author: Phillips :

text:
    Appeal of Patterson-Andress Co., Inc.
    Docket No. 5263.
    Promulgated March 2, 1927.
    Personal service classification' denied upon the ground that the evidence does not establish that the earnings are to be ascribed primarily to the activities- of the principal stockholders.

      Charles C. Parlin, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner. •
    The taxpayer appeals from the determination by the Commissioner of deficiencies of $6,768.55 and $17,278.84 in income and profits taxes for the calendar years 1919 and 1920, respectively, arising out of the denial of the taxpayer’s claim for classification as a personal service corporation.
    FINDINGS OF FACT.
    The taxpayer was incorporated September 17, 1917, under the laws of the State of New York, and has its principal office at 1 Madison Avenue, New York City. It was incorporated under the name of W. A. Patterson Co., Inc., which was changed on January 8, 1920, to Patterson-Andress Co., Inc.
    During 1919 and 1920 the stockholders of record and the number of shares owned by each were:
    Shares.
    W. A. Patterson_462
    O. S. Andress_462
    Miss A. J. Brown_ 76
    D,uring these years Patterson was president, Andress was vice president and treasurer, and Miss Brown was secretary and assistant treasurer.
    Each of these persons had had, prior to 1917, many years of experience in the advertising business, and for several years prior to 1917 had- been connected with the New York office of the Curtis Publishing Co.; Patterson as manager of the New York office, Andress as local manager for the Saturday Evening Post, and Miss Brown as secretary and assistant to the manager. In this connection they came into contact with advertisers and advertising agencies, and, believing that the agencies then operating were turning out machine-made products and that there was an opportunity for a different kind of advertising agency, the taxpayer corporation was formed by them for that purpose.
    The first account obtained was that of I. W. Lyons & Sons, who were dissatisfied with the service rendered by the agency theretofore handling their advertising. After handling this account for three years, Andress was elected a member of the board of directors of that company.
    In January, 1918, Andress received a letter from the Franklin Automobile Co., advising that they were about to sever their agency connections and suggesting a conference. Andress had advised with that company concerning its advertising while he was connected with the Curtis Publishing Co. From thirty agencies seeking the account, the taxpayer was chosen upon the assurance that personal attention would be given the advertising.
    Taxpayer acted as advertising agent for the Curtis Publishing Co., handling the advertising which that company placed in other magazines, preparing the copy therefor and advising with its officials generally with reference to the advertising and circulation of their publication. This was handled by Patterson, who spent at least two days a week upon the problems of that company.
    During the years involved, recognition as an agency was extended to taxpayer by the Curtis Publishing Co. under an instrument dated October 4,1911, the material portions of which read as follows:
    Date October 4th, 1917.
    AGENCY TERMS
    Reserving to The Curtis Publishing Company the right at any time, upon written notice, to annul or change the conditions of this agreement, we will hereafter, and until further notice, accept orders from you for advertising space in The Ladies’ Home Journal, The Saturday Evening Post, The Country Gentleman, or any other periodicals controlled by The Curtis Publishing Company, on the following terms:
    First : Orders will be accepted only when máde out at full gross rates without stipulation of agency commission or deduction.
    Secoiid: Subject to and upon the terms hereof, bills will be rendered to you monthly, subject to thirteen per cent. (13%) agency differential and three per cent. (3%) cash discount (figured on the net amount).
    Third : This agency differential, in the case of each advertiser, is conditional upon our being satisfied that you have been and are rendering adequate service calculated to develop his business, and further upon our being satisfied that you are charging the advertiser gross rates on all our advertising. We will not be so satisfied, however, and will make no allowance if we conclude you are charging rates on any periodicals in such way as inures tó our disadvantage in the matter of our own rates. You are not to make ány charge to any person in such way as would in our judgment, directly or indirectly, injure our business or interests. The expression of our dissatisfaction in any particular shall be final. But we will gladly alter our decision in any particular case if you are able to make us an explanation which will satisfy us.
    Fourth: The cash discount of three per cent. (3%) will be figured on your net bill, and will be allowed only upon the condition that payment is made by you in full during the month in which the bill is rendered. You may allow a cash discount of three per cent. (3%) on our gross bill to you for space, to your clients, provided they pay (your bill) during the month in which we bill you, and only upon this condition.

      Kecognition by the Publishers Association of Now York City was extended to the corporation by a letter dated November 26, 1917, reading:
    I take pleasure in advising you that recognition of this Association has been extended to you for one year, subject to continuation should the volume of business placed during that time warrant such action.
    Recognition is extended also subject to the stipulation that you will not request publication of free reading matter.
    The American Newspaper Publishers Association on March 26, 1918, recognized the taxpayer as an authorized agent by a letter bearing that date and having the same wording as the letter from the Publishers Association quoted above.
    In placing orders for advertising space, the following form was used:
    THE PATTERSON-ANDRESS COMPANY, INC., ADVERTISING, ONE MADISON
    AVENUE, NEW YORK
    Publisher
    Date.
    Insert advertising of_
    Space_ Insertions.
    As follows:
    Position_
    Charge $_Gr. Less. % Com. less_% cash disc.
    It is understood and agreed that the rate for this order is the minimum rate at which a contract for similar space and conditions can be secured, and that if at any time during the life of this contract you make a lower rate for same space and conditions, then this contract is to be completed at such lower rate from that date.
    We reserve the privilege of using space for this advertiser for one year from starting date at rates named on rate card on which this order is based.
    Unless otherwise agreed, this order may be cancelled, or less space used,
    by the payment of short rate in accordance with rate card on which the rates of this order are based.
    Short rate bills must be rendered within 60 days after expiration of contract.
    Any insertion not in accordance with instructions will not be paid for.
    The advertising, when received in time for early editions, must appear in all editions on the date for which the advertising is ordered, or pro-rata refund will be demanded.
    One copy of each issue in which the advertising appears must be sent to the advertiser, and one to this office.
    ALL BILLS M.UST BE RENDERED MONTHLY
    THE PATTEBRSON-ANDRESS COMPANY INC. Per_
    This order was prepared in triplicate, one copy sent to the publisher, one to the advertiser, and the other retained by the taxpayer.

      Taxpayer attended to the preparation of the copy to be used in the advertisement and secured cuts of any photographs of drawings to bo used. After the advertisement had been approved by the advertiser, the taxpayer would forward the copy to the publisher for insertion.
    The services rendered by the taxpayer to the advertiser include a study of the product and of the competition to be met, possible improvements, preparation of the advertising, including illustrations and texts, the selection of the publications or other mediums to be used, and the frequency with which they should be used.
    Bills for advertising space, whether in newspapers, magazines, billboards, or otherwise, are generally sent by the publisher to the taxpayer. The space used by each advertiser is billed separately. Such space is billed at the regular rate charged by the publisher. The taxpayer, as a recognized advertising agency, is allowed a discount of from 10 to 15 per cent. This discount is known as a commission and is retained by the taxpayer as compensation for its services, which include the study of the product and the market therefor, preparation of the advertising matter, and the other services mentioned above, rendered in connection with the sale of the products of the client. A further discount is generally allowed for cash payment within a certain period.
    In placing orders for advertising space the name of the advertiser is invariably given. The taxpayer has never ordered space for its own use. Generally, bills for advertising are sent by the publisher to the taxpayer, but in some instances advertising prepared by the taxpayer is placed by the advertiser directly or through representatives, in which case the publisher bills the advertiser for the space and the taxpayer bills the advertiser for its commission, which would be 15 per cent of the price paid for the space.
    When advertising space is ordered for one client and is canceled, it may not be used by the advertising agent for another client. In such cases, if there is a difference in rate between the space contracted for and that used, the space used is billed by the publisher at the higher rate. The taxpayer has no control over space which it has ordered for a client. Where space has been ordered by the taxpayer for a client and the relationship is terminated the space can be used only by the client and not by the taxpayer, either for itself or for another client.
    It is customary for the taxpayer to receive payment from advertisers before the date when payment becomes due to the publisher. In 1920 the taxpayer paid from $40,000 to $60,000 for advertising of a client, borrowing the money at the bank to enable it to do so and accepting notes from the client in part payment.

      In the preparation of advertising matter, it ivas necessary to have photographs made and art work done and to have electrotypes, lithographs, and engraved plates prepared. The officers of the taxpayer supervised and directed this work. In the case of an illustration to be prepared by an artist the general layout of the work desired would be specified. All such work as photographs, artists’ drawings, electrotypes, engravings, lithographs, etc., was ordered by the taxpayer on its own account. In some instances the work was billed to the client at cost to the taxpayer, and in other instances a service fee was charged.
    During 1919 and 1920 the taxpayer had in its employ between ten and twenty persons who were not stockholders. These included an art director and two men who did lettering upon advertisements and otherwise assisted in the preparation of advertising matter.
    The income and expenses for the years involved were as follows:

    The advertising income was the discount allowed by publishers to taxpayer upon the charge made to advertisers for space. Preparation income was the difference between amounts billed to clients and amounts paid out for art work, photography, electrotypes, engraving, lithographing, printing and other such services. This work was all done by persons outside taxpayer’s organization, on order from taxpayer. In some cases the clients were billed at cost; in other cases at cost plus a commission. The item of interest in 1920 was the amount received from certain accounts or bills receivable. The item of $17,516.68 from discounts in 1919 income represents the amounts allowed by publishers, printers, lithographers, and others as cash discounts for prompt payment of accounts. The item of $15,047.76 in 1919 expense represents such cash discount allowed by taxpayer to advertisers.

