part as hereinbefore provided, and by mailing written notice of such deposit to the last known post office address of the registered holder hereof, and upon and after such payment or deposit, payment of interest hereon or such portion hereof as shall have been redeemed, shall cease and determine. It is further expressly provided that any redemption by The Baker & Taylor Company of the series of bonds or any part thereof, of which series this hond is one, shall be apportioned among the several registered holders of said series of bonds in the proportion which the amount of the bonds registered in the name of each registered bondholder bears to the amount of the entire series of said bonds issued and outstanding. This bond is one of a series numbered from one to forty, each for Ten thousand ($10,000.00) dollars, and is transferable only on the books of the said The Baker & Taylor Company by the registered owner in person or by attorney upon the surrender and due assignment thereof.
    The whole issue of bonds was redeemed at par prior to the maturity date as follows:
    Apr. 1, 1907. $93, 352.41
    Jan. 1, 1908. 26,200.86
    Apr. 1, 1908. 9,641.65
    Dec. 28, 1908. 27, 814.00
    Apr. 1, 1909. 22, 713.66
    Dec. 29, 1909. 40, 087. 52
    Apr. 1, 1910. 7,333.89
    Jan. 1, 1911. kpr. 1, 1911. 42,221.48 151. 55
    Apr. 1, 1912. 44,936.74
    Apr. 1, 1913. 45,017.23
    June 4, 1914. 40,529.01
    Total _. 400,000.00

      Of tbe total issue of bonds-, $314,458.76 par value was paid off in cash and $85,546.24 par value was converted into capital stock. As the bonds were redeemed the purchase price thereof was charged against surplus account, as no account had been opened on the books for the bond issue.
    The earnings and net tangible capital of the predecessor concern for the four years ended March 31, 1906, were as follows:

    The capital stock of the corporation was increased from $40,000 in April, 1913, to $200,000. The increase of $160,000 in capital stock was paid for, to the extent of $85,546.24, by notes previously given by the corporation to the stockholders in the redemption of bonds, and the balance was paid in cash.
    In the computation of invested capital for the fiscal year ended March 31, 1921, the Commissioner excluded from claimed invested capital the claimed cost of the good will acquired.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Smith

: The question presented by this appeal is the right of the taxpayer to restore to surplus $400,000. paid out by the taxpayer in the redemption of income bonds and charged to surplus at the time when the payments were made. It is the contention of the taxpayer that the assets contributed to it by its two stockholders upon organization in 1906 were greatly ini excess of $40,000, the par value of the stock issued for them; that the assets were in reality issued for the shares of stock and for $400,000 income bonds issued to the two stockholders in the same proportion as the shares of stock were issued to them; that the-taxpayer should have set up on its books of account upon organization an asset, entitled “good will,” of $400,000 and that a liability of a like amount should have been set up for the income bonds; that if this had been done there never would have been any charge-off to surplus upon the redemption of the bonds, and that then no question would have arisen as to the right •of the taxpayer to include in invested capital, the full amount of its surplus.

Under the Revenue Act of 1921, the invested capital of a corporation must be based upon the amount of capital contributed by the stockholders to the corporation plus the earned surplus. The only contribution of capital reflected upon the taxpayer’s books of account upon organization was net tangibles of $40,000. If assets of a value in excess of $40,000 were contributed, they were not contributed in exchange for shares of stock.

The income bonds were payable, principal and interest only, from moneys to be earned by the corporation in the future and payments were to be made out of such earnings only after they had been ascertained and declared by the board of directors of the taxpayer applicable to such payments “ after appropriating to the capital account ” such portion of the net earnings as the board of directors might deem advisable. The bonds were in no sense a lien upon any part of the assets turned over to the corporation by the stockholders. They were issued to the owners of the assets of the predecessor business in the same proportion that the capital stock was issued to them. They were in effect nothing more than an appropriation of the future earnings of the taxpayer.

We are of the opinion that the Commissioner has correctly held that the assets of the predecessor business were paid in to the taxpayer corporation for its capital stock of $40,000. The payment of $400,000 in redemption of the bonds was simply a distribution of earnings by the corporation to its stockholders. We do not think that the evidence of record warrants the restoration to surplus, or the inclusion in invested capital, of any part of the $400,000 in question.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of MATOS ADVERTISING AGENCY.
    Docket No. 3743.
    Submitted September 23, 1925.
    Decided November 18, 1925

      Walter Willard, Esq., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Graopner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $1,961.21 for the calendar year 1919. In its petition the taxpayer claims classification as a personal service corporation and, in the event such classification is denied, it requests assessment under section 328 of the Revenue Act of 1918. No evidence was offered at the hearing in support of the claim for special assessment, leaving in issue only the question of whether the taxpayer is entitled to personal service classification.

      FINDINGS OF FACT.
    The taxpayer is a Pennsylvania corporation with its principal place of business in Philadelphia. It was incorporated in 1910 for the purpose of conducting a general advertising agency and had a capital of $10,000, divided into 100 shares of capital stock. The stock was paid for in cash and was held as follows:
    Shares.
    William W. Matos, president and treasurer_ 98
    E. B. Matos (wife of William W. Matos)_ 1
    Joseph H. Hughes_^_ 1
    Total_100
    William W. Matos devoted his entire time to the business of the taxpayer. E. B. Matos and Joseph H. Hughes gave no time to the business and performed no services for the taxpayer.
    The work of the agency was the acceptance of business from mercantile concerns which use advertising, advising them how best to utilize advertising in their distribution and sales plan, preparation of booklets, and placing of advertising where necessary. All advertising copy was prepared under the direction of William W. Matos, who, for a number of years prior to the organization of the agency, had been engaged in newspaper work in Philadelphia. During that time he had been rendering advertising and editorial services to several persons, which led to his establishing an advertising-agency.
    The income of the taxpayer consists of fees charged for such work as the preparation of circulars and commissions on advertising placed with newspapers, periodicals, and similar advertising media.
    In all cases of advertising placed with publications the space was obtained in the name of the advertiser. The publications bill the agency monthly for the space used, designating the advertiser, and in many cases render separate bills for each advertiser, and the agency about the same time bills the advertiser for the amount due. The agency bills the advertiser- for the full amount of the cost of space used, less, in some cases, 2 per cent for payment in 10 days, and, in remitting to the publishers, deducts its commission, which ranges from 10 per cent to 15 per cent.
    Space purchased by one advertiser can not be used by or transferred to any other, nor can space in the newspapers be purchased in bulk. If space contracted for is not used in full, the portion used is billed to the advertiser at the rate governing such smaller amount.
    In 1919 the taxpayer employed two bookkeepers, one stenographer and one checking clerk, who were paid a total of $1,570.65. The duty of the checking clerk was to check space used in newspapers. During the early part of 1919 the taxpayer also employed, on a salary, a technical copy writer, who was engaged in the taxpayer’s advertising department.
    Taxpayer also had one employee who solicited daily advertising from local brokers. For his services he was paid 50 per cent of the commissions, amounting in 1919 to $11,512.50.
    The taxpayer was one of the originators and is a member of the American Association of Advertising Agencies, an organization consisting of over a hundred agencies. In order for an agency to become a member it must file an application describing its organization, what lines of advertising it handles, and its departments, such as analytical, research, art, and copy work. The association maintains supervision over its members to compel observance of its ethics, which require, principally, that proper service be rendered advertisers and that members assume an obligation to publications for advertising space used by their clients.
    Members of this association are not automatically granted recognition and credit by publishers, but are investigated by the American Newspaper Publishers Association. The latter association then makes its recommendation to the publishers, who, if the agency be favorably recommended, grant it recognition and extend credit for the advertising space ordered. The agencies are notified by letter that the publisher’s association has accorded them recognition. If payment of client’s accounts is not made, the agency loses its recognition. Members of the advertising association submit balance sheets to it and the association furnishes statements to the publisher’s association.
    The balance sheets of the taxpayer for 1918 and 1919 were as follows :

    In 1919 the taxpayer placed total advertising amounting to $304,-559.92, on which commissions, representing gross income, amounted to $44,222.90. It claimed a deduction in the return filed of $1,499.77, representing unpaid advertisers’ accounts which the taxpayer had paid publishers.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of LEWIS DILL.
    Docket No. 4563.
    Submitted October 14, 1925.
    Decided November 18, 1925.

      Eraos 8. StocTcbridge and R. K. Slaughter, Esgs., for the taxpayer.

