text:
    Appeal of FEDERAL FUEL CO.
    Docket No. 1865.
    Submitted October 8, 1925.
    Decided February 17, 1926.
    1. To entitle a taxpayer to deduct from gross income, as a bad debt, an item ascertained to be worthless and charged off in a given year, such a debt must have had an existence in fact and law.
    2. A deduction may be taken as a loss, under the Revenue Act of. 1918, only in the year in which the loss was sustained.

      James G. Marks, Esq., for the taxpayer.

      A. E. Murray, Esq., for the Commissioner.
    Before Phillips and Tkammell.
    This is an appeal from the- determination of a deficiency in income and profits taxes for 1920 in the amount of $9,644.68. In the answer of the Commissioner one of the errors assigned by the taxpayer in his petition was conceded, and at the trial the taxpayer waived another alleged error, leaving for the decision of the Board only the question of the correctness of the action of the Commissioner in disallowing a deduction, claimed by the taxpayer in its 1920 return as a bad debt, in the amount of $5,000.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of Pennsylvania, having its principal office at Connellsville. . It was engaged in the business of buying and selling coal. In 1919 it entered into a contract with C. Hoffberger & Co., of Baltimore, Md., to supply to that company coal to be furnished to the City of Baltimore. Hoff-berger & Co. were required by the city to deposit $5,000 with the city as a guarantee that the contract would be complied with. In turn Hoffberger & Co. required the taxpayer to deposit with it the same amount as a guarantee that it would comply with its contract. Test cars of coal were shipped to the city, and they were refused on the ground that the coal did not meet the terms of the contract as to quality. The city then canceled the contract with Hoffberger & Co. The taxpayer then demanded the return of the money deposited by it with Hoffberger & Co., who refused to return it on the ground that the taxpayer had not complied with its contract as to furnishing coal and claimed that it was entitled to damages for the breach in an amount in excess of $5,000. All of these transactions took place in 1919.
    The taxpayer referred the question to its lawyers, who after consideration advised, by letter June 24, 1919, that it had no cause of action against Hoffberger & Co. for the return of the money except to the extent that the $5,000 exceeded the damages Hoffberger & Co. sustained on account of the breach of contract by the taxpayer, and that the damages might exceed that amount.
    During the latter part of 1920 taxpayer’s counsel made an examination into the legal liability of the Eidge Co., from which the taxpayer purchased the coal to supply to Hoffberger & Co., and he reached the conclusion that that company was not liable to the taxpayer and that no recovery could be had from anyone. The taxpayer thereupon, before the close of that year, charged off the entire amount of $5,000 on its books. In 1921 the taxpayer succeeded, through the efforts of another attorney, in recovering $1,250 from Hoffberger & Co. on account of the claim and settled the controversy.
    DECISION.
    The deficiency should be computed in accordance with the concession of the Commissioner and the following opinion. Final determination will be settled on 10 days’ notice, under Bule 50.
   OPINION.

Trammell : We have held that before a deduction can be allowed on account of a debt ascertained to be worthless and charged off there must first be a debt. Appeal of Luke & Fleming, Inc., 1 B. T. A. 12; Appeal of Louis Titus, 2 B. T. A. 754. In this appeal any amount due by Hoffberger & Co. was at all times collectible. It is not intimated that they were not financially responsible and able to pay the amount. They denied owing the taxpayer anything, and claimed that the taxpayer owed them damages in excess of the amount. This appears to have been the only reason that the claim was not paid in full in 1919, when the controversy arose. It is true that in 1921 Hoffberger & Co. did pay one-fourth of the amount to the taxpayer in settlement of the claim.

If the debtor was not legally liable to the taxpayer, then there was no debt to become worthless. It can not become worthless because of inability to establish legally the liability for the debt, for in such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such a debt. Appeal of Luke & Fleming, Inc., supra.

If the taxpayer sustained a loss from the transaction, such loss is deductible only in the year in which the loss is sustained. It is sufficient for the purposes of this appeal to say that the loss was not sustained in 1920.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Appeals of D. W. COWDEN and GEORGE R. COWDEN.
    Docket Nos. 2605, 2606.
    Submitted. November 10, 1925.
    Decided February 17, 1926.
    1. Commissioner’s method of determining gain on sale of shares of stock approved.
    2. Shares of stock sold in 1919 had a fair market value of $100 each at March 1, 1913.

      Phil D. Moreloch and Dudley Doolittle, Esqs., for the taxpayers.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    Each of these appeals is from a determination of a deficiency in income taxes for the year 1919. The amounts in controversy are $11,627.03 and $6,284.93 as to D. W. Cowden and George B. Cowden, respectively. In each case the asserted deficiency results from the Commissioner’s inclusion in gross income of gain found to have been realized from the sale of shares of stock of a corporation. On motion of counsel the two appeals were consolidated and heard together.
    FINDINGS OF FACT.
    In the year 1919 D. W. Cowden owned 1,300 shares of the par value of $100 each of the H. D. Lee Mercantile Co., hereinafter designated as the corporation. He acquired 100 shares of such stock in 1889, when the corporation was organized, and the remainder at various dates prior to the taxable year here involved. All such shares were bought either from H. D. Lee, the president and principal stockholder of the corporation, from the corporation at the several dates when the authorized capitalization was increased by corporate action, or from other stockholders who were unable to take up their allotments or increases in authorized capital in proportion to their prior holdings. He paid the par value for the entire 1,300 shares. On March 1, 1913, he owned 750 shares. In the year 1919 he received a stock dividend in the amount of 557.05 shares, thereby increasing his total holdings to 1,857.05 shares. In the year 1919, prior to receiving the stock dividend but subsequent to the declaration thereof, he sold 1,300 shares for $130,000. He reported no gain from such sale in his income-tax return for that year.
    In 1919 George K. Cowden owned 900 shares of the corporation, which he had acquired at various dates between the years 1900 and 1919. He bought this stock from Lee, from minor stockholders, and from the corporation when additional shares resulting from increases in authorized capital were issued. - He owned 263 shares on March 1, 1913. In all cases he paid the par value for such shares. In 1919 he received a stock dividend in the amount of 385.65 shares, and in the same year, at some date subsequent to the declaration of the stock dividend but prior to his receipt of the certificates, he sold 900 shares and received therefor the par value for 794 shares and $115 per share for the remaining 106 shares. In the same year he sold 59 shares of the stock received by way of dividend for $115 a share. In his income-tax return for 1919 he included as gains realized during the taxable year the difference between the cost at par of the 106 shares and the $115 per share received therefor, and also the total of $6,785 received from the sale of the 59 dividend shares.
    The corporation was organized about 1889 by H. D. Lee and I). W. Cowden. The original authorized capital was $100,000, divided into shares of the par value of $100 each, of which Lee owned 75 per cent. As the business of the corporation developed, the capitalization was increased from time to time. Between January 1, 1908, and March 27, 1912, the outstanding capital stock was 5,000 shares of the par value of $100 each, and on the latter date was increased to 8,000 shares of the same par value, and so remained until after March 1, 1913. From 1889 until after 1910 the stock of the corporation was somewhat closely held by the founders and its officers and employees, but some shares were owned by customers and others not directly participating in the management or operation. In 1916 the corporation increased its capitalization and issued a large number of new shares, which were offered and sold to the public and to prior owners of stock at par.
    During the five years preceding 1913 the corporation was prosperous and paid regular dividends ranging from 6 per cent to 20 per cent and averaging 15.6 per' cent. Its books show the following gains, undivided profits, and dividend payments in the years 1908 to 1912, inclusive:

    The balance in the undivided profits account of the corporation at January 1, 1912, was $99,424.54. On February 15, 1912, this was increased by a credit in the amount of $77,107.56, which represents the net earnings from the year 1911, and on that date a cash dividend in the amount of $50,000 was declared. On March 27, 1912, two additional items, in the total amount of $22,873.50, the sources of which are not disclosed by the record, were credited to this account, and on the same date an additional cash dividend in the amount of $150,000 was declared.
    The stock of the H. D. Lee Mercantile Co. had a fair market value of $100 per share on March 1, 1913.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Lansdon:

In support of their allegations in this appeal the taxpayers raise two issues which must be determined before their tax liability for the year 1919 can be ascertained: (1) That the Commissioner used an incorrect method in ascertaining the gain realized from their sales of stock in 1919, and (2) that even if the Commissioner’s method of computing such gain is correct the result is erroneous, because the fair market price or value of the shares of the corporation exceeded the par value at March 1, 1913.

On January 1, 1919, D. W. Cowden owned 1,300 shares of the capital stock of the corporation, which he had bought at par. He had acquired 750 of such shares prior to March 1, 191%. In the year 1919 he received a stock dividend in the amount of 557.05 shares. In the same year, and subsequent to the declaration of the stock dividend, he sold 1,300 shares for $130,000. On January 1, 1919, George K. Cowden owned 900 shares of the corporation, which he had acquired at par. He owned 263 of these shares on March 1, 1913. In the year 1919 he received a stock dividend in the amount of 385.65 shares. For the purpose of arriving at a basis for determining gain on these transactions the Commissioner computed the cost of the whole number of shares owned by each of the taxpayers after receipt of stock dividend by applying the method or formula set forth in article 1547 of Eegulations 45. Having ascertained that the cost of the taxpayer’s stock and the fair market price or value of the shares owned at March 1, 1913, were identical, he divided the amount so paid, which was $130,000 in the case of D. W. Cowden and $90,000 in the case of George E. Cowden, by the whole number of shares owned by each after the declaration of the stock dividend, and multiplied the resulting quotients by 1,300 and 900, and thereby found that the cost of the shares sold by D. W. Cowden and George E. Cowden during the year in question was $91,004.55 and $67,133.35, and that the resulting gains from such sales were $38,995.45 and $31,241.63, respectively.

The taxpayers’ first contention is that the cost of the shares sold by them in 1919 was $130,000 and $90,000, respectively, and that no taxable gains resulted from the sales. We are unable to agree with this conclusion. Before the declaration of the stock dividend the taxpayers had certain inchoate interests in the assets of the corporation. The declaration and distribution of such dividend neither increased nor decreased their interests. The dividend shares after issue were indistinguishable from the old shares, either legally or in the market sense. The only result of the declaration and distribution of the stock dividend was that each of the taxpayers, in common with all other stockholders, had a larger number of shares evidencing his ownership of unchanged interest in the assets of the corporation. It follows, therefore, that the cost of each share, either before or after the distribution of the stock dividend, must be found by dividing the cost of all by the whole number of shares involved. Eisner v. Macomber, 252 U. S. 189; Miles v. Safe Deposit & Trust Co., 259 U. S. 247; Towne v. McElligott, 274 Fed. 960.

The taxpayers further contend that they sold their original purchases of stock before they received the stock dividends and prior to their ownership of the shares evidencing such distribution, and that the time at which such sales were made enables them to identify the property sold as the identical shares which theretofore had been purchased for $100 each, Avhich they assert is the correct basis for computing the gains resulting from the sales in question. In our opinion this position is untenable. It is refuted by the taxpayers’ admission that they received and sold the stock-dividend shares. If they had sold their shares acquired by purchase prior to the declaration of the stock dividend, in the absence of any contract otherwise they would have parted with the right to such dividends. Furthermore, it is a well-established rule that the right to receive stock dividends vests in all stockholders of record from the moment of the declaration of such dividends. Fletcher on Corporations, section 3681, p. 6123. The Commissioner’s method of computing gain from the transactions that are the basis of this appeal must be approved.

The second issue raised by the taxpayers is that on March 1, 1913, the shares of the corporation had a fair market price or value greatly in excess of their par value. It appears from the testimony that there was no general market for the shares of the corporation at or about March 1, 1913. All acquisitions of stock by purchase from the corporation, from Lee, or from the minority stockholders were at $100 a share. One of the taxpayers bought 30 shares from a customer of the corporation for $100 a share and testified at the hearing that the vendor of the shares believed them to be worth much more than par. Obviously such testimony does not prove a fair market price or value in excess of par. It is true that the stock of the corporation was somewhat closely held prior to 1916, but there is nothing in the record to indicate that there was any legal bar to prevent any stockholder from selling any or all of his shares at any price agreed to between himself and any willing purchaser. There was nothing more than a sort of general under standing- or gentlemen’s agreement that shares for sale should first be offered to Lee, and, in the event of his failure to purchase, thereafter to other shareholders at par. As all the sales of shares at or about March 1, 1913, as well as for many years both prior and subsequent to that date, were made at par, the Board is of the opinion that no greater value based on sales has been proved by the testimony offered in behalf of the taxpayers.