      The salaries stated for each year are the amounts paid to employees other than the stockholders.
    The assets and liabilities shown by the balance sheets of the company at the beginning and end of each of the taxable years were as follows:

    Accounts receivable represented unpaid amounts billed to clients for advertising, art work, etc. Accounts payable represented unpaid amounts billed by publishers, artists, photographers, printers, etc. Notes payable represented money borrowed in 1920 to finance the account of one client.
    As of December 31, 1918, and December 31, 1919, the amount unpaid by clients after deducting taxpayer’s commission thereon was approximately equal to the amount due to publishers. As of December 31, 1920, taxpayer bad financed the advertising of its clients, or one of them, to the extent of approximately $55,000, by paying such amount for advertising of the client prior to payment therefor by the client.
   OPINION.

Phillips :

The sole question presented for determination is whether the taxpayer is entitled to exemption from the corporate income and profits tax as a personal service corporation. Section 200 of the Eevenue Act of 1918 defines such a corporation to be one—

* * * whose income is to be' ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is no.t a material income-producing factor; but does not include * * * any corporation 50 per centum or more of whose gross income consists * * * of gains, profits or income derived from trading as a principal * * *.

The principal function of the taxpayer was to render an advertising and sales service to its clients. As a part of this service it studied the advertising needs of its clients, prepared the advertising matter, gave advice to its clients with respect to the magazines or newspapers to be used, and placed orders for advertising space. The record disclosed that in each order for space the name of the client was given and that the rate to be paid per line often depended upon the total amount of space used by the advertiser within any year. The space so reserved belonged to the advertiser and not to the agent. If the agency terminated, such space could not be used by the agent, but was available for use by the advertiser, whether or not he secured another agent. Whether or not the taxpayer pledged its credit for the payment of bills for advertising placed through it (upon which question vfe express no opinion), it seems clear that it did not purchase and sell advertising space on its own behalf, and that it does not fall within that portion of the definition which excludes corporations 50 per centum or more of whose gross income is derived from trading as a principal.

There is no question that the principal stockholders were regularly engaged in the active conduct of the business. We must consider, then, whether the income is to be ascribed primarily to their activities and whether capital, invested or borrowed, was a material income-producing factor.

An examination of the balance sheets will show that for 1919 capital, as compared with the business done, was very small. An examination of income and expense will show that the earnings of the taxpayer distributable to the stockholders were approximately $58,000 for 1919, of which some $3,000 is interest and discount attributable directly to the use of capital, and $81,000 for 1920, of which some $5,500 is interest and discount. During these same years the corporation paid to some fifteen, twenty or more employees, who were not stockholders, $39,500 and $60,000, respectively, amounts almost as great as those distributable to the stockholders. We know nothing of the services performed by these employees, except that one was art director and two others did lettering upon the advertisements. In our opinion it can not be said that in such circumstances the income is to be attributed primarily to the activities of the stockholders. They secured the clients — it was to their experience and guidance that clients looked, but the performance of the duties undertaken, from the time of the first step to the checking and preparation of a statement of the proper charges for advertising, required the services of an organization which outnumbered the stockholders by six or seven'to one. We do not mean to hold that personal service classification must be denied in all cases where there are employees under the supervision of stockholders, but where, as here, employees so greatly outnumber the stockholders and there is no evidence of the character of the service performed by most of them and they receive substantially one half of the earnings over the expenses other than salary, we can not find that the income is to be ascribed primarily to the activities of the stockholders. In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon non-stockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. Just as another clause excludes from personal service classification those corporations where capital contributes materially to the income, so does this clause exclude corporations where the services of employees so contribute.

There is an additional factor to be considered in 1920. In that year taxpayer used its capital and its surplus and borrowed money to enable a client to continue its advertising campaign. How far this use of capital contributed to income we are unable to determine, but there is no doubt that the commissions received from this advertising were substantial. In consideration of all the circumstances, personal service classification must be denied.

Decision will be entered for the Commissioner.


source: Caselaw Access Project

license: Public Domain

text:
    National Oil & Gas Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2040.
    Promulgated March 4, 1927.
    During the taxable year the petitioner became entitled to a certain amount of oil as his share of that produced under a lease. He disposed of only a portion thereof during the taxable year.' His books were' kept and his returns were made upon the basis of cash receipts and disbursements. Held, that a reasonable allowance for depletion is to be based upon the amount of oil sold, the proceeds of which are included in the return. Appeal of R. M. Wayyoner, 5 B. T. A. 1191, followed.

      Harry C. Weeks, Esq., for the petitioner.

      Brucé A. Low, Esq., for the respondent.
    Petitioner appeals from the determination by the Commissioner of a deficiency of $14,588.75, income and profits taxes for 1919. The proceeding involves the determination of two issues: (1) The proper allowance for depletion of oil based upon discovery value, and (2) whether allowance should be based upon the amount of oil sold or upon the amount of oil produced, the petitioner making his return upon a cash receipts and disbursements basis. The facts were stipulated.

      FINDINGS OF FACT.
    The taxpayer is a Texas corporation with its principal office at Wichita Falls. The deficiency asserted herein was calculated without any allowance for depletion upon oil produced.
    The petitioner owned until December 1, 1919, a three-eighths interest in an oil and gas lease of 2% acres of land in Block 74, Red River Valley Land Subdivision, Wichita County, Texas, upon which it was required to pay, under its contract, no development expenses whatever, and no operating expenses until the production of the property had declined to 50 barrels per day. One dollar and fifty-seven and one-half cents per barrel is a reasonable depletion unit to be used in the allowance of a deduction for depletion upon said property.
    The petitioner’s share of the oil actually produced from said property in 1919 was 26,843.56 barrels. During 1919 the petitioner sold 23,729.97 barrels of such oil and received therefor $41,611.46, which was reported by it as gross income and accepted by the Commissioner. The proceeds from the remaining 3,113.59 barrels of oil produced from said property in 1919 were not accounted for as income by the petitioner in 1919. The records of the petitioner do not show that payment for said oil was received. The selling price for such oil was $6,056.35. It is not known whether this sum was misappropriated by someone connected with the petitioner or whether it was not paid to the petitioner in 1919.
   OPINION.

Phillips :

In computing the net income of the petitioner no allowance was made for depletion. It is now agreed between the parties that $1.575 per barrel is a reasonable depletion unit to be used in the computation of the deduction.

The parties also raise the question whether depletion allowance should be based upon the amount of oil produced, whether' or not sold in the taxable year and included in the income of that year, or upon the amount of the oil sold. Petitioner keeps its books upon a cash receipts and disbursements basis. Its share of the oil produced during the year was 26,843.56 barrels. It returned as income the proceeds from the sale of only 23,729.97 barrels. It is not 1mown what happened to the remaining oil, but the parties are agreed that payment therefor was not received by the petitioner in 1919 so as to constitute a part of its income upon a cash receipts and disbursements basis.

In the Appeal of R. M. Waggoner, 5 B. T. A. 1191, it was held that, in such circumstances as we have here, allowance for depletion could be taken only upon the basis of the oil sold during the year, the proceeds of which were included as income; in other words, the depletion was to be taken upon the same basis as the income was returned. The decision in that appeal is decisive of the question here involved. The deficiency should therefore be computed by allowing a deduction for depletion based upon 23,129.97 barrels at $1.575 per barrel.

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


text:
    Appeal of G. A. Miller.
    Docket No. 4469.
    Promulgated March 4, 1927.
    1. The deficiency determined by the Commissioner was based upon a revenue agent’s report which was shown by the evidence to be incorrect in many respects. Held, that the computation of income must be determined upon the basis of more reliable evidence in the record.
    2. The parties had introduced in evidence by consent a prior report made by an internal revenue agent, which report did not contain the errors made in the report relied upon by the Commissioner. While the Board was unable from the evidence to determine the amount of the income, it did appear that income was more nearly reflected in the first revenue agent’s report and was not in excess of the amount shown in that report. Held, that in such circumstances the deficiency should be recomputed on the basis of income shown in such first report.

      Fred L. Van Dolsen, Fsq., for the petitioner.
    17. Frank Gibbs, Esq., for the Commissioner.
    Taxpayer appeals from the determination by the Commissioner of a deficiency of $6,857.99 in income tax for 1919. He alleges that the Commissioner erred in computing the profit derived from the performance of certain contracts and in the computation of depreciation.
    FINDINGS OF FACT.
    During the taxable year the taxpayer was engaged in the general contracting business in Tampa, Fla. During 1917, 1918, and 1919, he performed various contracts for one M. F. Plant. A separate account was kept for each, contract and bills therefor were rendered to Plant. Such separate accounts were then transferred to a general ledger account with Plant, to which all payments were credited. One of such contracts with Plant provided for the installation of a swimming pool at the Belleview Casino, which was owned by Plant. The pool was completed in 1919. This contract ivas oral.

      Plant died in 1918 and differences arose between taxpayer and the estate as to the amount to be paid for this and other work, which differences were finally compromised at an amount substantially less than that claimed by the taxpayer.
    A so-called amended return was filed by the taxpayer for 1920 in which he reported as income the gain derived from contracts completed within the year. This method of reporting income was accepted by the Commissioner, who caused an audit to be made by a revenue agent who reported that income from the contract to build the pool had been understated by $2,368.59. A second audit was made by another agent who determined that such income was understated by $24,079.31. This audit was accepted by the Commissioner as the basis for the computation of the deficiency. In this audit the agent determined that the cost to taxpayer of constructing the pool was $79,570.88. This was adopted by the Commissioner in computing the deficiency. Such cost was $77,734.84. It was determined that taxpayer received in cash from such contract $99,672.50. Such amount was received but included payments for other work. On January 1, 1919, there was due and owing to taxpayer from Plant $28,057.24 upon contracts other than that for the pool. No part of such payments was credited by the agent or the Commissioner against the amount so due. No loss was allowed therefor. Such amount was due upon contracts which were included in the compromise between the taxpayer and Plant’s estate. The revenue agent’s report used by the Commissioner as the basis for computing the deficiency does not reflect the income of the taxpayer from the contract to construct the pool.
    The taxpayer claimed a deduction of $6,333.33 for depreciation. The Commissioner allowed only $3,647.75. A reasonable allowance for depreciation is $5,017.58.
   OPINION.'