      P. J. Rose, Esq., for the Commissioner.
    Before GiiaupneR, Teammell, and Phillips.
    This is an appeal from the determination of a deficiency of $1,393.90, income tax for 1922.
    FINDINGS OF FACT.
    Prior to 1912 the taxpayer had been engaged in the lumber business as an individual. In 1912 a partnership was formed under the name of Lewis Dill & Co. to continue this business. The firm was composed of taxpayer and one T. A. Myers who had been an employee of the taxpayer. Myers made no contribution to the partnership capital, all of which was contributed by taxpayer. In 1912 a lot described as 11 Overhill Hoad, Baltimore, was purchased from the partnership funds, and in 1912 and 1913 a residence was erected on such lot, the cost of which also was paid from partnership funds. Title to such lot was taken in the name of the taxpayer and the property was carried as an asset on the books of the partnership. The property was used by taxpayer as his dwelling and, in computing and dividing partnership profits, he was charged with interest of 6 per cent on the cost of $24,804.05.
    In 1916, L. Alan Dill, son of the taxpayer, was admitted to the partnership, which was then composed of Lewis Dill, T. A. Myers, and L. Alan Dill. The latter made no contribution to the partnership capital.
    In 1920, Myers withdrew and there was paid to him, from the partnership assets, his portion of the partnership earnings which had not previously been drawn by him and had been credited to his capital account. Since that date the business has been conducted in the same name by the taxpayer and his son.
    In 1922 the dwelling house was sold for $40,000. The profit was shown upon the partnership profit and loss account and reported as income of the partnership. The Commissioner has included the profit as income to the taxpayer.
    There were no written agreements upon the formation of any of the partnerships and no agreement as to the .distributive share. At the end of each year the taxpayer determined the percentages to be used in dividing the income of the year. In 1921 and 1922 taxpayer received two-thirds and his son one-third. '
    During 1922 dividends of $18 were paid on certain stock standing in the name of Lewis Dill. Such dividends were treated as income of the partnership and were so reported in its tax return. The Commissioner has treated such dividends as income of the taxpayer. The dwelling house and the stock, referred to above, were included in the statements of assets and liabilities submitted to banks and others for the purpose of credit.
    In 1911 the partnership built a lumber mill. It was of wood construction, except for the boiler room, which was of brick. This mill, together with the boiler, engine, shafting, pulleys, and other machinery, cost $18,000. The taxpayer deducted depreciation at 10 per cent. The Commissioner reduced the depreciation on the brick portion to 3 per cent. The average useful life of this property was 10 years.
    Lewis Dill keeps no personal books of account. Capital accounts were carried upon the books of the partnership for each of the partners, showing, in the case of taxpayer’s son, the profits left in the business.
   DECISION.

The profit on the sale of the dwelling house and the dividends on the stock should be accounted for as income of the partnership. Depreciation on the lumber mill is allowed at 10 per cent. The deficiency should be computed accordingly. Final determination will be settled on 10 days’ notice, under Rule 50.


text:
    Appeal of SARGENT BARGE LINE, INC.
    Docket No. 4035.
    Submitted July 15, 1925.
    Decided November 18, 1925.

      William, Huele, Jr., Esq., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Sternhagen, Green, and Love.
    The Commissioner has asserted a deficiency in income and profits taxes for the taxable period July 1 to December 31, 1918, in the sum of $492.25. The deficiency results from the fact that the Commissioner holds the taxpayer affiliated with the Sargent Transportation Line, Inc. The taxpayer contends that the Sargent Transportation Line, Inc., is a personal service corporation and that, therefore, it can not be affiliated with the taxpayer, which both parties agree is a corporation in which capital is a material income-producing factor.

      BINDINGS OB BAGT.
    For many years prior to July 1, 1918, Donald J. Sargent was engaged in the business of coal transportation in and about New York Harbor. This business was carried on under the name of the Sargent Transportation Line. He started the business with one barge, which he operated personally. Thereafter, as the business grew, he employed others to operate the barge and devoted his entire time and energies to the business. By July 1, 1918, he had accumulated 10 such barges and was doing a substantial business. On that date he decided that his method of conducting his business was unsatisfactory and he caused two corporations to be organized. The first of these was the Sargent Barge Line, Inc., the taxpayer herein, which had an authorized capital of 750 shares of no par value common stock. The second was the Sargent Transportation Line, Inc., which had an authorized capital stock of 100 shares of no par value common stock. All of the stock of both corporations was issued to Sargent.
    Pursuant to his plan, all of his individual assets, which were used in the business he had theretofore built up, were transferred to the Sargent Barge Line, Inc., and thereafter all of the physical assets of the business were carried in the name and were the property of that company.
    The record does not disclose whether any money was actually paid in to the Sargent Transportation Line, Inc., for the stock issued. It does appear, however, that $1,000 was loaned to the Transportation Line by the Barge Line, and this seems to have constituted its working capital. So far as the record discloses, this company had no physical assets.
    Sargent devoted all his time to the operation of both companies with the result that, for all practical purposes, in so far as patrons of the business were concerned, the services rendered were the same as when the business was conducted by him as an individual.' Shippers delivered their coal to the railroad piers and notified Sargent to arrange for its transportation to vessels, industrial plants, etc., in and about New York Harbor. The Transportation Line then chartered the barges necessary for the transportation of the coal from the piers to its destination and arranged with the owners of tug boats for the service of their boats in the movement of the barges. In chartering barges preference was always given to those of the Sargent Barge Line and the barges of that company were always used if available and suitable. When the necessity arose, as it frequently did, the barges of other lines were chartered. The average number of barges employed was estimated to be 25; however, in many instances, as many as 100 were used. The barges were chartered by the day or on a tonnage basis and never for an extended period of time.

      Sargent conducted all negotiations with the owners of the coal, made the contracts therefor, secured the necessary barges by charter, supervised the movements of the barges and saw to it that they arrived safely at their destination and promptly discharged their cargoes so as to avoid delay in the departure of vessels with the consequent demurrage. In the early history of the business the collections for the services rendered were made by the captains of the barges, but later, when it was found difficult to secure trustworthy individuals to act as captains, it became necessary for the Transportation Line to make its own collections, and this it did through the medium of monthly statements.
    In some instances the Transportation Line received a greater compensation for its services than was customarily paid. Those securing the services were willing to make these additional payments because of the efficient service rendered by the Barge Line and the Transportation Line under the management and supervision of Donald J. Sargent.
    On the income-tax return filed by the Sargent Transportation Line, Inc., for the taxable period in question, appear the following schedules:
    GROSS EARNINGS ON TRANSPORTATION.
    Transportation of coal-$152,328. 86
    Less charter cost of boats, towage, etc- 127, 689.24
    - $24,639.62
    INTEREST RECEIVED.
    On bank balances- $73. 39
    ORDINARY AND NECESSARY EXPENSES.
    Office salaries-. $541. 00
    Auditing expense- 1,250. 00
    General expense and outside superintendence_ 127. 95
    •Rent_ 750. 00
    Office expense_ 759. 08
    Compensations_ 531.80
    Legal expense_ 597.88
    4, 557. 71
    COMPENSATION OF MEMRERS."
    Donald J. Sargent, president, owner entire stock, manager, practically whole time' — :_$5, 000.00

      Balance sheet as at December 31, 1918.

    Assets:
    Cash, in bank 2, 227.44
    Petty cash_ 250.00
    2,477.44
    Accounts' receivable- 29,744.28
    32,221. 72

      Liabilities:
    Loan account---$1,000.00
    War tax_ 1,690.62
    Sargent Barge Line, Inc_ 4, 618. 64
    Accounts payable_ 6, 751.94
    Insurance claim (a/c Sargent Barge Line, Inc.)--— 8,637.35
    Net profit, period 7/1/1918 to 12/31/1918_ 9, 523.27
    32,221.72
    It appears from the testimony that the amount of $127,689.24, above referred to, was composed in part of the following items:
    Chartering barges_$94,908. 52
    Towing_ 24, 650.21
    Stevedoring_ 6, 855. 90
    The stevedoring charge, above referred to, would be procured at the request of the owners of the coal through ,0’Connel and O’Pool, boss stevedores, who had their offices with the Sargent Barge Line. In instances where the contract included “ trimming in ” the coal, this latter service furnished by the stevedores was supervised personally by Sargent. The bills for the stevedoring and trimming services were paid by the Transportation Line and the same amount on monthly statements collected from the parties for whom the service was rendered.
   DECISION.

The determination of the Commissioner is approved.


author: Arundell:

text:
    Appeal of CHARLES M. MONROE STATIONERY CO.
    Docket No. 950.
    Submitted October 8, 1925.
    Decided November 18, 1925.
    Temporary conditions limiting use of trade-marks. and trade names will not support a deduction for obsolescence or loss of useful value.