The taxpayers, however, do not rely on sales of shares to sustain their allegation that the stock of the corporation had a fair market price or value greater than par at March 1, 1913. Their contention is that the stock was so closely held and that transfers were subject to such actual, if not legal, restrictions that no fair market value had been established, or could be established, by such limited sales as were made from time to time. They seek to support their allegation of value by proving (1) that for five years preceding March 1, 1913, the corporation had average annual net earnings in the amount of $73,045.35, and (2) that during all such years, even after the declaration of dividends that averaged 15.6 per cent of the par value of the outstanding capital stock, the corporation owned assets, reflected in its surplus account, greatly in excess of the par value of its issued shares.

For the purpose of proving a substantial earning power and value of intangibles or good will, and thereby establishing a fair market price or value at March 1, 1918, the taxpayers rely on a statement from the books of the corporation, which was in evidence at the hearing, setting forth the undivided profits, the net annual earnings, and the annual distribution of dividends for the years 1908-1912, inclusive. During such years the average outstanding stock was $560,000, the average net earnings were $73,045.35, and the average dividends declared and paid were 15.6 per cent of the issued shares. Assuming that 10 per cent per annum is a fair return on tangibles, the taxpayers allocate all earnings in excess of that rate to intangibles, and thereby arrive at the conclusion that the good will of the corporation so capitalized increased the value of the shares to $130 each. In the absence of sales, this may be a satisfactory method for determining the value of good will, but the sale price of shares of stock is affected by so many other conditions that we can not accept this result as conclusive in establishing the value asserted by the taxpayers in the face of the evidence of actual sales.

The net earnings of the corporation were large, but it is in evidence that much of such profits was distributed as cash dividends from year to year, and that in March, 1912, such a distribution not only exhausted the surplus available for dividends, but caused a deficit of $22,873.50 and an actual impairment of capital assets that reduced the book value of the shares below par. At March 1, 1913, the only possible surplus of the corporation was represented by the net earnings that had accumulated after March 27, 1912, less the amount of $22,873.50. Even if book value is a proper basis for determining fair market price or value, the shares of the corporation had such value little, if any, in excess of par at March 1, 1913. We know of no law or business practice, however, under which it can be held that market price or value of shares is determined solely by their book value.

Analysis of earnings to determine the value of stock is helpful only in the absence of better evidence, and can not be relied upon solely and with complete disregard of the price at which sales have been made. Actual sales reflect fair market price or value, and this we can not ignore, even if the application of a formula, theoretical at least, would result in a higher figure. In the appeal at bar we have clear evidence of actual sales at par, and therefore there is no reason for the use of a formula to determine fair market price or value at March 1, 1913. In view of the facts that all the stock purchased by the taxpayers was acquired at various dates over long periods of time, both before and after March 1, 1913, at a uniform price of $100 a share, and that as a matter of corporation policy annual dividends absorbed practically all net earnings and kept book value and par value of the shares substantially the same at all times, we must hold that the proof of intangible or good will value adduced to sustain the taxpayers’ allegations in this appeal is not sufficient to establish a fair market price or value in excess of par at March 1, 1918.


author: GeatjpNer

text:
    Appeal of THE BEAUMONT CO.
    Docket No. 5444.
    Submitted December 7, 1925.
    Decided February 17, 1926.
    Expenditures made in connection with the development of patents held, to be capital expenditures and not deductible from gross income as expenses.

      Thos. P. Dudley, Jr., Esq., for the Commissioner.
    Before Gealtpner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended June 30, 1921, in the amount of $3,717.72, of which $1,859.52 is in controversy. The disputed portion of the deficiency arises from the disallowance by the Commissioner of expenses incurred in the development of patents which were claimed by the taxpayer as a deduction from gross income.
    FINDINGS OP PACT.
    The taxpayer is a West Virginia corporation, with its principal office at Morgantown, and during the fiscal year ended June 30, 1921, was affiliated with the Spring Stopper Co. of New York and the Spring Stopper Co. of Delaware.
    In the fiscal year here involved the Spring Stopper Co. of New York incurred experimental expenses in connection with the development of patents in the amount of $5,293.39 and had a gross income of $2.84. The difference between these amounts, or $5,290.55, was claimed by the taxpayer as a deduction from income in reporting the consolidated income of the affiliated companies. Similar expenditures in previous years had been capitalized.
    The Commissioner disallowed the claimed deduction in view of the past practice of the taxpayer in capitalizing such expenditures.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

GeatjpNer

: We must approve the action of the Commissioner in disallowing the claimed deduction, not on the ground that the taxpayer is precluded from changing its method of reporting the kind of expenditures which give rise to the deficiency, but for the reason that expenditures made for the development and in the acquisition of patents are properly capital expenditures. Appeal of Gilliam Manufacturing Co., 1 B. T. A. 967; Appeal of Goodell-Pratt Co., 3 B. T. A. 30.


text:
    Appeal of ESTATE OF HENRIETTA PUTNAM.
    Docket No. 5273.
    Submitted November 24, 1925.
    Decided February 17, 1926.

      Robert G. McKay, Esq., for the taxpayer.

      John F. Greaney, Esq., for the Commissioner.
    Before Graupnee, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in estate tax in the amount of $5,155.09. The deficiency arises from the fact that the Commissioner determined that the transfer of certain stock, made by the decedent to her son in 1916, was made to take effect in possession or enjoyment at or after death.
    FINDINGS OE PACT.
    Decedent died November 15, 1921, a resident of Worcester, Mass. The decedent on February 17, 1916, gave 50 shares of stock in Tiffany & Co. to her son, Charles E. Putnam, who was her only child. On the same date the stock was transferred on the books of the corporation to Charles E. Putnam. This stock was acquired by the decedent on May 22, 1915, by bequest from her brother, under a will which provided that in the event of her death prior to the death of her brother the property should go to her son. From the time she received it until she transferred it to her son as aforesaid she gave her son one-half of the income from the said stock. From the time he received the said stock from his mother he gave her one-half of the income therefrom. There was no agreement, either oral or written, or any understanding between the decedent and her son when she transferred the stock to him that he would give her any part of the income therefrom, and there was no agreement on his part to do so. At the time when the decedent received the stock she desired that her son have it, but it was not turned over to him until she transferred it on the date aforesaid.