Phillips :

The error in computing depreciation is admitted in the answer, being one of many made in the agent’s report which was accepted as the basis for computing the deficiency.

The sole remaining issue relates to the determination of the gain derived from a contract to construct a swimming pool. The Commissioner accepted a report made by a revenue agent as the result of a second examination of the taxpayer’s books. The evidence, both oral and documentary, shows this report to be so erroneous that the computations based upon it must be rejected in favor of more reliable evidence. Some of the errors made are set out above in the findings of fact.

There was introduced in evidence, with the consent of both parties, a portion of the report made by the revenue agent who first examined the books of the taxpayer for 1919. The amounts used in the computations agree with the amounts of the payments received and with the cost proven, and consideration is given to all of the contracts with Plant. It is clear from all the evidence that the taxpayer did not sustain any gain from these contracts in 1919 in excess of that shown in this report. In fact, there may be some question if this report does not also overstate the 1919 income from the Plant contracts to some extent, but the proof is insufficient to show that such is the case. We therefore conclude that the taxpayer’s income from the Plant contracts was understated by not more than $2,368.59 and not by $24,079.'31 as determined by the Commissioner. The income as determined by him should be reduced by $21,110.12 on this account and by $1,369.83 on account of the insufficient allowance for depreciation, and the deficiency recomputed accordingly.

Decision will be entered on 20 days' notice, under Bule 50.


author: Phillips:

text:
    The Joyce-Koebel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4267.
    Promulgated March 4, 1927.
    1. The taxpayer purchased merchandise'in England, the purchase price to he paid in pounds sterling. Held, that the cost of such goods must be arrived at by reducing sterling to dollars at the rate of exchange prevailing on the date of purchase of the goods.
    2. Where merchandise was purchased abroad in pounds sterling on credit and paid for at a time when the rate of exchange was different from that prevailing at the date of purchase, held, that the credit transaction was an investment or speculation in foreign exchange and that a taxable gain or deductible loss occurred when payment for the goods was made.
    3. In the circumstances set out above, the gain or loss from the exchange transaction is the difference between the cost of the ■ goods at the date of purchase, measured by the purchase price in pounds sterling reduced to dollars at the rate of exchange prevailing on the date of purchase, and the cost in dollars of the exchange remitted in payment.
    4. Because of improper accounting, the taxpayer included profits of prior years in its profit and loss account for 1920, and in its tax return for 1920. The income of the taxpayer for the taxable year involved is to be adjusted to exclude profits of prior years so included.

      Hugh Satterlee, Esq., and Walter N. Seligsberg, Esq., for tbe petitioner.

      A. H. Murray, Esq., Harry Herslcowitz, Esq., and Thomas P. Dudley, Jr., Esq., for the respondent.

      The petitioner seeks a redetermination of a deficiency of $476.36 in income and profits tax for 1920 asserted by the Commissioner, arising from an adjustment in its invested capital. The petitioner alleges that its net income for 1920, used in the computation of the deficiency in question, was overstated by $76,202.36, arising from accounting errors made upon its books and erroneously used by it in making its income-tax return.
    FINDINGS OF FACT.
    The petitioner is a Delaware corporation with its principal office in New York City. Since 1918 it has been engaged in the business of importing and selling uncut diamonds for commercial purposes.
    The Commissioner determined the petitioner’s net income for 1920 to be $105,413.52, which is the net profit for 1920 shown by it upon its books in its profit and loss account after proper adjustment has been made for tax-exempt income, and is the amount reflected in the income and profits-tax return filed by the petitioner.
    During 1918, 1919, and 1920, the bulk of petitioner’s merchandise was purchased in London on the basis of pounds sterling. Payment therefor was made in pounds sterling purchased in New York. During these years all invoices for goods purchased were entered in the purchase record and in accounts payable in dollars at the normal rate of exchange for the pound sterling, regardless of the prevailing rate at the date of purchase, and all remittances of pounds sterling were entered in the cash book and in accounts payable at the cost in dollars of the exchange remitted to London.
    Prior to closing the books for 1920, it was discovered by an officer or accountant of petitioner that under this method of accounting the balances due English concerns, as reflected on thé books of the petitioner, did not agree with the balance due in pounds sterling. The accountant accordingly prepared statements in which he recomputed cost of goods sold upon the basis of the exchange prevailing at the date of each purchase, and also computed gain or loss due to difference in the exchange rate between' the date of purchase and date of payment. Upon this basis he determined that the difference between the invoice price of goods as shown on the books and as computed upon the prevailing rate of exchange at date of invoice for all purchases made in 1918, 1919, and 1920, was $208,892.64. He also computed a gain of $28,831.53 in exchange for those years, arising from the difference between the rate prevailing at the date of invoice of goods and at the date of payment of the accounts. As of December 31, 1920, an entry was made on the books of the petitioner decreasing cost of goods purchased by $208,892.64 and decreasing accounts payable to the respective London creditors by the same amount. This amount was carried into the profit and loss account of the petitioner for the year 1920. At the same time entries were made showing a profit of $28,831.58 on foreign exchange, which was carried with the profit and loss account for 1920. Both of these amounts are included in their entirety as income in the petitioner’s 1920 tax return and in the income used by the Commissioner in determining the deficiency.
    During 1920 petitioner purchased goods in London at a total cost of £133,434-5-1. It entered this amount in its purchases at $649,351.13, converting pounds sterling into dollars at the normal rate of exchange. Converted into dollars at the rate of exchange prevailing at the date of purchase, the invoice price for such goods was $477,264.59.
    On January 1, 1920, petitioner was indebted to London creditors in the amount of £42,983-9-5 for goods purchased. Reduced to dollars at the rate of exchange prevailing at the time the indebtedness was created by the purchase of goods, this indebtedness was $192,310.31. During 1920 petitioner purchased goods at a total cost of £133,434-5-1, or $477,264.59 at prevailing rates of exchange. At the close of 1920 there was unpaid £14,452-2-8, representing an indebtedness of $50,303.36. During 1920 the petitioner purchased £161,965-11-10 sterling at a cost to it of $599,334.42, and with such sterling paid credits which it had established in the purchase of goods costing it $619,271.54, on the basis of converting sterling to dollars at the rate of exchange prevailing at the date the goods were bought and credit established. »
   OPINION.

Phillips:

Petitioner does not question the adjustment of its invested capital which gave rise to the deficiency determined by the Commissioner. It contends that it has discovered accounting errors in its original return whereby its income was overstated .by $76,202.36.

The petitioner purchased the greater part of its goods in London on the basis of the pound sterling. From time to time it purchased sterling exchange with which to pay its London creditors. Purchases were entered in its purchase account and in accounts payable at the normal rate of exchange of the pound sterling, while payments were entered in the cash book and in accounts payable at the cost of exchange remitted. In this manner, over a period of three years, the accounts of the company were distorted. This was discovered by an accountant at the close of 1920 and entries were made to bring the books into a condition where they reflected the true situation. However, in carrying these entries into the profit and loss statement, no attempt was made to allocate the amounts to the years in which the distortions occurred, but the entire amount was charged into 1920 profit, thereby overstating the profit from the operations of that year.

To determine the proper method to be followed in computing income in such a situation as we have here, the transactions must be analyzed. The company purchases goods, the purchase price being payable in pounds sterling. It may pay for those goods at the time of purchase by buying sterling at the then prevailing rate, or it may choose to establish a credit and pay the account later. In any event, the cost of the goods must be arrived at by reducing sterling to dollars at the rate of exchange prevailing on the date of purchase. Appeal of Bernuth Lembcke Co., 1 B. T. A. 1051.

If the company, instead of making payment at that time, makes ’ the purchase on credit, it is investing or speculating in foreign exchange. It may derive a profit or sustain a loss on the exchange operation, but the cost of the goods to it is not affected by such profit or loss. We therefore conclude that the proper method of accounting is to include purchases in the accounts at the rate of exchange prevailing at the date of purchase and to account for any profit or loss in the payment therefor as a separate transaction. Such was our decision in Appeal of Bernuth Lembcke Co., supra, where exchange was first purchased and later used to purchase goods. We there held that upon the purchase of the goods a loss resulted from the investment in exchange and that the cost of the goods was the value of the exchange at the date the goods were purchased.

During !920 the petitioner’s total purchases in sterling were £133,434-5-1. It entered this amount in its purchases at $649,357.73, at the normal rate of exchange. Actual cost, at the exchange rate prevailing at the various dates of purchase, was $477,264.59. Purchases for 1920 were therefore originally overstated by $172,093.14, the difference between the amount entered as cost and that which should have been entered. The correcting entry made by the petitioner, $208,892.64, included errors for 1918 and 1919 as well as 1920. To the extent that it corrects errors of prior years this entry has no place in the computation of 1920 income. The cost of goods purchased in 1920, and consequently the income for 1920, has been overstated in this entry by $36,799.50, the difference between the correcting entry which was made and that which should have been made.