      A. Evan Hughes, Esq., for the taxpayer.

      Briggs G. Bimpieh, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1918 and 1919 in an amount less than $10,000. The deficiency arises from the refusal of the Commissioner to permit the taxpayer to deduct $25,000 for the alleged loss of useful value of intangibles for the year 1918. It is not clear from the pleadings and testimony given at the hearing whether the taxpayer is relying entirely on the alleged loss of useful value of its trade names and trade-marks, or whether it desires to secure deduction spread over several years by an allowance in the nature of obsolescence. In view of the conclusion reached in the opinion, it does not become material to determine this point.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation with its principal place of business in St. Louis. It was organized more than 20 years ago with a capital stock of $100,000, fully paid for in cash.
    It was organized for the purpose of taking over the stationery business of Charles M. Monroe. For this business it paid $100,000, of which amount $75,000 was paid for the stock of stationery owned by Monroe and $25,000 was paid for certain trade-marks and trade names, the most well known of which was the trade name “ Monroe Doctrine.” The trade names and trade-marks were worth, on March 1, 1913, not less than their cost. The business of the taxpayer was that of a wholesale dealer ⅛ stationery, including such articles as paper, pamphlets, pen points, pencils, and toothbrushes. The sales were made primarily in Missouri, Kansas, and Illinois. The sales were made by regularly employed traveling salesmen and through mail orders. The goods sold on mail order carried the above-mentioned trade names.
    In 1918 the taxpayer was unable to place orders for merchandise that bore the company’s trade names, for the reason that the manufacturers, who were then operating under the regulations of the War Industries Board, refused to accept such orders. During the years in question the company continued to sell merchandise on hand bearing the company’s trade-marks and trade names, and the regulations of the War Industries Board did not in anywise restrict such sales. Some of the retail stores which had purchased articles bearing the company’s trade names were selling those goods to the public. The turnover on some of the goods was very rapid and some goods took a year or longer to be turned. The restrictions of the War Industries Board on the manufacture of goods were removed immediately after the Armistice and goods were available to the taxpayer within six months’ time. The company did not attempt to revive its mail-order business immediately after the war, but devoted its attention entirely to its regular wholesale business. Before 1924 the company reestablished its mail-order business and is now selling goods through that channel bearing the trade-marks and trade names formerly used by it.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Arundell:

Through the mail-order department of its business the taxpayer sold certain trade-marked articles. In 1918 it was unable to place orders for such goods, due to certain restrictions placed on the manufacturers by the War Industries Board. It is not apparent from any evidence presented to us that the regulations of the War Industries Board specifically prohibited the manufacture of the articles marked in the manner desired by the taxpayer. It merely experienced one of the many difficulties which confronted business due to the war emergency. We can but regard this condition as temporary. The taxpayer was not prevented from selling such trade-marked goods as it had on hand and, in fact, it did continue to trade in them during the years in controversy.

A temporary condition which may have prevented the taxpayer from securing merchandise in its business can not offer a basis for permitting a deduction for obsolescence or loss of useful value of its trade-marks or trade names. The fact that the company is now using them serves to emphasize the fact that the claimed deduction should not be allowed.


text:
    Appeal of THE RAINBOW ROYALTY CO.
    Docket No. 3619.
    Submitted November 2, 1925.
    Decided November 18, 1925.

      W. B. 'Washington, O. P. A., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    This is an appeal from the determination of a deficiency of $2,427.04 in income and profits taxes for 1919. Originally the taxpayer appealed from the disallowance by the Commissioner of a deduction for depletion, but this was abandoned at the hearing. The sole question remaining is as to the value of property paid in for stock or shares at the time of incorporation. The taxpayer claims that its profits tax should be computed under section 301 upon the basis of an invested capital of $100,000, instead of under section 302 as computed by the Commissioner.
    FINDINGS OE FACT.
    The taxpayer was incorporated some time about 1917. For $100,000 par value of its capital stock issued at the time of its incorporation it received fractional interests in. three oil properties. These fractional interests had been purchased by several individuals before the organization of the taxpayer, at a price of $50,000. This purchase had been made within 60 days prior to the transfer to the corporation. The value of the property paid in for stock was $60,000.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be made on 15 days’ notice, under Kule 50.


author: Littleton:

text:
    Appeals of R. D. HENRY, FRANK A. TARR, and OTTO HAAS.
    Docket Nos. 3545, 3543, 3542.
    Submitted October 15, 1925.
    Decided November 18, 1925.
    Distributive shares of members of partnerships determined from the evidence.

      Maynard Teall, Esq., for the taxpayers.

      A. J. Seaton and A. Colder Maelcay, Esqs., for the Commissioner.
    Before Littleton, Smith, and Trussell.
    This is an appeal from the determination of deficiencies in income tax for the calendar year 1920 in the following amounts:

    The deficiencies arise from additions to taxpayers’ income of profits alleged to have been received by them from certain partnerships.
    FINDINGS OF FACT.
    Taxpayers are residents and citizens of Dawson, Pa. During the calendar year 1920, R. D. Henry and Otto Haas each owned a one-fourth interest in a partnership known as the Judy Mine Coal Co. and a one-fourth interest in a partnership known as the Steuben Pike Coal Co. Henry and Tarr each owned a one-third interest in a partnership known as the Youghiogheny Coal & Coke Co.
    At the hearing it was stipulated that the net income of the Judy Mine Coal Co. for the year 1920 was either $18,697.82 or $20,060.32, the difference in dispute being an item of $1,362.50 claimed by the taxpayers to have been paid as commission by the Judy Mine Coal Co., but by the Commissioner to have been a withdrawal of capital by Henry; that the net income of the Steuben Pike Coal Co. for the calendar year 1920 was either $106,621.50 or $107,273.67. The only ■question in dispute, regarding the net income of the latter company relates to depletion, and is whether a tract of land containing 4½ acres of Pittsburgh seam of coal, known as the Nicholson property, was purchased for $2,700 or for $1,000.
    All of the coal produced by the Judy Mine Coal Co. was sold through the Youghiogheny Coal & Coke Co., a brokerage firm, which charged the Judy Mine Coal Co. a commission on all coal sold. The commission was usually deducted by the Youghiogheny Coal & Coke Co. in making remittances to the Judy Mine Coal Co. However, on July 24, 1920, the Judy Mine Coal' Co. paid to the Youghiogheny Coal & Coke Co. $1,362.50 by check as commission on coal sold. The net income of the Judy Mine Coal Co. for the calendar year 1920 was $18,697.82, one-fourth of which was income to Henry and one-fourth to Haas.
    During the year 1920 the Steuben Pike Coal Co. was the owner of various coal rights and coal properties, among which was a tract of 4½ acres of land, known as the Nicholson property, containing the Pittsburgh seam of coal, for which it paid $2,700. The net income of the Steuben Pike Coal Co. for the year 1920 was $106,621.50, one-fourth of which was income to Henry and one-fourth to Haas.
    During the year 1920 the Youghiogheny Coal & Coke Co., in which taxpayers owned a one-third interest, made a contribution of $1,000 to the Salvation Army.
    During the year 1920 the regulations of the United States Fuel Administration permitted- the Youghiogheny Coal & Coke Co. to charge only $2.35 per ton for coal mined by it from what the Fuel Administration had termed the thick vein of coal. The partnership, however, took the position that it was operating the thin vein of coal and should be permitted to sell its coal at $2.75 per ton, the price allowed other operators working the thin vein in another district, and engaged the services of an attorney to take the .matter up with the United States Fuel Administration and, if possible, to secure a permit authorizing the sale of its coal at $2.75. At the time the attorney was employed his compensation was not agreed upon. The permit desired by the partnership was granted by the Fuel Administration, whereupon the partnership agreed to pay the attorney as compensation for his services 7½ cents per ton on each ton of coal sold during the time the permit to charge $2.75 was in effect. Accordingly, during the year 1920, it paid to him the sum of $4,453.10.
    During 1915 there-existed a partnership known as Cochran Bros., composed of A. G. Cochran, owner of three-fourths interest, and George G. Cochran, owner of one-fourth interest, engaged in the mining of coal. In that year Henry was appointed guardian of George G. Cochran, and E. C. Higbee of A. G. Cochran, by the Court of Common Pleas of Fayette County, Pa. Henry and Higbee have acted as guardians of George G. and A. G. Cochran until the present time. On December 29, 1919, they, as guardians, sold, with the consent of the court, certain coal properties belonging to their wards, including the improvements and mine equipment, to one William Haas for $10,000. On January 1, 1920, Haas organized a partnership known as Cochran Bros.' Special, composed of William Haas, H. M. McDonald, H. Mont Emmel, and J. Boy Henry,— E. D. Henry being employed as treasurer of the partnership at a salary of $100 a month. At no time was he a partner of Cochran Bros. Special nor did he have any interest therein. During the calendar year 1920 the Grace Coal & Coke Co., a partnership, in which E. D. Henry held a proprietary interest, borrowed $50,000 from the partnership of Cochran Bros. Special, which amount was repaid by the Grace Coal & Coke Co. during the years 1920 to 1923. The Commissioner held that the $50,000 borrowed by the Grace Coal & Coke Co. from Cochran Bros. Special was income to E. D. Henry in the year 1920.
    DECISION.
    The deficiencies should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 10 days’ notice, under Eule 50.
   opinion.