      The decedent made a gift to her son of the stock involved on February 17,1916, which was accepted in praesewM, and the gift was not to take effect at or after her death.
   DECISION.

The deficiency determined by the Commissioner is disallowed.


text:
    Appeal of AMERICAN BOX CO.
    Docket No. 5418.
    Submitted December 2, 1925.
    Decided February 17, 1926.
    Corporations held affiliated.

      Henry J. Richardson, Esq., for the taxpayer.

      Percy B. Crewe, Esq., for the Commissioner.
    Before Gratjpner, Trammell, and Phillips.
    Taxpayer appeals from the determination of a deficiency of $4,95.5.93, income and profits tax for the fiscal year ended May 31, 1920, and alleges as error the refusal of the Commissioner to- consolidate the net income and invested capital of the taxpayer and the American Veneer Co., claimed to be affiliated corporations.
    findings of fact.
    The taxpayer is a corporation organized and existing under the laws of the State of Ohio, with its principal office at Cleveland. During the year in question it was engaged in the manufacture of wooden packing cases.
    The American Veneer Co. is a corporation organized under the laws of the State of Alabama in 1916 for the purpose of manufacturing lumber for use in the manufacture of wooden packing cases, and during the year in question was engaged in such business.
    It was organized By F. H. Rose, the secretary of the taxpayer, pursuant to a resolution adopted at a meeting of the directors of the taxpayer held' May 2, 1916, which resolution authorized the secretary to incorporate such a company and subscribe for $20,000 of its capital stock on behalf of the taxpayer. The same resolution authorized F. H. Rose to subscribe for $5,000 of the capital stock in his own name.
    Upon its organization' it issued 250 shares of its capital stock, 198 to the taxpayer, 50 to F. H. Rose, and the remaining two shares to qualify directors.
    In 1917, 60 additional shares were issued. During the year in question in this proceeding the outstanding shares of the capital stock of the taxpayer and of the American Veneer Co. were owned as follows:

    F. H. Eose was a director and the secretary and treasurer ox both corporations. His wife, Mary Upson Eose, owned 90 shares of stock in the American Box Co. and was the sister of the principal stockholder of the Upson Nut Co. At stockholders’ meetings Eose voted the stock of his wife, of the Upson Nut Co., and of D. A. Upson and W. J. Upson. He was also authorized to vote the stock of the American Veneer Co. owned by the American Box Co.
    F. B. Stevens was a director and president of the two corporations.
    D. E. Dangler was a director and vice president of both corporations, and voted the stock of Clara, Euth, and David Dangler.
    W. D. B. Alexander was president of the National Screw & Tack Co., a stockholder of the American Box Co. J. E. Williams was secretary to Alexander and voted the stock of Alexander and the National Screw & Tack Co. at stockholders’ meetings.
    The only salaried officer of either corporation was F. H. Eose, whose salary was paid by the American Box Co. Most of the products of the American Veneer Co. were used by the American Box Co. The total assets of the American Veneer Co. as of May 31, 1920, were approximately $50,000, and on that date it owed the American Box Co. about $30,500 for money advanced it for expenses and operations. No interest was paid on this indebtedness.
    The American Box Co., during the fiscal year ended May 31, 1920, owned or controlled, through closely affiliated interests, substantially all the stock of the American Veneer Co.
   DECISION.

The deficiency should be computed upon the basis of a consolidated return of the taxpayer and the American Veneer Co. for the year involved. Final determination will be settled on 15 days’ notice, under Rule 50.


text:
    Appeal of ALEXANDER S. BROWNE.
    Docket No. 3881.
    Submitted November 3, 1925.
    Decided February 17, 1926.

      Allison L. H. Newton, Esq., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    Taxpayer appeals from the determination of a deficiency of $1,710.30, income tax for 1920, and alleges that the Commissioner committed error by including as income to the taxpayer certain amounts claimed to be the income of his wife.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Boston, Mass. In 1915 taxpayer was inspector of agencies for the New York Life Insurance Co. in New England. In January, 1915, two contracts were made between the New York Life Insurance Co. and the taxpayer, substantially similar in their wording but each relating to a separate part of the territory over which taxpayer operated. By these contracts the New York Life Insurance Co. agreed under certain conditions to pay the taxpayer in the fifth year thereafter a so-called renewal commission on premiums received during said fifth year on account of contracts of insurance written during the year 1915 in the territory in which the taxpayer was employed as inspector of agencies. The conditions were that the expenses of said branch in the year 1915 should not exceed a certain ratio and that the amount of insurance written in that year should exceed a certain allotment. These conditions were met in 1915. The contracts further provided as follows:
    Third. — It is further understood and agreed that even although you may have performed said conditions entitling you to be allowed said renewal commission at one or the other of the rates aforesaid, nevertheless no such renewal commission shall ever become due or payable unless you remain continuously in the Company’s employ until said fifth year renewal premiums become due and are duly received by the Company. The termination of your employment shall terminate all right to said renewal commission. Provided, however, that in the event of your death while in the Company’s employ, any such renewal commission earned by you shall be paid to your executors, administrators, or assigns; and provided, further, that said renewal commission, if earned, as aforesaid, shall he payable if the Company shall terminate your employment contract without assigning any cause therefor.
    On June 22, 1920, the taxpayer executed and delivered a written assignment to his wife, Amy T. Browne, of all his right, title, and interest in and to any and all such renewal commissions then due him or which might accrue to him on or after such date under the terms of the aforesaid agreements with the New York Life Insurance Co. A duplicate original of such assignment was delivered to the New York Life Insurance Co., who thereafter, in 1920, paid said Amy T. Browne $5,270.69 as the amount due under such contracts. This amount was reported by Amy T. Browne as income to her. The Commissioner included such amount as income to the taxpayer and assessed the deficiency in tax here in question.
   DECISION.