At the close of 1920 the petitioner’s accountant also adjusted the books to reflect the profit derived from trading in exchange and credited $28,831.53 to profit for 1920 on this account. This amount was returned as income for that year. It represents the accountant’s computation of the gain derived from exchange transactions in 1918, 1919, and 1920. So far as it includes gain derived from remittances made in 1918 and 1919 it has no place in the computation of 1920 income.

The gain realized in 1920 upon exchange transactions completed in that year by the remittance of sterling, as set forth in the findings of fact, was $19,947.12. Income for 1920 has therefore been overstated by $8,884.41, the difference between the gain reported as realized and that realized in fact.

It is the contention of the petitioner that the net income for the year can be reflected correctly only by converting balances of accounts payable in sterling at the end of each year into dollars at the rate of exchange prevailing at the end of each year, thus in effect making an inventory item of such accounts. This contention has already been decided adversely to the contentions of the petitioner in the Appeal of Roessel & Co., Ltd., 2 B. T. A. 1141, where it was held that gain or loss on investments or transactions in foreign exchange were to be reported in the year in which the transaction is completed by payment. The computation of the gain set out above has been made upon that basis.

Decision will be entered on ÍS0 days’ notice, wnder Rule 50.


author: Green :

text:
    Appeal of Benjamin H. Read.
    Docket No. 5664.
    Promulgated March 5, 1927.
    1. The purchase of assets and the assumption of liabilities of a corporation by the owner of practically all of the stock held to be merely a step in, rather than a separate transaction from, the dissolution of the corporation.
    2. A corporation was dissolved and its assets were purchased for a fixed sum by its sole stockholder, who also assumed its liabilities, and the Commissioner, in determining the gain resulting to the stockholder from the dissolution, computed the net worth of the assets at the date of the transfer by including accounts receivable and liabilities therein at their face value. The stockholder claimed that the accounts receivable were without value and that the Commissioner’s determination of net worth was excessive.
    It appearing from the evidence that the liabilities were satisfied by the stockholder subsequent to the tax year at a discount sufficient to offset the amount of the accounts receivable, and, further, that the stockholder subsequently recovered a substantial portion of the accounts receivable, held, 'that the Commissioner’s determination must be approved.

      Thomas F. Gadwdlader, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1920 in the amount of $5,125.78. It is alleged that the Commissioner erred in his computation of the gain realized by the petitioner on the liquidation and dissolution of a corporation of which he owned practically all the stock, in that in his computation the Commissioner included the notes and bills receivable at an amount in excess of their value at the time they were taken over by the petitioner.
    FINDINGS OP FACT.
    The petitioner resides at Baltimore, Md., and is engaged in business as a coal merchant, with offices in the Maryland Trust Building.
    In 1907 his business, which had been conducted as an individual enterprise since 1892, was incorporated in the State of Delaware under the name of Lynah & Bead, Inc. The total authorized capital stock of $50,000 was divided into 500 shares having a par value of $100 per share, 494 shares of which were issued to the petitioner. For this stock, $7,500 was paid in cash and the remaining $42,500 was set up on the books against good will.
    In 1920 the petitioner decided to dissolve the corporation and to continue the business in his individual capacity. He purchased the assets of the corporation, consisting of cash, coal, and accounts and bills receivable, for $82,000, and assumed its liabilities. On October 11, 1920, the date on which the dissolution was effected, the corporate books disclosed the net worth of the business as $88,192,63. In computing the gain the Commissioner excluded the item of good will and stock represented thereby in the amount of $42,500; reduced inventory by $4,358.89; eliminated a liability of $9,980.12 carried as “additional tax due 1917”; added an additional liability of $39 on account of additional tax for 1915; and made the necessary adjustment of surplus resulting from these changes, thereby arriving at a net worth of $51,274.86 for the assets of the corporation.
    The principal items listed in bills receivable consisted of nine notes for the aggregate amount of $25,447.54 advanced by Lynah & Bead, Inc., to the Carbon Creek Coal Co. Prior to October 11, 1920, the date on which the petitioner acquired the business of Lynah & Bead, Inc., these notes were presented for payment and were returned protested. At the instigation of the petitioner the five endorsers, the president, treasurer, and three directors of the Coal Company, joined in judgment notes and one, of them offered $20,000 in settlement of his liability on all claims against the corporation, amounting to $60,000, which offer was rejected. A trustee was appointed to take over the affairs of the Carbon Creek Coal Co. and on or about July 2, 1923, he paid to the petitioner $11,680.43 on the claim of Lynah & Bead, Inc. At the time the advances represented by these notes were made, the endorsers submitted a financial statement showing their net worth as $110,000. The principal item in this statement ivas a tract of land in Kansas, listed at a value of $75,000, of which an undivided seven-tenths interest was owned by one of the directors. The petitioner subsequently, in 1925, entered suit on the judgment and levied on the endorsers’ interest in the land and settled the case by accepting a mortgage for $4,000. Considering this mortgage as cash, the total amount remaining unpaid, including principal, interest, and expenses, was $16,599.96.
    In the accounts payable on October 11, 1920, was a claim of the Tidewater Coal Exchange for $55,614.05. This exchange had been organized during the war for purposes of expediency in the distribution and handling of coal. It was operated in somewhat the same manner as a bank. The medium of exchange was coal instead of dollars. Coal was shipped to the exchange and the broker was credited by the exchange in tons of coal with the amount received. No money was passed or entered on the books, and when coal was withdrawn the broker’s account was charged with the amount so drawn. After the war, when restrictions on buying and selling coal were lifted, the records of the exchange disclosed that Lynah & Bead, Inc., had overdrawn its account by several thousand tons. The price of coal had greatly increased and a claim was made for settlement for the amount overdrawn at a rate of $10.50 per ton. A draft was drawn on the corporation for that amount but was dishonored when presented for payment. Subsequently an attorney was appointed by the executive committee of the exchange to negotiate the settlement of such claims and on January 3, 1921, he'accepted the petitioner’s check for $22,587.57 as payment in full. The Tidewater Coal Exchange was later forced into bankruptcy and a trustee was appointed to wind up its affairs. Payment of the full amount of the claim against Lynah & Bead, Inc., was demanded, and upon refusal, suit was brought for the balance due. This suit was compromised on December 17, 1923, on payment by the taxpayer of $10,276.60 and a waiver of all right to the amount previously paid. Another liability was a claim by the Pennsylvania Bailroad Co. for approximately $1,400 for freight. There was some question as to the validity of the claim at the time of the dissolution of Lynah & Bead, Inc. It. was contended by the petitioner that the freight had previously been paid and the payment of this amount would result in duplication. A suit brought on the claim was compromised at a saving to the taxpayer of $449.29 of the total amount claimed.
    At the time the petitioner took over the business of Lynah & Bead, Inc., on October 11, 1920, there were a number of liabilities against the corporation the amounts of which were undetermined. The principal item in this group was income taxes accrued, which the taxpayer estimated at $3,500. They were later determined to be $3,094.56. Another' item was made up of the expenses connected with the settlement of the claim of the Tidewater Coal Exchange. These expenses were estimated at that time to be approximately $1,200. Actual expenses in that connection, as later determined, were $931.96. Another item was composed of sundry expenses and incidentals amounting to $842.54.
    In determining the net worth of the assets of Lynah & Head, Inc., as of the date of dissolution, the Commissioner has included in the liabilities the full amount claimed by the Tidewater Coal Exchange, and in the assets of the corporation the face value of the notes of the Carbon Creek Coal Co.
   OPINION.

Green :

It is the contention of the petitioner that the purchase of the assets of Lynah & Read, Inc., and the dissolution of that corporation constituted two separate and distinct transactions; that no profit was realized on the purchase on the ground that it ivas not a closed transaction; and further, that even though the purchase be treated as a step in the dissolution of the corporation, the value of the assets received upon dissolution was not in excess of $32,000.

From the facts disclosed by the record, there is little doubt that the purchase of the assets of Lynah & Read, Inc., by the petitioner was merely a step in the dissolution of the corporation and was in effect a mere matter of form. The petitioner had determined to dissolve the corporation and to continue the business in his individual capacity and it mattered little what procedure was followed in effecting the dissolution of the corporation and the transfer of its assets to him so long as it was handled expeditiously. A conversion of the corporate assets into cash would simplify the procedure materially. With the exception of a few qualifying shares he was the sole stockholder, and the corporation having been dissolved, the transfer of the corporate assets to him would be purely a matter of form regardless of the method adopted. Ostensibly there was a sale of assets by a corporate entity to an individual and, standing alone, should be treated as such, but in a case where the result is merely in form, it will be treated as a bookkeeping transaction rather than a sale. Gulf Oil Corporation v. Lewellyn, 248 U. S. 71. The effect of the various steps was to dissolve the corporation and distribute the assets to the petitioner in liquidation. Such a transaction gives rise to taxable gain measured by the difference between the cost or March 1,1913, value of the stock, whichever is greater, and the value of the assets received on liquidation.

Only one question is to be determined and that is the net value of the assets received by the petitioner. The assets consisted of cash, coal (the value of which is not in dispute), and accounts and bills receivable. The petitioner, testifying in his own behalf, stated that he made a careful examination of the accounts receivable and of the accounts payable at the time of dissolution and reached the conclusion that $32,000 represented the net worth of the corporate assets. For the most part,, his testimony in support of his conclusion as to the value was limited to subsequent events connected with the final settlement of the accounts in question. From the record it appears that the only account receivable considered doubtful was that of the Carbon Creek Coal Co., amounting to $25,447.54. This account he considered totally bad, but subsequently recovered something over $15,000, leaving $16,599.96, including interest and expenses of collection, unpaid. It was included in the assets at face value by the Commissioner.