Littleton:

The issues in these appeals, which were heard together, .are disposed of by the foregoing findings of fact. The petitions alleged that the Commissioner erred in his determination of the distributive net income of the various partnerships, in which the taxpayers held an interest, and in holding that E. D. Henry received $50,000 income from the partnership of Cochran Bros. Special. Certain of the issues originally raised were disposed of by the stipulation filed, and from all the evidence submitted the Board is of the opinion that the Judy Mine Coal Co. is entitled to deduct $1,362.50 as commission paid to the Youghiogheny Coal & Coke Co. in 1920; that the-Steuben Pike Coal Co. paid $2,700 for 4½ acres of land, known as the Nicholson property, containing the Pittsburgh seam of coal; that the Youghiogheny Coal & Coke Co. paid attorney’s fees in the amount of $4,453.10, and that the amount was a legal deduction from gross income of that partnership; that the Youghiogheny Coal & Coke Co. contributed $1,000 to the Salvation Army during. 1920, which was a proper deduction as a charitable contribution by the partners in their respective income-tax returns; that R. D. Henry was not at any time a partner or the owner of any interest in the partnership known as Cochran Bros. Special, and that the sum of $50,000 borrowed by the Grace Coal & Coke Co. from Cochran Bros. Special did not constitute income to him.


author: GRAUpner

text:
    Appeal of CAPITOL SECURITIES CO.
    Docket No. 3031.
    Submitted October 16, 1925.
    Decided November 18, 1925.
    Evidence insufficient to enable determination of invested capital or rate of depreciation.

      Theodore I. Schneider, O. P. A., for the taxpayer.
    A. P. Smith, Esq., for the Commissioner.
    Before GeaupNek and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1919 in the amount of $2,427.34. The taxpayer contends that the Commissioner placed an incorrect value on buildings and equipment for the purpose of determining invested capital; that he used an incorrect March 1, 1913, value of buildings and equipment in determining the amount of depreciation; that he used an erroneous rate in determining the depreciation; and that he failed to make an allowance for obsolescence.
    FINDINGS OE FACTS.
    The taxpayer is the owner of the New Kenmore Hotel in Albany, N. Y., which it acquired in 1908. The hotel buildings had a value as of March 1,1913, of $175,000.
    Since the erection of this hotel, two large and more modern hotels have been erected in Albany, resulting in the New Kenmore being rated as a third-class hotel and in the increase of its operating costs and the decrease of its earnings.
    In 1919 the taxpayer borrowed $150,000, securing the loan by a mortgage. Of this loan $125,000 was used to take up two other mortgages and the balance of $25,000 was used in making alterations, the greater part being spent in altering the plumbing.
    Most of the furniture, kitchen equipment, and silverware used in the hotel was second-hand equipment. Linen and towels were purchased new and charged to expense.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled,on 10 days’, notice, under Rule 50.
   OPINION.

GRAUpner

: The only evidence offered in this appeal which is at all'satisfactory in establishing any of the facts involved is that establishing the March 1, 1913, value of the hotel building. This value we find to be $175,000, and depreciation should be allowed on that basis. As to the rate to be applied in determining the allowable depreciation, the only evidence is that of a contractor who testified, in substance, that the building would have a useful life of from 10 to 20 years from 1917, depending on the repairs made. No evidence was offered to prove either the value of the equipment or its useful life. The depositions of the taxpayer’s witnesses contain some general statements to the effect that the erection of new and more modern hotels in Albany has tended to render the taxpayer’s hotel obsolete, but as to the extent to which this affects the value of the taxpayer’s property we are not informed.

No evidence was offered to establish the value of assets for the purpose of determining invested capital.

We believe it advisable to point out that we are wholly uninformed as to the value attributed by the Commissioner to the taxpayer’s property and as to the rates of depreciation used in determining the tax liability. The statement attached to the deficiency letter discloses that the deficiency was based on a revenue agent’s report. No effort was made to advise us of the values and rates set forth therein, which were the basis of the Commissioner’s determination. It is evident, we believe, that we can not find that the Commissioner erred unless we are first informed as to what he did in committing the error of which the taxpayer complains.


text:
    Appeal of TWELVE EAST THIRTY-FIRST STREET HOTEL CO.
    Docket No. 3645.
    Submitted October 13, 1925.
    Decided November 18, 1925.
    A reasonable allowance for exhaustion, wear and tear of a certain hotel building for the year 1919 found to be an amount computed at 4 per cent upon the cost of the building.

      Edward Thompson, Esq., for the taxpayer.

      John W. Fisher, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $5,239.75. Only so much of the deficiency is in controversy as arises from the disal-lowance of part of the deduction taken by the taxpayer in its return for the year 1919 as an allowance for the exhaustion, wear and tear of the building owned by it.

      FINDINGS OF FACT.
    The taxpayer is a New York corporation with, its principal office in New York City.
    On June 30, 1919, the taxpayer acquired, at a cost oí $226,127.80, a certain hotel building situated in New York City. It retained title to the building until May 30, 1920, at which time the building was transferred to the Twelve East Thirty-first Street Eealty Co.
    The taxpayer, in computing its net income for the year 1919, deducted as an allowance for the exhaustion, wear and tear of the building in question, for the period July 1 to December 31, 1919, an amount computed at the rate of 4 per cent per annum on a valuation of $226,127.80. The Commissioner, upon audit of the taxpayer’s return, allowed for the exhaustion, wear and tear of the building an amount computed at the rate of 2 per cent per annum on the valuation claimed and disallowed the remainder of the deduction. Subsequent to the mailing of the deficiency letter herein, the Commissioner, upon consideration of the returns of the taxpayer and the Twelve East Thirty-first Street Realty Co. for the years 1920 and 1921, allowed for each year for the exhaustion, wear and tear of the building in question an amount computed at the rate of 4 per cent per annum on the- valuation mentioned.
    A reasonable allowance for the exhaustion, wear and tear of the taxpayer’s building during the period July 1 to December 31, 1919, is an amount computed at the rate of 4 per cent per annum on a valuation of $226,127.80.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, in accordance with Rule 50.


author: GRATJPNER:

text:
    Appeal of H. FENDRICH, INC.
    Docket No. 4254.
    Submitted September 22, 1925.
    Decided November 18, 1925.
    Taxpayer paid the sum of $5,000 for tbe use of certain machines under a lease contract. Helé, that such amount may not be deducted as an ordinary and necessary expense but must be exhausted pro rata over the life of the contract.

      Oonrad Wolf, Esq., for the taxpayer.

      Willis'D. Nance, Esq., for the Commissioner.
    Before Geaupneh, Teammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the nine months’ period ended .December 31, 1920, in the amount of $8,742.32. The question involved is whether the amount of $5,000, paid in 1920 for the use of certain machines under a lease contract, may t - deducted as an expense in that year, or whether the amount was a -.apital expenditure to be spread over the period of the lease and an aliquot part taken each year as exhaustion.
    FINDINGS OF FACT.
    The taxpayer is an Indiana corporation with its principal place of business at Evansville. It was organized April ", 1920, for the purpose of manufacturing cigars. It succeeded a partnership which had conducted the same business.
    During the existence of the partnership bands were placed by hand on the cigars which it manufactured. About the time that the corporation was organized a mechanical device for banding cigars was patented and was placed on the market by the International Banding Machine Co., a New York corporation.
    On April 20, 1920, the taxpayer, as lessee, entered into an agreement with the International Banding Machine Co., as lessor, for the use of 10 of the banding machines for a period of five years. The material part of the agreement which gives rise to the controversy here reads as follows:
    1. The lessor prill deliver said machine or machines hereby leased to the lessee f. o. b. in the Borough of Manhattan, New York City, on or before the 15th day or June, 1920. * * *
    2. The lessee agrees to pay the lessor upon the execution of this agreement five hundred ($500) dollars in New York funds for each machine covered hereby, and shall not at any time after the delivery to it f. o. b. as aforesaid, of each respective machine, have or claim repayment of said sum or any part thereof.
    These provisions were followed by others relating to the ownership of the leased machines, their use and maintenance, and the following:
    6. The leased machinery shall be used only in the banding of cigars, and the lessee shall pay the lessor throughout the full term of this agreement, the sum of $150.00 per quarter-yearly per machine in advance for the use of said leased machinery, commencing on the date when the said leased machinery is delivered to the lessee.
    7. The term of this agreement shall be five years from the date or dates of deliveries * * *.
    The initial payment of $500 per machine, a total of $5,000, was paid by the taxpayer at the time the agreement was executed, and the machines were delivered to it substantially in accordance with the agreement.
    ■ The taxpayer charged the initial payment of $5,000 to expense and claimed the full amount as a deduction from gross income in the return filed for 1920. The Commissioner allowed a deduction of only $666.67, on the theory that the payment should be prorated over the life of the agreement, which resulted in the deficiency here involved.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

GRATJPNER:

In its petition the taxpayer contends that the sum of $5,000 was paid for the privilege of securing the lease. At the hearing it claimed that the $5,000 was paid for the purpose of expediting the manufacture of the machines by a company which was then starting in business, and to secure prompt delivery. Taxpayer also asks that we hold the agreement to be divisible.