The determination of the Commissioner is approved. See Mitchell v. Bowers, 9 Fed. (2d) 414; Appeal of Yale Kneeland, 1 B. T. A. 150.


text:
    Appeal of TURNER TERMINAL CO.
    Docket No. 3934.
    Submitted September 24, 1925.
    Decided February 17, 1926.

      George H. Goodner, G. P. A., and Walter K. Smith, G. P. A., for the taxpayer.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Geeen and Phillips.
    The Commissioner determined a deficiency in income and profits taxes for the year 1920 in the sum of $2,792.80. The petitioner concedes the correctness of a part of the deficiency, and there is involved in this appeal only the sum of $702.51. The petitioner contends, and the Commissioner denies, that it is entitled to a paid-in surplus of $400,000, upon the ground that it acquired, in exchange for stock of the par value of $200,000, assets of the value of $600,000.
    FINDINGS OF FACT.
    The petitioner, the Turner Terminal Co., an Alabama corporation, with its principal place of business at Mobile, was organized in 1909 under the name of the Turner Hartwell Docks Co., with an authorized capital stock of $200,000.
    For a period of approximately 15 years prior to the organization of the company its three stockholders had been gradually accumulating water-front property near the mouth of the Mobile River. Their holdings by 1909 totaled 28 acres. For some five or six years the title to all of the water-front property in Mobile was involved in litigation, which was finally terminated in 1906 by the decision of the Supreme Court of the State of Alabama in the case of Mobile Docks Oo. v. City of Mobile, 146 Ala. 198.
    The water-front property was acquired and the corporation was organized for the purpose of constructing a very large shipping terminal, consisting of slips and docks for ocean-going vessels, warehouses, and railroad tracks connecting with those of the Louisville & Nashville Railroad and the Gulf, Mobile & Northern Railroad. The tract acquired by the taxpayer, by reason of its location on the river, its frontage thereon, and proximity to the railroads, was especially well adapted to the use for which it was acquired.
    The entire authorized capital stock was exchanged in 1909 for the 28 acres of land, and shortly thereafter the corporation perfected its plans for its slips, docks, etc., and negotiated a bond issue of $250,000. The actual construction work was started immediately thereafter.
    The stockholders at the tirne of the exchange of the property for stock placed on the property a value of $600,000. This valuation was approximately 50 cents per square foot. There were no sales of similar property within two years before or after the exchange. In 1906 three similar pieces were sold, one at 68, one at 94, and one at 49 cents per square foot. The next sale was in 1915, at the rate of 68 cents per square foot. The next was in 1916, at the rate of 94 cents per square foot. In 1909 a small tract adjoining the railroad tracks, but having no water frontage, sold for 88 cents per square foot. In 1910, at which time the company had expended approximately $200,000 in construction work, it rejected an offer of $850,000 and refused to give an option to purchase at $1,000,000.
    The assets which the petitioner acquired in exchange for its stock of the par value of $200,000 had an actual cash value of $600,000 at the time of the exchange.
   DECISION.

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


text:
    Appeal of THOMAS CUSACK CO.
    Docket No. 1987.
    Submitted July 9, 1925.
    Decided February 17, 1926.

      Gamden B. McAtee, Esq., for the taxpayer.

      A. B. Marrs, Esq., for the Commissioner.

      Before Steenhagen, Geeen, and Love.
    The taxpayer appeals from the determination of deficiencies in income taxes for the years 1918 and 1919 in the amounts of $110.74 and $1,162.98, respectively. It is alleged that the Commissioner erroneously excluded from invested capital two items: First, good will $40,000; and second, franchise $40,000. There is no evidence in the record as to the value of the franchise.
    From the allegations of the petition which were admitted by the amended answer, or by the Solicitor at the hearing, we make the following
    FINDINGS OF FACT.
    The taxpayer is a Kentucky corporation, with its principal office at Louisville, engaged in the business of outdoor advertising. The present company is the successor of Louisville Gunning System. When the last-named company was reorganized on September 1, 1906, its assets were acquired by the taxpayer for stock, and at the same time the taxpayer assumed and agreed to pay certain liabilities of the old corporation, the most important of which was an obligation to the stockholders incurred by the declaration of a dividend. The amount of the payment made on account of the dividend was credited to the good-will account. The assets acquired consisted of good will, franchise, bulletin plant, and wall plant. The actual cash value of the good will thus acquired in exchange for stock was $40,-000, and stock of the par value of that amount was exchanged therefor.
   DECISION.

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


text:
    Appeal of CROWELL & LITTLE CONSTRUCTION CO.
    Docket No. 3658.
    Submitted November 21, 1925.
    Decided February 17, 1926.

      Edward T. Quigley, Esq., for the taxpayer.

      A. S. Murray, Esq., for the Commissioner.
    Before Maequette, Moeeis, Geeen, and Love.
    This is an appeal from the determination of a deficiency of $14,906.86 in income and profits taxes for the calendar year 1920, of which $5,412.88 is in controversy. The question involved is the de-ductibility of a net loss sustained during the period April 8, 1919, to December 31, 1919, there being no corporate existence prior to that time, from 1920 income.
    FINDINGS OP PACT.
    1. The taxpayer is an Ohio corporation, organized and incorporated April 8,1919, and engaged- in the general contracting business.
    2. The taxpayer kept its books and rendered its returns on a calendar year basis. Its amended return for the period April 8, 1919, to December 31,1919, inclusive, showed a net loss of $11,767.02. For the calendar year 1920 the taxpayer had a net income of $16,519.36, from which it deducted the above net loss in computing its taxable income for that year. This deduction was disallowed by the Commissioner.
   DECISION.

The determination of the Commissioner is approved. Appeal of Butler's Warehouses, Inc., 1 B. T. A. 851.


author: MoRRis:

text:
    Appeal of TWO NINETY-TWO FLATBUSH AVENUE CORPORATION.
    Docket No. 5189.
    Submitted November 17, 1925.
    Decided February 17, 1926.
    A taxpayer making capital additions to leased premises, the life of which is greater than the term of the lease, and which are surrendered upon the termination thereof, is entitled to a proportionate annual allowance of the cost over the life of the lease.