Offsetting this doubtful item in accounts receivable, however, were a number of liabilities in the form of claims, which the petitioner’s testimony indicates he considered unjust and unreasonable and which he had refused to pay on that ground. The record does not show that he, at any time, considered that he would be required in the end to pay the full amount of these claims. They were also allowed in full by the Commissioner in computing the net worth of the assets. The principal claim was that of the Tidewater Coal Exchange for $55,614.05. It later developed that this claim was settled for a little more than half of the total amount, and that, even though the full amount shown by the notes of the Carbon Creek Coal Co. had been lost, the gain in the settlement of this claim would practically offset such loss. The freight claim of the Pennsylvania Eailroad was also settled at a big discount in favor of the petitioner. It also appears that the petitioner overestimated expenses with reference to the expenses in settling these claims and with reference to income taxes which had accrued during the year 1920, prior to the date of dissolution.

After considering the testimony, we find nothing to justify the conclusion that the net worth of the assets was less than the amount found by the Commissioner. In fact, the petitioner’s statement of the facts existing as of the date of dissolution and of the subsequent settlement of the accounts fully justified the finding of the Commissioner.

Judgment will be entered after 10 days' notice, under Rule 50.


author: Geeen :

text:
    Appeal of Estate of L. E. McKinnon, Bertram W. Burtsell, and Norman Parsons Clement, Executors.
    Docket No. 2650.
    Promulgated March 5, 1927.
    Interest on foreign bonds paid to a nonresident alien individual while the bonds are held within the United States as security for a loan, does not constitute gross income from sources within the United States, within the meaning of section 213 (c) of the Revenue Act of 1918.

      Daniel B. Priest, Esq., for the petitioners.

      Ellis W. Manning, Esq., for the Commissioner.
    This appeal involves the taxability, under the Kevenue Act of 1918, of interest received by a nonresident alien during the calendar year 1919 upon coupon bonds of a foreign government and of a foreign, nonresident corporation, which bonds were during that year held by a domestic bank as collateral security for a loan. The petitioner claimed the interest as exempt, but the Commissioner held otherwise and determined a deficiency in the sum of $1,770.28.
    FINDINGS OF FACT.
    L. E. McKinnon, the decedent, was during the year 1919 a citizen and resident of the Dominion of Canada. During this year he owned certain coupon bonds of the Kingdom of Great Britain and Ireland and of the Grand Trunk & Pacific Railroad of Canada, the latter being a nonresident corporation. These bonds were put up as collateral security for a loan made by the Fidelity Trust Co. of Buffalo, N. Y., to the decedent. Interest on the bonds in the sum of $1,314.44 was collected by the Trust Company and credited to the account of the decedent with such company.
   OPINION.

Geeen :

The issue here is entirely one of law, there being no dispute as to the facts. The issue of law depends entirely upon the construction to be placed upon the applicable provisions of the Kevenue Act of 1918, which are as follows:

See. 213. That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”—
(c) In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on tlie manufacturo and disposition of goods within the United States.

We are thus called upon to determine whether interest paid on bonds of a foreign government or a nonresident corporation, temporarily in the United States by virtue of being pledged as security for a loan, is subject to tax as income within the meaning of the clause, “ In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States.” Since the deceased was a nonresident alien, we have left only the question of'whether the income accruing to him from such bonds was from sources within the United States.”

The Commissioner contends that these bonds are property; that they have a situs within the United States; and that, therefore, the interest paid thereon is from “ sources within the United States.”

In Webster’s New International Dictionary the word “ source ” is defined as “ that from which anything ■ comes forth, regarded as its cause or origin; the first cause.” This definition we believe to be the one commonly accepted and used. What then is the source of this interest? The bond is but the evidence of the debt. The bond, in itself, is the source of nothing, since it merely represents. The interest is not paid by the bond. The bond is not subject to suit for the payment of interest and in itself has incurred no obligation to pay. The payment is made by the obligor, it having promised to pay and it being responsible for the. payment. It seems clear, therefore, that the obligor is the source of payment; that the interest “ comes forth ” from it; and that it is the “ cause or origin ” of the payment.

Counsel for the Commissioner has argued to us that the case of DeGanay v. Lederer, 250 U. S. 376, supports a contrary conclusion. This contention we have disposed of in the Appeal of Standard Marine Insurance Co., Ltd., 4 B. T. A. 853, where we held that interest received on the bonds of a nonresident, owned by a foreign corporation but held within the United States, was hot taxable income. The conclusion there reached is in accord with the decision of the courts.

In the case of State Tax on Foreign-held Bonds, 15 Wall. 300, it was said:

The bonds issued by the railroad company in this case are undoubtedly property, but property in the hands of the holders, not property of the obligors. So far as they are held by nonresidents of the State, they are property beyond the jurisdiction of the State. ,

The sound reasoning behind this statement is equally applicable to bonds held by nonresidents of the United States.

In the case of Manitowoc Gas Co. v. Wisconsin Tax Commission, 116 Wis. 111; 152 N. W. 848, a set of facts similar to those before us was presented to the Supreme Court of the State of Wisconsin, and the court there held:

It was stated in Income Tax Cases, 148 Wis. 456, 503, 134 N. W. 673, 135 N. W. 164, that the Constitution as amended clearly recognizes the idea that the taxation of property and the taxation of incomes are two separate and distinct things. In taxes upon property the rule of taxation must be uniform while taxes upon incomes may be graduated and progressive. It may be conceded that, logically and philosophically considered, all taxes are ultimately derived from property or labor and paid in property. But as was said in Van Dyke v. Milwaukee, 159 Wis. 460, 463, 464, 146 N. W. 812, 150 N. W. 509, philosophical and logical distinctions must yield to the clearly expressed intent of the written law and to the possibility of a practical administration. thereof. The Constitution divides the subjects upon which taxes may be levied into two classes, one property, the other incomes, privileges, and occupations. The supreme law of the state having so divided them, and there being nothing in such division contrary to a valid classification or to the federal Constitution, courts must respect the division arid administer the law as written. Income Tax Cases, 148 Wis. 456, 503, 134 N. W. 673, 135 N. W. 164.
The taxing power of a state does not extend beyond its territorial limits. Union R. T. Co. v. Kentucky, 199 U. S. 194, 26 Sup. Ct. 36, 50 L. Ed. 150, 4 Ann. Cas. 493. Within such limits it may tax persons, property, incomes, or Dusiness. Taw on Foreign-Held Bonds, 15 Wall. 300, 21 L. Ed. 179. If the tax be on property it, or its lawfully constituted situs, must be found within the state. If an interest in property is taxed the situs of either the property or interest must be found within the state. If an income be taxed the recipient thereof must have a domicile within the state, or the property or business out of which the income issues must be situated within the state so that the income may be said to have a situs therein. Whether an income may have a situs for taxing purposes different from that of its recipient is not determined. But assuming that it can, did the income in question Rave a situs in this state?
The bondholders as such were individually sought to be taxed. They were creditors of the relator, and a portion of them resided outside the state. The nonresidents as bondholders owned no property and conducted no business within its borders, and had no domicile here. True, their debt was secured by property within the state, but the situs of the security for a debt is not necessarily the situs of the evidence of the indebtedness. The income tax law does not seek to reach property or an interest in property as such, but to reach incomes having a situs within the state, or growing out of a privilege exercised or occupation conducted within the state. The law levying an income tax upon nonresidents, “ upon such income as is derived from sources within the state or within its jurisdiction,” must be construed to mean such income as issues directly from property or business located within the state, and not income from loans made therein, though, as here, secured by a trust deed upon property situated • within the state. The situs of the property out of which such income issues is that of the domicile of the creditor. Taw on Foreign-IIeld Bonds, 15 Wall. 300, 21 L. Ed. 179. The purchase of a bond is the making of a loan of money to the obligor. The bond represents so much money due from the debtor. The purchase of it does not constitute any business carried on within the state. The situs of a bond remains at the domicile of the bondholder. So the interest in question did not, as to nonresident bondholders, constitute an income derived from sources within the state within the meaning of subsection 3, § 1087m, Stats. 1911.

The interest here sought to be taxed was paid by a nonresident corporation to a nonresident alien. It is immaterial that either temporarily or permanently the bond itself was within the jurisdiction of the United States. The income flowed from a source without the United States to a nonresident alien. It is of no consequence that it was routed through the City of Buffalo. The Fidelity Trust Co. of that city was merely a conduit through which the interest passed from one nonresident alien to another, and such interest is clearly not “ gross income ” within the meaning of the Revenue Act quoted above.

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


author: Smith :

text:
    Appeal of Ethel M. Codrington.
    Docket No. 4685.
    Promulgated March 5, 1927.
    A nonresident alien receiving dividends upon shares of stock of the Canadian Pacific Railway Co. through her agent located in the United States, is not liable to income tax in respect of such dividends under the Revenue Act of 1918.

      W. F. Gibbs, Esq., for the Commissioner.
    The petitioner appeals from the determination of a deficiency in income tax for the year 1920 in the amount of $55.93. The sole question in issue is whether a nonresident alien receiving dividends upon shares of stock of the Canadian Pacific Railway Co., a foreign corporation with its principal office outside of the United States but with an office or offices in the United States, through a resident fiduciary, is liable to income tax upon those dividends under the provisions of section 213 (c) of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is now and was during the year 1920 a nonresident alien residing in England and a subject of Great Britain. A part of her income for the year 1920 was derived from sources within the United States and this income was received by her through her agent in the United States, The New England Trust Co. of Boston, Mass., such income being as shown on the petitioner’s return for 1920. The agent did not include in the return made for the petitioner dividends in the sum of $1,655 received by it from the Canadian Pacific Railway Co., which dividends were transmitted to the petitioner with her other income. The Commissioner added to the net income reported by The New England Trust Co. of Boston the amount of the dividends in question.
    The Canadian Pacific Railway Co. is a corporation incorporated under the laws of the Dominion of Canada. The greater part of its mileage is outside of the United States but a small fraction thereof is within the United States, and the corporation is engaged in operating the business within the United States and has an office or place of business therein. It derives part of its income from sources within the United States and part from sources without the United States.
   OPINION.