It appears to us immaterial whether or not the agreement was divisible. The cases cited by the taxpayer involve contracts a part of which were valid and a part invalid. We are not concerned with the validity of any part of the contract executed by the taxpayer, particularly as it appears that the requirements of the contract have been fulfilled by both parties. In asking us to find that the payment of $5,000 was made for a purpose other than to secure a license to use the patented machines, the taxpayer is asking that we read into the agreement something that will vary its plainly expressed terms and to construe the meaning of the agreement in a manner radically different from the meaning which would naturally be arrived at by placing upon the terms thereof their ordinary and accepted meaning. There appears to us to be no ground for such a construction, as the instrument on its face is complete and we can find in it no ambiguity which needs an interpretation other than that to be gained by the clear import of its terms.


text:
    Appeal of HENRY STODDARD.
    Docket No. 3198.
    Submitted September 25, 1925.
    Decided November 20, 1925.

      William B.Dana, Esq., for the taxpayer.

      Ward Loveless, Esq., for the Commissioner.
    Before Gratjpner, Trammell and Phillips.
    This is an appeal from the determination of a deficiency of $3,930.48 in income tax for the calendar years 1919, 1920, and' 1921. The question involved is whether the taxpayer is entitled to deduct a claimed loss on the sale of securities which were held by trustees under an instrument given by the taxpayer.

      FINDINGS OF FACT.
    The taxpayer is an individual and a resident of Connecticut. For a number of years it has been the custom of the taxpayer and his wife, both of whom are of advanced age, to spend the winter of each year in the South.
    On December 21,1916, the taxpayer executed and Clifford I. Stod-dard and the Union & New Haven Trust Co. accepted the trust created by the following instrument:
    I, Henry Stoddard, of the Town of Woodbridge, State of Connecticut, do hereby give, grant, sell, assign, transfer and convey unto my son, Clifford I. Stoddard, of said Woodbridge, as trustee, and unto the Union & New Haven Trust Company, a corporation organized under the laws of the State of Connecticut and located in said New Haven, as co-trustee, with my son Clifford, the several items of property noted in the schedule or schedules of property hereto- annexed, marked “Exhibit A,” and made part hereof. The said trustees are to take, hold and dispose of said property upon the trust and subject to the conditions stated in this instrument. Said trustees shall have power to invest or reinvest any part of the principal of the trust fund, to change investments, and for that purpose to sell, convey, pledge and mortgage said trust fund at discretion to hold the same during my life, collect the income and to pay over to my wife, Amelia E. Stoddard, annually three thousand dollars ($3,000), to be paid in equal quarterly installments, on or about the 16th days of January, April, July and October in each year, and at such times to pay over the balance of said net income to me during the full term of my life. At my death, the said trustees are to pay over and deliver to the trustees named in my will all the trust fund, principal, and income, to be held by such trustees named in my will upon the trusts and as a part of the trust fund created, established and provided for in my will.
    I hereby reserve the right to withdraw from said trust fund any and each item of property, and add thereto at my discretion, and I also reserve the right to terminate this trust, either in whole or in part, at my discretion, and in case of the exercise of such reserved right of withdrawal of any item of property, or of terminating this trust, in whole or in part, then and in such event, the trust shall terminate and the property shall be thereupon returned to me.
    Subsequent to the execution of this instrument the following securities, which are referred to in the instrument as being listed in “Exhibit A,” were delivered to the Union & New Haven Trust Co. and placed in a safe-deposit box:
    500 shares, Brooklyn Rapid Transit Co.
    100 shares, Scranton Electric Co., preferred.
    100 shares, Mackay Co., preferred.
    400 shares, Interborough Consolidated Corporation, preferred.
    300 shares, American Telephone & Telegraph Co.
    300 shares, The General Electric Co.
    161 shares, The Associated Drygoods Corporation, first preferred.
    80 shares, The Associated Drygoods Corporation, second preferred.

      $13,000 par value, New York, New Haven & Hartford Railroad Co.’s debenture, due Match 1st, 1947, numbers 1028 to 1031, both inclusive, 1045, 1712 to 1717, both inclusive, 1937 and 1938.
    The stock certificates representing part of the securities were transferred to Clifford I. Stoddard and the Union & New Haven Trust Co., trustees under the deed of Henry Stoddard.
    Subsequently, Henry Stoddard, Amelia E. Stoddard, Clifford I. Stoddard, and the Union & New Haven Trust Co. executed the •following instrument:
    Memorandum agreement, made this 28th day of October, 1918, by Amelia E. Stoddard and Henry Stoddard, husband and wife, with Clifford I. Stoddard and Union and New Haven Trust Company, Trustees.
    Witnesseth, that the said Amelia E. Stoddard has and does assign to said, trustees the securities mentioned in the schedule annexed hereto, in trust, however, to collect and pay over the income and account for the principal as is herein stated. The trustees are to collect the income and add the same to the income received by said trustees from the Henry Stoddard Trust. The net joint income so received is to be paid over by said trustees to said Henry and Amelia E. Stoddard, one-half to each at the times and in the manner mentioned in the Henry Stoddard Trust. Said Amelia E. Stoddard may add to said trust or withdraw therefrom any securities at her pleasure and this trust terminates upon her death, and in such case, the trustees will turn over the trust property to her executors and administrators. Said Henry Stoddard agrees to the equal division of said joint net income and becomes a party hereto for that purpose.
    Henry Stoddard, from time to time after the execution of the instrument in 1916, directed the sale of certain securities held by the trustees and the addition thereto of others. During- the years 1919, 1920, and 1921, certain of the securities held by the trustees under the Henry Stoddard instrument were sold at losses in the amounts of $2,482.80, $7,360.91, and $12,963.54, respectively. Of the securities sold all except certain Liberty Loan bonds, Victory notes, and Anglo-French bonds were acquired by Stoddard prior to the creation of the so-called trust in 1916. The Liberty Loan bonds and Victory notes were sold in 1921 at a loss of $171.23. The Anglo-French bonds were sold in 1920 at a profit of $310. The amount of the losses on securities acquired before March 1, 1913, was computed on the basis of cost or March 1, 1913, value, whichever was lower.
    The taxpayer at all times retained control of the securities held by the trustees and directed the sales of securities and- the investment of funds held by them. In some cases the proceeds of sales were paid directly to the taxpayer and in others they were paid to the trustees.
    In October, 1924, the taxpayer and his wife revoked, in writings the instruments they had formerly executed, and the trustees returned to them the securities which they, the trustees, then held.
   DECISION.

The determination of the Commissioner is approved. Baltzell v. Mitchell, 3 Fed. (2d) 428; Appeal of Brown & Ives, Trustees, 2 B. T. A. 936.


text:
    Appeal of MARLBORO FERTILIZER CO.
    Docket No. 3797.
    Submitted July 14, 1925.
    Decided November 20, 1925.

      Edward P. Hodges, Esq., for the taxpayer.

      Blount Balls, Esq., for the Commissioner.
    Before Marquette and Moeris.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amount of $11,-963.28, and an overassessment for 1918 in the amount of $4,995.68, or a net deficiency of $6,967.60. .
    The question is whether the net income should be determined on the basis of a calendar year or a fiscal year.
    FINDINGS OF FACT.
    The taxpayer is a South Carolina corporation with principal office in Bennettsville.
    It was organized in 1910 by about 15 farmers, and thereafter engaged in the business of manufacturing fertilizer for use on farms.
    The nature of its business was such that practically its entire product was made and sold within the first six months of each year. Most of its sales occurred in April and to a large extent payment was made therefor by notes delivered in June but due in October. The taxpayer engaged in practically no activity during the last six months of each calendar year, outside of the collection of accounts and the purchase of raw materials in preparation for the business of the following year.
    The taxpayer opened a new set of boohs on January 1 of each year, and for the years 1910 to 1921, inclusive, rendered its tax returns on a calendar year basis.
    The annual meeting of the taxpayer was held on July 1 of each year, and for convenience the profit and loss account was ruled down on June 30 of each year to disclose the then book profits. No dividends were declared by the directors until after the collection of the accounts which were reflected in the June 30 profit and loss statement. The directors held their meetings for that purpose at the end of December each year, or just after January 1 of the following year, after the determination of the income for the year then closed.
    No accounts of the taxpayer were ruled down at June 30, except the profit and loss account, and no transfer was made to the surplus account until January 1 of each year.
    The books of account of the taxpayer were kept on a calendar year basis.
    The Commissioner computed the income on the basis of a fiscal year ending June 30 of each year, and determined an overassessment for 1918 of $4,995.68 and aggregate deficiencies for 1919 and 1920 of $11,963.28, or a net deficiency of $6,967.60.
   DECISION.