      Benjamin Mahler, Esq., for the taxpayer.

      Johm, W. Fisher, Esq., for the Commissioner.
    Before Marquette, Morris, Green and Love.
    This appeal is from the determination of a deficiency in income tax for the year 1921 amounting to $69.17. The deficiency arose from the reduction of the depreciation taken by the taxpayer on a brick building for that year.
    FINDINGS OP PACT.
    The taxpayer is a corporation engaged in showing moving pictures in the Borough of Brooklyn, City of New York.
    January 12, 1912, Joseph H. McGowan, of Brooklyn, leased from the trustees of the Estate of Aaron S. Robbins two certain lots of real estate situated in the Borough of Brooklyn. The life of the lease was 10 years from May 1, 1912. The rental for the first 5 years was 7 per cent of the assessed taxable value of the land, and for the second 5 years, 10 per cent of such value. All rental was payable monthly. The lessee agreed to pay all yearly taxes, water rates, and other charges which might be imposed according to law upon the premises, or any part thereof, by the State or city government, and also at his own expense promptly to comply with all laws, rules, orders, regulations, and requirements of the board of fire underwriters or other similarly constituted body, and to make all repairs which might become necessary or proper to keep the premises in perfect condition. Failure to comply with any of these requirements gave the lessor the right of reentry or suit as for rent in the proper court, as he might choose.
    The lease provides that at the expiration of the term, either by lapse of time, forfeiture, or otherwise, the lessee will quit and surrender the premises in perfect condition, reasonable use and wear thereof being allowed for, and that all improvements and additions, alterations, and repairs to or upon said premises shall remain and be surrendered with the premises leased without disturbance, molestation, or injury. It grants to the lessee the privilege of erecting such buildings or structures as he may desire, and of making such repairs, additions, or alterations to the premises as he may deem necessary and proper, and provides that no building or buildings, or other structures, nor any additions, repairs, or alterations shall be made upon the premises until the plans and specifications thereof shall have been submitted to the lessors and approved by them. It also provides that the lessee shall keep all the buildings on the premises at the time of the execution of the lease or thereafter erected properly insured against loss or damage by fire at his sole expense. All its covenants, agreements, and conditions were made binding on the heirs, executors, administrators, successors, and assigns of the respective parties.
    On June 1, 1913, a like lease was executed between the same parties for an adjoining tract of land, the only material difference between the two being that the life of the latter was 8 years and 11 months instead of 10 years.
    The two leases were assigned to taxpayer for $5,000. It erected on the first, at a cost of $32,045.92, a building to be used as a theatre for the exhibition of moving pictures, and on the other, at a cost of $3,787.80, an aerodrome, to be used for the same purpose during the summer months. The equipment for the theatre cost $2,511.51 and for the aerodrome $1,793.09. The taxpayer remained in possession during the full term of the leases.

      In its return for 1921 it claimed a depreciation deduction of $1,100, being 5 per cent on the cost of the theatre and aerodrome, of which the Commissioner disallowed $1,020.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

MoRRis:

The facts appear to be that taxpayer held by assignment from the original lessee two leases, each for a certain tract of real estate in the Borough of Brooklyn, New York City, running, respectively, 10 years and 8 years 11 months. Both expired on the same date.

Taxpayer built on one of the tracts a moving-picture theatre at a cost of $82,045.92, and on the other an aerodrome at a cost of $3,187.80.

The leases contain no provision for extension or renewal. Each provides for its surrender, with all repairs and improvements made on the land, at the end of the term. The case comes clearly within the puiwiew of the decision of the Supreme Court of the United States in Duffy v. Central R. R. Co. of New Jersey, 268 U. S. 55. That case related to a like provision in the Bevenue Act of 1916. It involved a 999-year lease and a 30-year lease and the improvements made by the lessee thereon.

Under the 30-year lease the lessee removed an old pier and built in its stead a new one. The court said, in part:

In respect of the 999 year leases, the additions and betterments will all be consumed in their use by the lessee within a fraction of the term, and, as to them, allowances for annual depreciation will suffice to meet the requirements of the statute. In the case of the pier leases, the improvements may and probably will outlast the term, and, as to them, deductions may more properly take the form of proportionate annual allowances for exhaustion.

In the instant case there could be no doubt that the improvements would in the natural course outlast the term of the lease. The lessee was clearly entitled to a proportionate annual allowance for exhaustion of the cost thereof, measured by the term of the lease.


author: Moeres

text:
    Appeal of Estate of MINNIE L. JACKSON.
    Docket No. 4219.
    Submitted November 20, 1925.
    Decided February 17, 1926.
    A charitable bequest of a specific sum payable in annual installments is not an annuity. The gross amount thereof is deductible from 'the gross estate in determining the value of the net estate subject to the estate tax.

      Bynum E. Hinton, Esq., for the taxpayer.

      John F. Greaney, Esq., for the Commissioner.
    Before Marquette, MoeRis, Green, and Love.
    This is an appeal from the determination of a deficiency in estate tax of $291.25, arising from the reduction of the amount of certain charitable bequests by the Pennsylvania inheritance tax and the reduction of the remainder to its present worth in determining the amount deductible from the gross estate.
    FINDINGS OE FACT.
    ■ 1. Minnie L. Jackson died testate November 25, 1923, and at the time of her death was a resident of Pittsburgh, Pa. Among the bequests in her will were four to admittedly educational and religious corporations within the purview of section 403 of the Revenue Act of 1921, as follows:
    Item 5. I give and bequeath to Simpson College at Indianola, Iowa, the sum of Seven Thousand Five Hundred ($7,500.00) Dollars, to be paid by my Executor, hereinafter named, in three annual installments.
    Item 6. I give and bequeath to Ohio Weslyan University of Delaware, Ohio, the sum of Seven Thousand Five Hundred ($7,500.00) Dollars, to be paid by my Executor, hereinafter named, in three annual installments.
    * * * * * * *
    Item 8. I give and bequeath to the Women's Foreign Missionary Society, the General Women’s Society of the Methodist Episcopal Church, Fifteen Thousand ($15,000.00) Dollars, to be paid by my Executor, hereinafter named, in three annual installments.
    Item 9. I give and bequeath to the Women’s Home Missionary Society, the General Women’s Society of the Methodist Episcopal Church, Fifteen Thousand ($15,000.00) Dollars, to be paid by my Executor, hereinafter named, in three annual installments.
    By a codicil these amounts were reduced to $5,000, $5,000, $10,000, and $10,000, respectively, making an aggregate of $30,000.
    2. The Commissioner reduced the amount of the bequests by 10 per cent, on account of the Pennsylvania inheritance tax paid thereon, computed the present worth of the remainder under a 4 per cent annuity table, and thus determined the deductible value of the four legacies at $24,975.79.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION,