Smith :

Section 213 of the Revenue Act of 1918, in defining gross income, provides in paragraph (c) the following:

In tlie case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.

The Revenue Act of 1918 does not define a resident corporation. It does, however, define a domestic corporation and a foreign corporation. The Commissioner has held that the Canadian Pacific Railway Co. is a resident foreign corporation within the meaning of the Act. He does not, however, contend that the company is “ in its strict sense, a resident corporation of the United States, that is, the Commissioner admits that the legal residence of the Canadian Pacific is Canada, although it has lines and offices situated in the United States.”

If the Commissioner’s contention in this case is correct then every nonresident alien receiving dividends upon the shares of stock of the Canadian Pacific Railway Co. is liable to income tax to the United States in respect of the dividends received, and it is immaterial whether the dividends were received through a fiduciary located within the United States or received directly from the office of the company in Canada. In either case the source of the income would be the interest of the stockholders in the Canadian Pacific Railway Co. The source is not changed by reason of the fact that the income was received through a conduit located in the United States. Appeal of Estate of L. E. McKinnon, 6 B. T. A. 412.

We think that it Avas never the intention of Congress to impose an income tax upon nonresident aliens in respect of income received from dividends of a foreign corporation practically all of whose property is located in a foreign country. Upon the evidence of record we are of the opinion that the Canadian Pacific Railway Co. is not a resident corporation of the United States.

Judgment will be entered for the 'petitioner.


author: Love:

text:
    J. E. Strong and Stella Strong, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1909.
    Promulgated March 5, 1927.

      G. F. Spencer, Esq., for the petitioners.

      Bruce A. Low, Esq., for the respondent.
    This is a proceeding to redetermine deficiencies in income tax for 1919 in the following amounts: J. E. Strong, $624.05; Stella Strong, $680.97. In the petition there are six assignments of error, three of which were abandoned at the hearing. The remaining three are, in substance, that the Commissioner erred (1) in including in income of J. E. Strong certain unexplained bank deposits; (2) in disallowing in part contributions to churches; and (3) in disallowing the deduction as a loss of $1,000 subscribed by Strong to an enterprise known as the Red River Yalley Oil Co.
    FINDINGS OF FACT.
    The petitioners are husband and wife and reside in Wichita Falls, Tex. In the taxable year they made separate returns of community income.
    The husband was in the business of buying and selling oil leases. He also bought and sold oil stock on the exchange on his own account and for others. He kept no books of account. He used a single bank account through which funds of others as well as his own funds were handled in buying and selling stock. Some of the purchases and sales of stock were cash transactions. He kept no record of any of the stock transactions and his income-tax return was made from memory. A revenue agent checked up his bank account and as a result the Commissioner added to income $1,867.43.
    In the taxable year the petitioners contributed to the Christian Church at Wichita Falls, $10 per month, or a total of $120.
    In that year, J. E. Strong and a number of other individuals, associated under the name of Red River Valley Oil Co., acquired a lease of land in Montague County, Texas, in so-called wildcat territory, for the purpose of prospecting for oil. It was not a corporation. They sank a well to a depth of 2,000 feet, discovered no oil, and abandoned-the project. The lease was then allowed to be forfeited as being of no value. Strong subscribed $1,000 to the enterprise, but paid in only $500. After the abandonment of the enterprise there remained in the hands of a trustee unused funds of about $200. Several years later the trustee bought a lease and sold it at a profit, and in a final distribution made in 1925, Strong received $80 as his share. The group, as such, did nothing between the time the original lease was forfeited and the date the other lease was purchased several years later.
   OPINION.

Love:

The issues involved in this case are purely issues of fact. When a petitioner keeps no records of his business transactions he is frequently left without means of proving exact conditions, and his memory is not sufficiently exact to enable him to supply the want of record evidence. Such is the situation in the instant case.

In 1919, the petitioner, J. E. Strong, paid in $500 to the Red River Valley Oil Co. In the same year, the company brought in a dry hole and abandoned the proposition as condemned territory. Strong got back no part of his $500 investment, except that in 1925 as a result of the purchase and sale of another lease by the trustee, on which deal a profit was made, he received as his part $80. We think it is clear that he lost his investment of $500 in 1919.

The petitioner claims to have contributed $350 to churches and other benevolent organizations in 1919. At the hearing he was able to point out specific contributions to the extent of only $10 per month, to which amount he swore. He should be allowed as a deduction the amount so identified — $120.

With reference to the contention in regard to the adjustment of income as a result of an audit of- petitioner’s bank account, that issue is much more complicated and very much less clear. The petitioner testified that of his friends’ moneys he deposited to the credit of his own account not less than $2,000. The Commissioner allowed him as offset for “ other stocks,” $2,690. The petitioner contends that the offset allowed by the Commissioner only took care of miscellaneous stock bought and sold on his own account, and did not take care of that bought and sold for his friends. But he was wholly unable, or at least failed, to point out and Identify what stock transactions were included. The record on this question does not justify us in disturbing the determination of the Commissioner as to that contention.

Judgment will be entered on 15 days notice, v/nder Rule 50.


author: Milliken :

text:
    P. J. Quealy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7196.
    Promulgated March 9, 1927.

      Earl B. Breading, Esq., and Walter M. Burhhardt, Esq., for the petitioner. . •

      L. 0. Mitehell, Esq., for the respondent.
   Milliken :

This proceeding results from the determination by the Commissioner of a deficiency in income taxes for the calendar year 1921, in the amount of $6,016.44. Petitioner claimed as a deduction, in his tax return filed for the year 1921, the amount of $78,584.38, representing a loss. sustained on stock that became worthless in that year. The Commissioner determined that the stock became worthless in 1920 and allowed the deduction for that year. - The sole issue involved in this proceeding is the year in which petitioner sustained the loss.

FINDINGS OF FACT.

Petitioner is a resident of Kemmerer, Wyo. In the year 1918, the Liberty Potash Co. was organized and incorporated, under the laws of the State of Utah, and erected a plant at Green River, Wyo., to extract potash from the leucite deposits in Sweetwater County, Wyoming. Petitioner was approached, during the year 1918, with respect to the purchase of stock in the corporation, it being represented to him that the manufacturing plant would use large quantities of coal, and, as he was the owner of adjacent coal mines, hé believed that an investment in the stock would prove advantageous not only in itself, but also in that the establishment of a manufacturing plant would provide a ready market for his coal. During the years 1918 and 1919, he purchased stock for cash, in the Liberty Potash Co., to the extent of $76,575. In the latter part of 1919, the corporation began active operations and shipped large quantities of potash to the eastern markets. Much of the machinery and equipment had been purchased on the basis of a small cash payment, with title to remain in the seller until full payment had been made. The company did not promptly pay its bills as they became due. In the latter part of 1919 many of the creditors were demanding immediate payment for supplies. Creditors of the company, in 1919, filed a petition in the proper court for the appointment of a receiver. On January 2, 1920, a receiver was appointed for the company. The receiver took over the operation of the plant and ran it until February 26, 1920, upon which date the court, upon petition of the receiver, directed that the plant be shut down and that the company cease operations.

Prior to the issuance of the order to close down the plant, the court had, on February 16, 1920, authorized the receiver to issue receiver’s certificates in the amount of $37,500. Petitioner purchased receiver’s certificates in the amount of $3,750.

After the receiver was appointed for the Liberty Potash Co., a committee for the protection of creditors and preferred stockholders was formed, held meetings, and took joint action under the name of “Joint Committee of Creditors and Preferred Stockholders of the Liberty Potash Company.” Petitioner was a member of this committee.

The committee of creditors and stockholders conducted active negotiations with various parties seeking to interest capital, to the end that the company might be financially rehabilitated. During the years 1919, 1920, and 1921, they were successful in interesting Armour & Co. to the extent that the latter made many experiments and tests at the property of the corporation and only withdrew from active participation in lending financial assistance owing to its own difficulties in that particular. The American Smelting & liefining Co. also made experiments and tests. Finally, under date of May 14, 1921, a contract was entered into between the Liberty Potash Co. and W. W. Crocker, of San Francisco, Calif., by the terms of which the latter agreed to take over the operation of the plant, satisfy the claims of creditors, and give the stockholders a portion of stock in a corporation to be organized.

Stockholders were assessed by the committee during the years 1920 and 1921, in various amounts, on the stock owned by them. Petitioner paid assessments as follows:

April 8, 1920_$760.76
November 21, 1920_,_ 880.38
March 12, 1921_ 600. 00
August 17, 1921_ 368.25

The assessments received were used to defray the expenses of the committee in carrying on its negotiations during the years 1920 and 1921.

In 1919, the Liberty Potash Co. purchased certain boilers under a title-retaining contract. Large sums were due on the boilers, and the parties secured by the title-retaining contract petitioned a proper court, on January 13, 1921, for permission to remove the boilers. Petitioner, on March 25,1921, agreed to purchase the boilers provided the parties would consent to leave the boilers in the plant of the Liberty Potash Co. Petitioner agreed to assume this liability, believing, as he did, that to remove the boilers would result unfavorably in concluding the contract with the Crockers for the taking over of the plant.