The tax should be computed on the basis of calendar years. Final determination will be settled on 10 days’ notice, under Rule 50.


text:
    Appeal of BEACH & SWEET, INC.
    Docket No. 2381.
    Submitted May 13, 1925.
    Decided November 20, 1925.

      Harry P. Gross, Esq., for the taxpayer.

      Edward G. Lake, Esq., for the Commissioner.
    Before Geeen and Lansdon.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1919 and 1920 in the amount of $8,017.78. The taxpayer claimed to be a personal service corporation and prepared and filed its income-tax returns for the years in question upon that basis. The Commissioner declined to give the taxpayer personal service classification and the deficiency above mentioned resulted.'
    FINDINGS OF FACT.
    Prior to 1906, Beach <& Sweet, a copartnership, was engaged in the insurance business in Providence, R. I. At the same time and in the same city the Henry W. Cooke Co., a corporation, was engaged in the real estate loan and insurance business. Each of the companies was the agent for several reputable insurance companies. It was deemed advisable to consolidate the insurance branch of the Cooke Co. with Beach & Sweet, and this was effected in 1906 by organizing a corporation known as Beach & Sweet, Inc. This company took over all the insurance business of both the Cooke Co. and Beach & Sweet, a copartnership.

      In exchange for the businesses transferred to it, the corporation issued 544 shares of its capital stock of the par value of $100 each. The holdings of the various stockholders were as follows:
    Shares.
    Henry W. Cooke Co___272
    Joseph TV. Lewis (stockholder in Cooke Co.)_ 1
    Benjamin B. Adams (stockholder in Cooke Co.)_ 1
    Francis M. Smith (stockholder in Cooke Co.)_ 1
    Joseph G. Henshaw (stockholder in Cooke Co.)_ 1
    Robert G. Holt (employee of Cooke Co.)_ 1
    Charles H. Beach_266
    C. L. Beach (son of Charles H. Beach)_ 1
    Total_544
    Henshaw, Lewis, Adams, Smith and Holt were stockholders in name only. The stock held by them was transferred to them only for the purpose of qualifying them as directors of the corporation. The beneficial ownership of the stock held by them was in the Cooke Co. and the dividends on said stock were paid to said company.
    The H. W. Cooke Co. during the years in question did considerable business in the sale and renting óf real estate, placing of loans and mortgages, caring for estates, making appraisals of property, and handling auction sales of real estate. In the handling of this business it frequently found or made opportunities to turn insurance business to the taxpayer, with the result that a substantial part of the business of the taxpayer came from or through the Cooke Co.
    Through its ownership of a majority of the stock in the taxpayer, the Cooke Co. selected and elected five out of the seven directors of the taxpayer and through these directors had absolute control and management of all of its affairs and the selection and election of officers.
    Charles H. Beach and C. L. Beach devoted practically all of their time to the business of the taxpayer. Joseph G. Henshaw devoted a considerable portion of his time to the business, and for his services the Cooke Co. was paid the sum of $8,250 per annum. Other stockholders or employees of the Cooke Co., including those who held qualifying shares in the taxpayer company, devoted time to the insurance business of the taxpayer but looked to their dividends or salaries from the Cooke Co. for remuneration for the services rendered.
    In the year 1919 the taxpayer paid $19,124 as commissions to non-stockholder employees. A considerable portion of this amount was paid to Holt, who at that time was the record, but not the beneficial, owner of one share of stock. The commissions were paid at the rate of 40 per cent of the premiums secured. Charles H. Beach was the only stockholder Tvho received compensation for services rendered to Beach & Sweet, Inc.

      When the taxpayer corporation was organized, in determining the amount oí stock that should be issued to Charles H. Beach and to the Cooke Co., the agencies owned by the partnership were valued at $5,000, upon the theory that the renewals which would follow naturally from the ownership of tjie agencies were worth at least that amount. The Cooke Co., through Henshaw, received stock of the par value of $26,700 in exchange for the business turned over. The evidence shows this business to have been actually worth that amount of money.
    The financial statement for the year 1919 shows:
    Cash on hand_$12,848
    Accounts receivable_ 83,945
    Accounts payable_ 78,099
    The financial statement for the year 1920 shows:
    Gash on hand_$31,210
    Accounts receivable_ 80,231
    Accounts payable_ 90,632
    The premiums due from the insured were usually paid within 30 days, though in many instances longer time was given or taken. The taxpayer was required to remit to the insurance companies in 60 days. A large part of the money necessary for the remittances to the insurance companies was collected from the insured before the remittance was made.
   DECISION.

The determination of the Commissioner is approved. Appeal of Hanley-Ried & Co., 2 B. T. A. 315.


author: James:

text:
    Appeal of WATSONTOWN BRICK CO.
    Docket No. 3580.
    Submitted June 30, 1925.
    Decided November 20, 1925.
    During the year 1919 the stock of the taxpayer to the extent of from 72.96 to 89.97 per cent was owned or controlled by the Paxton Brick Go. Thereafter, the president and vice president of both companies acquired further stock from a quiescent minority, bringing the stock held or controlled to 92.64 per cent on November 3, and to 100 per cent on November 5. Held, that the taxpayer was affiliated with the Paxton Brick Go. from November 1, 1919, to .the end of the year.

      J. A. Farber, C. P. A., for the taxpayer.

      P. /S'. Crewe, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $8,127.48. The taxpayer claims erroneous treatment by the Commissioner of a dividend in connection with the computation of its invested capital and asserts affiliation with the Paxton Brick Co.
    BINDINGS 03? PACT.
    The taxpayer and the Paxton Brick Co. are and were during the taxable year in question Pennsylvania corporations, with principal offices at Watsontown. Both companies were engaged in the manufacture of refractory products during the taxable year.
    On October 9, 1919, the taxpayer declared a dividend of 40 per cent on its outstanding capital stock as of that date, in a total amount of $23,920. The dividend was paid as follows:
    Oct. 21, 1919_$5, 000
    Oct, 27, 1919_ 2,500
    Nov. 1, 1919_16, 420
    The total net income of the company for the year 1919, as determined by the Commissioner, and undisputed by the taxpayer, was $27,186.87. In computing the invested capital of the taxpayer the Commissioner deducted the entire amount of $23,920.
    The taxpayer consolidated its return for the year 1919 with that of its parent company, Paxton Brick Co., Watsontown, Pa., which consolidated return reflected a combined tax liability of the two companies of $3,663.60. This liability was assumed by the taxpayer and paid by it for the reason that its operations for the year 1919 had shown a gain, whereas those of the parent company (Paxton Brick Co.) had shown a loss.
    Thereafter, and during the year 1923, the Commissioner required the taxpayer and the Paxton Brick Co. to file separate returns for the year 1919, upon which returns there appeared to be due a total tax of $6,692.22, or an additional tax of $3,026.62. Thereafter, the Commissioner audited the returns of the taxpayer and determined a total additional tax in excess of $3,026.62 of $5,127.48, as shown by the deficiency letter dated February 23, 1925. It does not appear that the taxpayer has been given credit for the tax paid upon the original consolidated returns of $3,665.60.
    The Watsontown Brick Co. was incorporated on February 25, 1908, and has* an authorized capital stock of $100,000 par value, consisting of 2,000 shares of common capital stock of $50 each.
    The Paxton Brick Co. was incorporated on May 11, 1913, and has an authorized capital stock of $100,000 par value, consisting of 2,000 shares of common capital stock of $50 each.
    On January 1, 19.19, there were outstanding 1,239 shares of stock of the Watsontown Brick Co. Of the remaining shares, 536 were unissued and 225 were held in the treasury of the company as treasury stock. The entire authorized capital stock of the Paxton Brick Co. was issued and outstanding on January 1, 1919.
    The outstanding capital stock of the two companies on January 1, 1919, was owned as follows:

    On January 18, 1919, the Watsontown Brick Co. purchased from its minority stockholders 48 shares of stock and placed them in the treasury. The remaining shares of capital stock of the Watson-town Brick Co., which were held by the minority interests, were acquired by Messrs. E. and C. A. Summers. The dates on which this stock was acquired are as follows:
    Shares.
    April 10, 1919_130
    June 4, 1919_ 10
    Oct. 31, 1919_<_ 32
    Nov. 3, 1919_■_ 32
    Nov. 5, 1919_ 88
    Total_292
    The process of acquisition of all of the stock of the Watsontown Brick Co. by the Paxton Brick Co. or its stockholders during ihe year 1919 is illustrated by the following table:

      The business of the two companies is transacted as if they were but one company with two plants. The entire business of the two companies is transacted through one office, which is located at Wat-sontown, Pa. All orders for brick are received at this main office and are assigned to the particular plant which can handle the order most advantageously. The purchasing department of the main office serves both companies and all of the requirements for materials and supplies of both companies are handled by this one office. Advertising is contracted for by the main office, which arranges publicity for both companies. The cost of maintaining the main office is shared by both companies in accordance with the ratio of the brick produced. Both companies have the same officers and directors.
    The Paxton Brick Co. paid salaries in a total amount of $2,492.72, divided equally between J. C. Fowler and Charles E. Fisher. The Watsontown Brick Co. paid salaries to J. C. Fowler, Edgar Summers, W. E. Fowler, and Charles E. Fisher in the amounts, respectively, of $3,000, $6,000, $4,000, $2,500, and $2,500, a total of $18,000.
    Prior to the acquisition by the Paxton Brick Co. of 899 shares of the Watsontown Brick Co., the two companies had been engaged in intense competition. By that purchase, the interests in the Watson-lown Brick Co., which were actively opposed to the interests in the Paxton Brjkk Co., were retired from the management. The remaining stockholders of the Watsontown Brick Co. had never been actively interested in its affairs, were practically unknown to the directors and officers of the Paxton Brick Co., and their stock was acquired as rapidly as they could be located and negotiations completed for the several purchases.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in Accordance with Bule 50.
   OPINION.

James:

It is clear that the Commissioner erroneously computed the deduction from invested capital arising out of the dividend declared October 9, 1919, and thereafter paid in amounts totaling $23,920. The earnings of the taxable year should be prorated to October 9,1919, and only any excess of dividends over such earnings should be deducted in determining invested capital.

The taxpayer claims affiliation with the Paxton Brick Co. The evidence indicates that, throughout the year 1919, 899 shares of stock of the taxpayer were owned by the Paxton Brick Co. and that during the year officers and stockholders of that company acquired all of the outstanding stock of the taxpayer in excess of its own holdings. It also appears that at the beginning of the year a small block of its stock was acquired by the taxpayer itself. Between the beginning of the year and June 4, the combined stockholdings of the Paxton Brick Co. and its officers and stockholders in the taxpayer reached 87.29 per cent. By October 31, the total was 89.97 per cent, and by November 3, 92.64 per cent. On November 5 all of the stock of the taxpayer passed into the control of the Paxton Brick Co. or its officers and stockholders.

It is apparent that the Paxton Brick Co. at all times after the acquisition of its original holding of 899 shares controlled the business activities of the taxpayer. However, it does not appear that it controlled the stock held by minority interests other than that those stockholders were not active in the affairs of the taxpayer and their interests were acquired as rapidly as they could be located and negotiations completed for their stock. Control of the business is not control of the stock of a corporation conducting a business, nor, where a minority of- stockholders are present, even though quiescent, representing 27.04 per cent of the stock, can we hold that the stock owned or controlled by the parent company constitutes substantially all of such stock. Not until after the first of November in the taxable year did the stockholdings of the Paxton Brick Co., including the stock held by its officers and stockholders, exceed 90 per cent of the total outstanding stock* of the taxpayer. In the case of the stock-holdings of the Summerses in the taxpayer company, it is apparent from the manner in which both companies were operated that that stock was placed wholly at the disposal of the Paxton Brick Co. The Summerses were the principal officers of both companies and as such directed the policies of each for the common good of both. This, in our opinion, under the facts disclosed by the record in this appeal, constitutes ownership or control of substantially all of the stock of the Watsontown Brick Co. by the Paxton Brick Co.

It follows that the small minority left after the purchase of October 31 is not sufficient to deprive the taxpayer of consolidation with the Paxton Brick Co., and we hold, therefore, that the two companies were affiliated and that the tax should be computed on the basis of consolidated returns from and after November 1, 1919. These computations should be prepared in the manner heretofore set forth in the Appeal of American La Dentelle, Inc., 1 B. T. A. 575.


author: James

text:
    Appeal of INDEX NOTION CO.
    Docket No. 1023.
    Submitted March 17, 1925.
    Decided November 20, 1925.
    The taxpayer kept its accounts upon a single-entry set of books and computed its net income and made its returns therefrom. An examining revenue agent attempted to adjust the books of account of the taxpayer to a double-entry basis, in the course of which adjustment he determined a net income differing from that shown by the books of the taxpayer. The Commissioner adopted the method of the revenue agent and determined a deficiency. Seld, on the basis of discrepancies appearing on' the face of the report of the revenue agent, that the taxpayer has established an inaccuracy in the determination of the Commissioner, and, there being no other evidence before the Board, so much of the deficiency so determined as depends upon such inaccuracy is disallowed.

      Camden B. MeAtee, Esq., for the taxpayer.

      B. G. Simpieh, Esq., for the Commissioner.
    Before James, SteRNhagen, Trammell, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1917, 1918, and 1919, in the amounts, respectively, of $4,927.03, $3,430.69, and $504.25.
    FINDINGS OF FACT.
    Taxpayer is an Indiana corporation, with its principal office at Sullivan. It is engaged in the retail notion and general merchandise business. Its operations are carried on through chain stores located in the States of Illinois and Indiana.
    From the inception of the business and down through the years under consideration, the single-entry method of bookkeeping was employed in maintaining the accounts upon an accrual basis. In March, 1920, a certified public accountant was employed to install a system of accounting, contemplating the double-entry method of bookkeeping, as of January 1, 1920. An inventory of all the assets and liabilities of the business was made as of January 1, 1920, and new books of account were opened and thereafter maintained by the double-entry method.
    The returns of this taxpayer for the years 1917, 1918, and 1919, were rendered on the accrual basis. The net income was determined by the rules of accounting peculiar to the method employed in keeping the books; that is to say, the assets and liabilities at the beginning and close of each year were inventoried and the increase in the net worth of the business at the close of the year over the net worth at the beginning of the year, plus all unallowable deductions, was reported as the taxable net income of the year.

      The net income reported in the returns was in each instance supported by detailed schedules to show all items of income and expense entering into computation of taxable net income. These schedules were prepared from memoranda maintained and preserved by the taxpayer but not incorporated in the books of account.
    In 1922, taxpayer’s, books of account were examined by a revenue agent who attempted' to verify the items of income and expense shown by the detailed schedules accompanying the taxpayer’s returns. Several adjustments in the net income and invested capital reported in the returns were recommended by that officer and accepted by the Commissioner. Those adjustments are responsible for a major portion of the deficiency which the Commissioner proposes to assert. The adjustments recommended by the agent and accepted by the Commissioner are set forth below in chronological order:
    (A)Net income reported in return for 1917 increased as follows:
    (a) Eeduetion in opening inventory_$3, 076. 30
    (b) Eeduetion in purchases_ 3,163. 84
    (c) Cash discount earned_ 3,468.16
    Total increase_ 9, 708.29
    (B)Invested capital reported in 1917 return decreased as follows:
    (a) Eeduetion in earned surplus on account of overstatement of inventory at Jan. 1, 1917, see (A) (a) above under income adjustments-$3, 076. 30
    (b) Eeduetion in earned surplus on account of notes payable outstanding and not shown in balance sheet of Jan. 1, 1917, accompanying return_ 8, 600.00
    (c) Eeduetion in earned surplus at Jan. 1, 1917, by setting up a liability account denominated “Adj\ Payable ” in the sum of_ 976. 09
    . Total reduction_ 12, 652.39
    As a result of the above adjustments, the revenue agent has converted an earned surplus of $10,063.69 at January 1, 1917, according to taxpayer’s books at that date, into a deficit of $2,488.70.
    (C) Net income reported in return for 1918 increased as follows:
    (a) Cash discount omitted-•---$4,664.10
    (D) Invested capital reported in 1918 return decreased as follows:
    (a) Eeduetion in earned surplus at January 1, 1918, by setting up a liability account denominated “Adj-. Payable ” in the sum of_ ⅛ 419.101
    27o change was made in the taxable income as reported in the return for the year 1919. Invested capital for the year 1919 was reduced by the amount of the deficiencies in income and profits taxes found due for the years 1917 and 1918..

      DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, under Kule 50.
   OPINION.

James

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

(a)That the Commissioner erred in increasing the net income as reported in the amended return for 1917 by the sum of $9,708.29, made up as follows:

Reduction in opening inventory_$3, 076. 30
Reduction in purchases_ 3,163. 84
Cash discount earned_ 3, 468.15
9, 708. 29

(b) That the Commissioner erred in increasing the net income as reported in the amended return for 1918 by the sum of $4,564.10, on account of cash discounts earned during the year.

(c) That the Commissioner erred in reducing the invested capital of the years 1918 and 1919, respectively, by the amounts of the deficiencies alleged to be due for the years 1917 and 1918.

The taxpayer further alleges that these errors are the natural consequence of the Commissioner’s action in attempting to determine the net income of each of the years under consideration under the double-entry method of bookkeeping from books which were maintained by the single-entry method.

The evidence in this case discloses that the accounts of this taxpayer were maintained by the single-entry method of bookkeeping, but that memoranda and data outside of the books of account were also maintained, from which it was practicable for the taxpayer to furnish detailed information relating to all items of income and expense entering into the computation of taxable net income.

On the face of the returns of each year, and in the supporting schedules, there is no lack of detail of the various items of income and expense entering into the computation of the taxable net income; and the whole is supported by balance sheets purporting to show the financial condition of the business at the opening and close of ■each year, accompanied by a reconciliation of surplus.

Where books of account are maintained by the single-entry method •of bookkeeping, the determination of net income is made by comparison of the net worth at the close of the year with the net worth at the beginning of the year. The accuracy of the determination depends upon the correctness of the inventories of assets and liabilities at both dates. If the inventories are correct in all respects, then the increase in the net worth of the business plus any unallowable deductions must represent the correct taxable net income.

We have in evidence in this appeal two sets of balance sheets as of the close of each of the years 1916 to 1919, inclusive. Both sets were prepared by the taxpayer, one of which was attached to the returns as filed, while the other was submitted in evidence as taxpayer’s Exhibit No. 1. The two sets are so dissimilar in some respects that, upon comparison, one would hardly suspect that they both emanated from the same business. Their differences have not been accounted for by any evidence whatever. Which of the two sets, if either, correctly reflects the financial condition of the taxpayer at the close of the years 1916 to 1919, inclusive, we must confess we are unable to determine. The mysterious thing about both sets is that, notwithstanding their dissimilarity, both show a surplus in similar amounts at the close of 1919. It is readily apparent that under such circumstances we can not approve the taxpayer’s computations of net income for the several years under consideration, which are based upon a comparison of net worth at the close of each year. •

On the other hand, we are more reluctant to accept the revenue agent’s computations of net income for the years under consideration which have been approved and adopted by the Commissioner. We are not impressed with the accounting gymnastics which he has resorted to in his computations and seriously doubt the correctness of the results obtained thereby. He attempted to verify the items of income and expense appearing on the returns of the several years and found what appeared to him to be discrepancies. These we have outlined in our findings of fact. He accordingly adjusted the net income of each year to take care of these discrepancies, and then, by using the surplus at December 31, 1919, as a starting point, and by working back through a series of additions and subtractions, he established what would have been the surplus at December 31, 1916, if the correct net income of the intervening years was actually as he had computed it. Of course, the net income of each year as he has computed it fits in very nicely with the whole reconciliation of surplus; it could not be otherwise. But the great difficulty with the whole process is that he has not proven the accuracy of the surplus at December 31, 1916, as thus determined, thereby demonstrating the correctness of his computations. What is more, the language used ill his reports and the methods resorted to betray the fact that the discrepancies which he sought to correct existed in his mind only as vague probabilities.

We find further, upon examination of the balance sheets constructed by the revenue agent, evidence of the error of his methods. To make them balance, he found it necessary to include an adjustment account on the liability side of the balance sheets at the close of 1916 and 19 IT in the amounts of $976.09 and $4,419.10, respectively, to take care of amounts otherwise unaccounted for. Had these amounts been permitted to remain in the surplus account, obviously a reconciliation of surplus would have been impossible by using the net income as he determined it for each of the years under consideration.

Forced balance sheets are worthless for any purpose, more especially where they must be used as the basis for the determination of net income under the single-entry method of bookkeeping. We can not sanction the assertion of a deficiency determined under such circumstances. Appeal of Bruce & Human Drug Co., 1 B. T. A. 342.

The additions to net income and the deductions from invested capital made by the Commissioner, as set forth in the findings of fact, are disallowed. Upon the last point in this appeal, our decision must be for the taxpayer. Appeal of Guarantee Construction Co., 2 B. T. A. 1145.


author: ARUndell:

text:
    Appeal of FRANK-SIEVERS UNDERTAKING CO.
    Docket No. 2194.
    Submitted October 30, 1925.
    Decided November 20, 1925.
    Deductions on account of salary paid, held reasonable and allowable.

      Harry A. Frank, Esq., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before StBRNhagen, Lansdon, and Arundell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1919 and 1920. The deficiency arises from the disallowance of a portion of the amount paid as salary to the president of the corporation during the years in controversy.

      FINDINGS OF FACT.
    The taxpayer ivas organized under the laws of the State of Missouri on April 13, 1909, since which time it has been engaged in the undertaking and funeral directing business in Joplin. During the years in question its capital was $10,000, divided into 100 shares, of which John P. Frank, the president of the company, owned 41 shares; his wife, Mattie E. Frank, 24 shares; and his daughter, Letha McFann, 5 shares. The secretary of the company, John J. Gees, owned 15 of the remaining shares, and the balance was owned by two other persons.
    In December, 1918, an informal meeting of three of the directors of the corporation, viz, John P. Frank, Mattie E. Frank, and John J. Gees, was held, at which time the matter of salaries to be paid the officers of the corporation for the years 1918 and 1919 was discussed. At that meeting it was agreed that the salary of the president for the years 1918 and 1919 should be at the rate of $10,000 per year. At a meeting of the board of directors held in December, 1920, it was decided that the salary of the president for the year 1920 should be $8,000 per year. Salaries in the amounts authorized at these meetings were paid for the years 1919 and 1920. It was the custom at the directors’ meetings to keep the minutes on sheets of paper and-thereafter to copy into the regular minute book of the corporation what occurred at those meetings. The minute book does not contain any reference to the salaries authorized at the meetings of the directors.
    By reason of the influenza epidemic the business of the taxpayer materially increased during the years 1918, 1919, and 1920. Frank was required by reason of this unusual situation to work both day and night and frequently put in 18 hours a day during the years in question. It was his duty to answer the first calls immediately after death, make the arrangements for the funerals and direct the funeral services. He was also the general manager of the company and did all its buying and selling and took care of the granting of credit.
    During the years 1916 and 1917 Frank received as president of the corporation a salary of $1,800 and $2,400, respectively. During the year 1916 it was decided that only a minimum salary would be paid, as the company needed all available money to buy out the business of the Cunningham Undertaking Co., one of its competitors. In 1917 the salary was kept at a low level in order that the taxpayer might purchase the real estate of the Cunningham Co., and this real estate was so acquired in that year.

      During the years 1919 and 1920 a small increase in salaries was authorized and paid to the employees and to Gees, the secretary of the company, and in 1919 the officers and employees received in addition to their salaries a bonus of $200 each.
    During the year 1919 the gross income of the taxpayer was $88,698.14, and the salaries paid during that year totaled $11,900, of which amount the president received $10,200. During the year 1920 the gross income of the corporation was $35,992.42, and the amount of salaries amounted to $11,000, of which amount the president received $8,000 and the secretary $3,000. Dividends were declared by the corporation in the following amounts:
    Pet' cent.
    1916_15
    1917_10
    1918_15
    1919_20
    1920_15
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 20 days’ notice, in accordance with Rule 50.
   OPINION.

ARUndell:

We can not say that the salary duly authorized and paid to the president of this corporation for the years 1919 and 1920 was an unreasonable one. So far as the record discloses the salary paid bore no direct relation to his stock holdings in the corporation. An unusual situation confronted the taxpayer during the years 1918, 1919, and 1920. By reason of the influenza epidemic its business expanded far beyond its normal volume. It was the personality of Frank and the'trust and confidence - that the people of Joplin had in him that caused them to prefer the taxpayer company to handle the preparation and interment of their dead. During the emergency he was required to and frequently did work 18 hours at a stretch. He was always the one to answer the first calls, to make the arrangements, and to direct the funeral services. The entire management of the business was on his shoulders and he was the directing head of the organization. The corporation as such made money and during the years in question paid liberal dividends. We believe the salary paid to Frank for the years in question to be reasonable and it should be allowed.