Moeres

: The bequests in question are admittedly charitable within the meaning of section 403 (a) (3) of the Revenue Act of 1921. The sole issue is whether the aggregate amount is deductible or whether it should first be reduced by the amount of the inheritance tax of the Commonwealth of Pennsylvania and the value of the remainder computed by a certain annuity formula before deduction from the gross estate.

We have already held that the amount of the deduction for charitable bequests should not be reduced by the Pennsylvania inheritance tax. Appeal of Howard K. Walter, 2 B. T. A. 453.

The only question is, therefore, whether the gross amount of the bequest or whether the present worth computed by an annuity formula shoxdd be deducted from the gross estate of the decedent. The Commissioner contends that, since the amounts of the bequests were payable in three annual installments, they constitute annuities,_ and only the value thereof as of the date of the testatrix’ death is deductible from the gross estate. The pertinent parts of section 403 of the Revenue Act of 1921 are as follows:

Sec. 403. That .for the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate * * *
(3) The amount of all bequests, * * * for the use of any corporation organized and operated exclusively for religious, * * * or educational purposes, ⅜ * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, * * * or educational purposes.

To our minds neither the unambiguous wording of the bequests nor the language of the statute warrants the strained and complicated construction placed upon them by the Commissioner. The bequests simply read:

I give and bequeath to ⅜ ⅜ * the sum of * ⅜ * to be paid by my Executor, hereinafter named, in three annual installments.

This simple language has none of the earmarks of an annuity, nor does it constitute the ordinary legal conception of an annuity. Ruling Case Law defines an annuity as follows:

The term annuity has been variously defined, but the definitions, although differing in form, are substantially alike in meaning. In general terms, it is a yearly payment of a certain sum of money granted to another in fee for life or for years, and charging the person of the grantor only. 2 R. C. L. 2.

So, also, are annuities distinguished from legacies payable in installments : '

While by the terms of a devise the bequest of a certain amount may be made payable in stated installments at definite periods in the future, the postponement of the payment is presumed to be for the benefit of the legatee, and the bequest vests immediately upon the death of the testator. 2 R. C. L. 4. (Italics ours.)

In the bequests at issue there is nothing to indicate that the testatrix had in mind primarily “ yearly payments of a certain sum of money,” but, on the contrary, she clearly expressed her intention of bequeathing a definite gross amount to certain charities, the manner of payment being merely incidental. We are of the opinion that, under the language of the bequests and the provisions of the statute pertaining thereto, the gross amount of the bequests vested immediately upon the death of the testatrix and is. deductible from the gross estate.


text:
    Appeal of JAMES F. COLEMAN.
    Docket No. 4891.
    Submitted January 11, 1926.
    Decided February 17, 1926.

      Harry B. Bhillman, Esq., for the taxpayer.

      Arthur H. Murray, Esq., for the Commissioner.
    Before G-eahpnee, Teammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax for 1923 in the amount of -$70.60. The deficiency arises on account of the disallowance by the Commissioner of a deduction claimed on account of expenses paid in entertaining customers.
    FINDINGS OF PACT.
    The taxpayer during 1923 was a traveling silk salesman. During 1923 his sales amounted to over $500,000. He worked on a commission basis, and his actual traveling expenses, such as railroad fares and hotel bills, were paid him by his employer. No amount was allowed him, however, on account of other expenses which he was required to pay and did pay during the year in entertaining customers and prospective customers for the purpose of securing business. Most of his endeavors were in the City of New York or the immediate vicinity thereof, and no expenses whatever were allowed by the employer while the taxpayer was working there. He kept a memorandum book and each week set down the amount which he had expended during that week for auto hire in carrying prospective customers, theatre tickets and dinners for customers, and other items, such as telephone messages and telegrams, which were not included in the allowance received from his employer. The amount of $1,715.20 was paid out by the taxpayer during the year for such purposes, no part of which was reimbursed him by his employer.
   DECISION. .

The deficiency determined by the Commissioner is disallowed.


text:
    Appeal of L. B. PUTNEY MERCANTILE CO.
    Docket No. 3195.
    Submitted October 7, 1925.
    Decided February 17, 1926.