In the fall of 1921, W. W. Crocker advised the committee that he did not desire to proceed under his contract. All creditors and stockholders were advised that Crocker had determined not to proceed under the contract. The efforts of the committee were thus made futile.

On October 10, 1921, the receiver, after all negotiations for the rehabilitation of the company by outside interests had failed, petitioned the court for authority to sell at public or private sale all of the property and assets of the Liberty Potash Co. In 1921 the court authorized the sale, basing its approval of the sale on the facts that the Liberty Potash Co. had no cash on hand, owed creditors $489,500, owed receiver’s participating certificates $37,500, and had incurred receiver’s expenses in the amount of $75,000. The assets of the Liberty Potash Co. were not sufficient to pay the creditors, the receiver’s certificates, or the expenses of receivership.

The stock of the petitioner in the Liberty Potash Co. became worthless in the year 1921, and he sustained a loss in that year in the amount of $78,584.38.

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


author: Milijken :

text:
    Hollenberg Music Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14546.
    Promulgated March 9, 1927.
    Where the evidence fails to show that the disposition of an interest in real estate by a corporation to its stockholders constituted a sale, as distinguished from a distribution in kind, a loss alleged to result from the so-called sale is not established.

      M. A. Matlock, Esq., for. the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding results from the determination by the Commissioner of a deficiency in income tax for the year 1920, in the amount of $771.69. The petitioner contests that part of the deficiency due to the Commissioner’s disallowance of a deduction of $5,000, representing a loss alleged to have been sustained on the sale of real estate, and a deduction of a $1,500 rental payment alleged to have been made by the petitioner.
    FINDINGS OF FACT.
    The petitioner is an Arkansas corporation, engaged in the business of selling musical instruments, with its principal' place of business at Little Rock. Its principal stockholders are F. B. T. Hollenberg, who has been president of the corporation since 1891 and who held more than 80 per cent of its stock during 1920, and W. B. Parsons, who was treasurer during 1920 and owned 10 per cent of its stock. Hollenberg also dealt largely in real estate in Little Rock.
    In January of 1911, the lease on the property housing petitioner’s business being about to expire, the petitioner passed a resolution authorizing Hollenberg to negotiate for more suitable quarters, either by lease or purchase or by a 99-year leasehold on property on which petitioner might erect its own building. Hollenberg found that certain property then occupied by the First Presbyterian Church of Little Rock could be purchased for $40,000. The officers of the petitioner concluded that it would be unwise for the petitioner at that time to purchase property representing so large an investment, as the petitioner would not need it for several years. Hollenberg purchased the property as an individual, with an oral understanding that the petitioner could and would buy it from him later by paying him the amount which it had cost him, plus interest, taxes, etc., at the time the corporation took over the property.
    The First Presbyterian Church transferred the property to F. B. T. Hollenberg by deed dated August 5, 1912, which recited the consideration to be as follows:
    For and in consideration of the sum of forty-thousand dollars ($40,000.00) paid and to be paid by F. B. T. Hollenberg, as follows: to-wit:
    $1,000 cash — receipt of which is hereby acknowledged and one note for $4,000.00 due on demand, after thirty days notice, and without interest, and his six promissory notes for the sum of $5,000.00 each, payable on or before one, two, three, four, five and six years, respectively, with interest thereon at the rate of 6% per annum, interest to be paid semi-annually, but no interest to he paid except after twelve months from this date, and one pipe organ valued at $5,000.()0, to be delivered within twelve months from the date of said deed, according to the specifications agreed upon.
    The deed purports to convey the property to F. B. T. Hollenberg absolutely and makes no mention of the petitioner as being concerned in the transfer. Hollenberg, as an individual, made the down payment and executed the notes evidencing the balance of the purchase price.
    As the notes became due they were paid in part by petitioner and in part by Hollenberg as an individual. An excerpt from the minutes of a corporate meeting held January 11, 1916, is as follows :
    Whereas, F. B. T. Hollenberg purchased 50 feet and 10 feet easement on East Fifth Street, to be utilized by the Hollenberg Music Co. and the Company has paid approximately $10,000.00 and F. B. T. Hollenberg has paid balance, with exception of $10,000.00 which is due in May, 1916, and the delivery of a $5,000.00 Pipe Organ, which delivery was assumed by the Hollenberg Music Company, making about $15,000.00 paid by Hollenberg Music Company and as the purchase price was $40,000.00, in order to take over the property the company would have to pay F. B. T. Hollenberg $15,000.00 and assume the mortgage of $10,000.00. But not desiring to do so at this time, the treasurer, W. B. Parsons, is directed to pay F. B. T. Hollenberg Interest upon the $15,000.00 or any other sums advanced by him upon this property for, purchase price, taxes, insurance, improvement taxes, or otherwise, to the effect that a full and complete adjustment and settlement will be had with F. B. T. Hollen-berg up to January 1, 1916, upon that date, leaving unsettled only the amount $15,000.00, due F. B. T. Hollenberg, balance of purchase price, and interest at 6 per cent from January 1, 1916, payable semi-annually until such time as the company may elect to pay the $15,000.00 to him and actually take over the property. And the company is to assume the mortgage of $10,000.00 against said property.
    Subsequent to the date of this resolution, the petitioner paid additional sums, the total payments made by it on the balance due on the property amounting to $18,828.71. This amount was carried on the petitioner’s books in a real estate account. Thereafter, the petitioner decided not to take over the property but to dispose of its interest therein as represented in the $18,828.71 real estate account. To accomplish a satisfactory disposition of its interest in the property and eliminate the real estate account from its books, the petitioner declared a dividend of $24,000, as is shown by the following resolution dated February 6, 1917:
    Upon motion of F. B. T. Hollenberg, and seconded by W. B. Parsons, a dividend of 24% is hereby declared. This dividend of 24% to be paid to' the stockholders out of the surplus and undivided profits in its real estate on East Fifth Street, (being fifty feet off of the West ends of Lots, 7-8-9, Block 5, Little Rock), amounting to $18,828.71, and the sum of $5,171.29 cash. It being understood and agreed by all of the stockholders, however, that this $5,171.29 is to be paid into the new corporation, owning Fifth Street property, and the stockholders receiving this dividend of $5,171.29 are to take stock in the Company in lieu of cash. Carried.
    These resolutions having been adopted unanimously, the action of the’Board at meeting of the Directors on January 11th, 1916, pertaining to resolution then duly adopted and recorded on page 71, (this minute book) to settle with F. B. T. Hollenberg for his interest in Bast Fifth Street property and the Company to take over the entire property, is now therefore hereby cancelled and annulled, as above resolution duly carried is in lieu thereof, and this Company has no interest in said property by reason of the resolution above adopted, and it is so ordered by vote of the Directors present and acceptance of same by F. B. T. Hollenberg.
    Upon authority of this resolution, and to carry it into effect, three entries were made in the petitioner’s books early in 1917, after 1916 audit had been completed. The first entry charged surplus with $24,000 and credited dividend account, the next charged dividend account with $18,828.71 and credited real estate account, the remaining entry charged the dividend account with $5,171.29 and credited the German National Bank with having drawn a draft of $5,171.29. The two items charged to dividend balanced the credits thereto of a like amount.

      Upon the advice of a revenue agent, the new corporation (presumably to be organized by the petitioner) contemplated by the resolution was not created. Instead the interest in the property was placed in a trust in which the stockholders held a pro rata beneficial interest. The other stockholders deeded their interest in the property to Hollenberg, and he gave them back a declaration of trust. Some time during 1916 or 1911, Hollenberg let a contract for the erectios. of a building, which now stands on the property. The petitioner corporation, having disposed of its interest in the property, had nothing to do with this building.
    At the time the corporation decided to dispose of its interest in the church property, the pipe organ, which formed a part of the consideration to be paid the church, had not been delivered. Under the agreement by which petitioner disposed of the property to its stockholders or to Hollenberg, as heretofore set forth, the petitioner agreed to retain the liability for delivery of the organ whenever the church demanded it. In 1920 the church demanded the organ, and the settlement made by the petitioner is disclosed by the following resolution dated October 11, 1920:
    Tlie Treasurer reported his settlement with the Presbyterian Church whereby he paid Five Thousand ($5,000.00) Dollars in full settlement of the obligation of the Hollenberg Music Company to deliver to said church a certain pipe organ when called upon by the Trustees of the church to make such delivery.
    He informed the Directors that when the property on Fifth Street was purchased, the Hollenberg Music Company assumed an obligation to deliver said organ, which was described in the agreement as being one similar to the organ previously sold and delivered to the Second Baptist Church.
    The trustees of the Presbyterian Church had requested delivery of said organ and in taking the matter up with W. W. Kimball Company, they advised that this organ had been discontinued and it would be impracticable to reproduce it. This having been reported to Mr. Gray, representing the Board of Trustees, thereupon an agreement was entered into by the Trustees and the Treasurer, whereby the Company was to pay the Trustees the sum of Five Thousand ($5,000.00) dollars in lieu of the delivery of the aforesaid organ, which was accepted, and the Five Thousand ($5,000.00) Dollars paid July 1, 1020. By resolution unanimously adopted, the action of the Treasurer was ratified and affirmed. And, whereas, the Company has previously realized profit of One Thousand Two Hundred and Fifty ($1,250.00) Dollars from the sale of an old organ (which was sold to the Bethel A. M. E. Church of this city) taken out of the church and which was part of the contract, the aforesaid sum of Five Thousand ($5,000.00) Dollars paid as full quittance for the delivery of said organ to the church is hereby directed to be charged to profit and loss account and the transaction closed. Carried by unanimous voté.
    The petitioner claimed the $5,000 paid to the church in Í920 as a deductible loss for 1920. The Commissioner disalloived the loss, which disallowance, together with the disallowance of the rent deduction, forms the basis for this appeal. ‘
   OPINION.

Milijken :

In the absence of any evidence respecting the disallowance of the rent deduction, we need only consider the propriety of the disallowance of the deduction of $5,000 alleged to have been sustained as a loss in 1920 on the sale of real estate. The petitioner’s contention is that it purchased the church property in question from F. B. T. Hollenberg, in 1916, and thereafter sold it back to the stockholders during 1916 or 1917, retaining the liability to deliver the pipe organ, which liability resulted in a loss in the year 1920, when the settlement was made therefor with the First Presbyterian Church. The resolution of January 11, 1916, together with the resolution of February 6, 1917, and the oral testimony, tended to show that the petitioner did purchase the property from Hollenberg pursuant to the oral agreement existing between them. However, it is not clear that the later disposition of petitioner’s interest constituted á sale. The petitioner apparently considers the 24 per cent dividend declared by the resolution of February 6, 1917, to be a cash dividend and that the stockholders took the real estate in lieu of the cash due them thereunder. However, the resolution, as interpreted by the parties, authorizes the distribution of its interest in real estate and of certain stock (whether in the petitioner corporation or the proposed new corporation, is uncertain).

The oral testimony indicates that the parties involved considered the steps taken to dispose of the property interest to be a sale, but the record does not disclose just what took place. It is evident that no clear distinction was made between the petitioner corporation and the individuals who were its stockholders. This confusion of interests is reflected in the testimony, making it impossible to draw therefrom a comprehensive understanding of the plan worked out by petitioner. If, as the resolution of February 6, 1917, indicates, the petitioner merely distributed the property interest along with other dividends, we.are unable to see that loss, contingent or otherwise, resulted from the distribution. Since we are unable to find as a fact that a sale was made, we need not further consider the petitioner’s contention that it sustained a $5,000 loss in 1920.

Judgment will be entered for the respondent.


text:
    Fred McJunkin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8248.
    Promulgated March 9, 1927.

      W. W. Ranldn, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.

      Petitioner appeals from the determination of a deficiency of $729.63 in income tax for 1924, only a portion of which is in dispute.
    FINDINGS OP FACT.
    For the calendar year 1924 petitioner returned as taxable income from a partnership whose fiscal year ended October 31, 1924, the amount of $54,637.69. One-sixth of this amount, $9,106.28, was prorated to the calendar year 1923 and the balance to the calendar year 1924, and this proration was accepted as correct by the Commissioner in his computation of the deficiency. In computing the deficiency the Commissioner included a tax upon $9,106.28 at the rates prescribed by the Revenue Act of 1921 for the j^ear 1923 and refused to allow the petitioner a credit for 25 per cent of the tax so computed, which credit was claimed by the petitioner under section 1200 of the Revenue Act of 1924.
   OPINION.

Phillips:

The decision in this case must be adverse to the petitioner, being governed by the decision of the Board in the Appeal of Colip, 5 B. T. A. 123.

Decision will be entered for the respondent.


author: Littleton :

text:
    Charles J. Coulter, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8181.
    Promulgated March 9, 1927.

      Russell L. Bradford, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   Littleton :

The Commissioner determined a deficiency in income tax of $115.81 for the calendar year 1920. Petitioner claims that the Commissioner erred (1) in including as taxable income to him as a beneficiary of a trust created by the will of Charles J. Coulter, Sr., the amount of $3,221.76, representing that portion of the income of the estate of the said Charles J. Coulter, Sr., which had accrued between January and August 31, 1920, but had not been collected or paid by the trustees to his aunt, who was a life beneficiary in two-fifths of the income of the said estate and who died on August 31, 1920, and (2) in including as taxable income to him the amount of $378.41, representing that portion of the income of the estate of his aunt, under whose will he was the sole beneficiary, received by the executor during the first four months of the administration of the said estate, which amount was neither paid nor credited to him.

FINDINGS OF FACT.

Petitioner is a resident of New York, N. Y.

Charles J. Coulter, Sr., died prior to September 25, 1902. He left a will, which was duly admitted to probate, under which the Farmers Loan & Trust Co. of New York qualified as and was appointed substitute trustee, and was acting as such during the year 1920. Said will, so far as is material here, provides as follows:

Third: I give, devise and bequeath, all the rest, residue and remainder of my property, both real and personal, and wheresoever situated, to my executors hereinafter named, or such of them as shall qualify, the survivors- of them, and his and their successors in trust nevertheless, for the following purposes:
(1) To divide the same into live equal parts or shares, to set apart two of said parts or shares, to invest, re-invest and keep the same invested, tb collect, and receive the rents, issues and profits thereof, and to pay over the net income of said two parts or shares to my wife Elizabeth K. Coulter, in equal quarterly payments to her during her natural life. And upon her death
(A) To pay over to my son, Charles J. Coulter, Junior, the net income of one and one-half of said parts or shares during his natural life, and upon his death to convey said one and one-half part or share to the heirs of my said son then surviving, per stirpes and not per capita, share and share alike absolutely and forever. ■:
(B) To convey the remaining one-half of one of said two part3 or shares as my said wife may direct in writing by instrument in the nature of a last will and testament, and if my said wife shall make no disposition of said remaining one-half of one part or share by such instrument in writing, to convey the said one-half of one part or share to my said son and his heirs absolutely forever.
(2) To set apart one of said parts or shares, to invest, reinvest and keep the same invested, to collect and receive the rents, issues and profits thereof, and to apply the net income of said one part or share, or so much thereof as my executors may deem advisable, to the use of my son Charles J. Coulter, Junior, until he shall attain the age of twenty-one years; if the amount of said net income so applied to the use of my said son during his minority by my said executors shall not equal the entire amount of such net income, to pay over the balance of such net income during the minority of my said son to my wife, Elizabeth K. Coulter; when my said son attains the age of twenty-one years to pay over to him the net income of said one part or share in equal quarterly payments during his natural life and upon his death, to pay over the net income of said one part or share to my wife Elizabeth K. Coulter, during her natural life, and upon her death, to convey said part or share as my said son may direct in writing by instrument in the nature of a last will and testament, and if my said son shall leave no will, to convey said one part or share to his heirs surviving at the death of my said wife, per stirpes and not per capita, share and share alike absolutely forever.
(3) To set apart the two remaining parts or shares of my estate, to invest, reinvest and keep the same invested, to collect and receive the rents, issues and profits thereof, to pay over the net income of said two parts or shares to my sister, Elizabeth A. Coulter during her natural life, in equal quarterly payments; and upon her death.
(A) To pay over the net income of one of said parts or shares to my saicl wife during her natural life, and upon the death of my said wife to convey said one part or share to my said son and to his heirs absolutely forever.
(B) To pay-over the net income of said part or share to my said son during his natural life, and upon his death to convey the said one part or share to his heirs then surviving, per stirpes and not per capita, share and share alike, absolutely forever.

Elizabeth A. Coulter died on August 31, 1920, and the Farmers Loan & Trust Co. of New York was appointed executor of her estate. During the first eight months of 1920 the trustee under the will of Charles J. Coulter, Sr., had collected and paid over to Elizabeth A. Coulter the amount of $5,811.82. On August 31, 1920, the amount of income of the estate of the said Charles J. Coulter, Sr., which had accrued to Elizabeth A. Coulter, but which had not been collected or paid over to her by the trustee, was $3,221.16. The executor included this amount as a part of the capital of the estate of Elizabeth A. Coulter in its report, which was approved by the Surrogate Court of New York.

The Commissioner held that the amount of $3,221.16 which was collected by the trustee under the will of Charles J. Coulter, Sr., and executor under the will of Elizabeth A. Coulter, between August 31 and December 31, 1920, was distributable to the petitioner, since he succeeded under the will of Charles J. Coulter, Sr., to one-half of the income of the Charles J. Coulter, Sr., trust to which Elizabeth A. Coulter was entitled during her life, and increased petitioner’s income for 1920 accordingly. This amount of $3,221.76 was not during the year 1920 and has not since been paid or credited to the petitioner but has been held by the trustee as a part of the corpus of the estate of Elizabeth A. Coulter.

At the time of her death Elizabeth A. Coulter owned considerable property in her own right of a value in excess of $104,000. In her will she left her entire estate in trust for her nephew, the petitioner herein, with directions that the income therefrom be paid over to him. During the period from September 1 to December 31,1920, the estate of Elizabeth A. Coulter was in process of administration. The executors wore engaged in marshalling the assets of the estate, and the debts of the estate and the expenses of administration had not been determined or paid at the end of 1920. This estate was in process of administration and settlement until some time subsequent to December 22, 1921. During the last four months of 1920 the estate received income in the amount of $1,878.43, of which amount $1,500 was paid to petitioner. The said amount of $1,878.43 was included , by the executors as income of the estate in the income-tax return filed by the estate, and $1,500 thereof paid to petitioner was deducted under the provisions of section 219 (c) of the Revenue Act of 1918. The Commissioner increased petitioner’s income from the estate of Elizabeth A. Coulter in the amount of the said $318.41 upon the ground that the entire income received by the estate, notwithstanding it was in process of administration and settlement, was taxable to the petitioner.

Judgment will be entered for the petitioner upon the issues raised upon 15 days' notice, under Rule 50.