      Franklin 0. Parks, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Steiinhagen and Arundell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1919 in the amount of $501.88. The deficiency arises from the refusal of the Commissioner to affiliate the taxpayer with the L. B. Putney, Inc,, Albuquerque, N. Mex.
    FINDINGS OF FACT.
    The taxpayer is an Arizona corporation, with its principal place of business at Holbrook. It has an authorized capital stock of $200,000. During the taxable year William Chamberlin held in his name stock in the taxpayer of the par value of $39,800, which constituted 49.8 per cent of the outstanding stock. Robert E. Putney owned all of the remaining shares outstanding during the period from January 1,1919, to June 6, 1919, on which latter date he transferred his stock to L. B. Putney, Inc., a corporation organized on that date, which company continued to own said shares during the remainder of the taxable year.
    From 1905 to June 6, 1919, Robert E. Putney, as an individual, operated a wholesale grocery business in Albuquerque, N. Mex., under the name of L. B. Putney. This business had been operated by his father prior to 1905. On June 6, 1919, a corporation was organized under the name of L. B. Putney, Inc. Putney owned 2,678 shares of the stock of this corporation, which constituted 89 per cent of its outstanding stock, and his two sons owned 159 shares each, the holdings of the two sons constituting 10 per cent of the outstanding stock.
    In 1915 Putney established three branch stores, one at Holbrook, Ariz., one at Bernalillo, N. Mex., and one at Laguna, N. Mex. The business at Holbrook, Ariz., was incorporated in 1916 under the name of L. B. Putney Mercantile Co., the taxpayer herein. William Chamberlin was employed as the manager of the taxpayer company, and as an inducement to accept the position it was agreed that an opportunity should be afforded him to secure an interest in the company. Am agreement was entered into in September, 1916, between Putney and Chamberlin, which recited that Cham-berlin had purchased 39,800 shares of stock of the L. B. Putney-Mercantile Co. for $39,800, and had “executed his promissory note, dated September —, 1916, for the sum of thirty-nine thousand eight hundred dollars ($39,800), with interest at the rate of eight per cent (8%) per annum from date until paid, which said sum is the purchase price of said stock.”
    The agreement contained the further provisions:
    It is expressly understood and agreed by and between the parties hereto that said note shall be payable only out of the net earnings and dividends drawn by said stock in the said L. B. Putney Mercantile Company, and not otherwise. That under no circumstances shall the indebtedness evidenced by said note become a lien upon, or a charge against any real or personal property of the party of the second part, other than the net earnings and dividends from the said stock in the L. B. Putney Mercantile Company.
    ■ It is also expressly understood and agreed that the said promissory note shall be non-negotiable, except with the consent of both parties hereto.
    A stock certificate was made out in the name of William Chamber-lin, under date of December 19,1919, which certified that Chamberlin was the owner of 39,800 shares of stock in the taxpayer. This certificate was endorsed in blank by Chamberlin and left in the custody of Putney, who attached thereto the note given by Chamberlin in the amount of $39,800. On June 6,1919, Putney transferred to L. B. Putney, Inc., the note given by Chamberlin, to which was attached the certificate of stock theretofore made out in the latter’s name. L. B. Putney, Inc., entered the note on its books as a “ Special notes receivable.”
    During the period of Putney’s ownership of shares in the taxpayer company he furnished it with credit and stock in trade from the Albuquerque store as occasion demanded, and L. B. Putney, Inc., did likewise after it became a stockholder in the taxpayer. Cham-berlin never voted the stock and, except at the time of its issue and endorsement, never had the certificate in his possession. It was understood that he would have no voice in shaping the policies of the corporation prior to the time that the stock was paid for. The taxpayer never paid dividends, and no part of the principal or interest was ever paid on the original note or on the renewal notes which were given from time to time.
    In 1922 it was deemed advisable to dissolve the L. B. Putney Mercantile Co. Its property was transferred to L. B. Putney, Inc., the shares of stock in the taxpayer surrendered, and the note given by Chamberlin was returned to him.
    L. B. Putney, Inc., acting through its principal stockholder, B. E. Putney, at all times during the taxable period dictated the business policy of the taxpayer and owned or controlled substantially all of its stock.
   DECISION.

The taxpayer during the year 1919 was affiliated with L. B. Putney, Inc., and its tax liability should be computed on the basis of a consolidated return. The deficiency will be settled on 10 days’ notice, under Bule 50.


author: Phillips:

text:
    Appeal of GEO. H. SALMON.
    Docket No. 5783.
    Submitted January 11, 1926.
    Decided February 17, 1926.
    Salary of- nonresident alien held to be taxable only on suck portion as was paid to bim for services while he was in the United States.

      Geo. E. Kennedy, Esq., for the taxpayer.

      B. G. Simpieh, Esq., for the Commissioner.
    Before Phillips and Trammell.
    Taxpayer appeals from the determination of a deficiency of $286 in income tax for 1922.
    FINDINGS OE PACT.
    Prior to February, 1916, the taxpayer, a citizen of Great Britain, was a resident of the Dominion of Canada. In February, 1916, taxpayer took up his residence in New York City and resided there with his wife and daughter until May, 1922.
    In May, 1922, taxpayer was in the employ of the F. & E. Soter Corporation, which was engaged in manufacturing tobacco, and was vice president and one of the directors of that company. About that time this corporation proposed to acquire an interest in a factory manufacturing cigarettes in India. The taxpayer left the United States in May, 1922, for India for the purpose of examining this property. At that time he expected to return to the United States in about three or four months, after which he was to become connected with the New York City office of the taxpayer.
    Upon his arrival in India the taxpayer found that the machinery in the factory was obsolete and not suitable for the manufacture of cigarettes. Negotiations for the purchase of the plant were delayed for several months, following which taxpayer remained in India for the purpose of installing new machinery in the plant, which machinery was purchased and shipped from the United States. Taxpayer did not return to the United States until May, 1924, after which date he took up his residence in Brooklyn, N. Y.

      Shortly after taxpayer arrived in India his family followed him there. The furniture of his New York apartment was placed in storage in a warehouse in New York City. While taxpayer was in India he and his family lived at a hotel. Taxpayer filed Federal income-tax returns for 1922 and 1923 with the collector of internal revenue in New York. Taxpayer made no return of income to the State of New York for 1922.
    The salary of the taxpayer during the year 1922 was $5,000, paid to him in equal monthly installments.
    The taxpayer filed an income-tax return for 1922, including therein his salary for the full year, and claimed exemption of $2,900 as a resident alien, married, with one dependent, his daughter, who was then 16 years of age. The return filed showed a tax liability of $84. As the basis for the deficiency the Commissioner determined that the taxpayer, on December 31, 1922, was a nonresident alien, entitled to an exemption of only $1,000, but included in gross income the salary for the full year. The deficiency determined by the Commissioner is in excess of the tax of $84 shown upon the original return.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Phillips:

Whether the taxpayer was a resident or nonresident alien of the United States after May, 1922, is practically a moot question. The return filed by the taxpayer showed gross income of $5,000, against which a personal credit of $2,900 was claimed, leaving taxable income of $2,100, upon which a tax of $84 has previously been assessed. The deficiency determined by the Commissioner is the amount of tax, as he computes it, in excess of the $84 previously assessed. If the taxpayer was a resident throughout the year 1922, as he claims, the deficiency must be disallowed. On the other hand, if the taxpayer became a nonresident in 1922, the Commissioner was in error in including the entire compensation for the year as taxable income to the taxpayer. As a nonresident alien the taxpayer would be taxable only upon such portion of the $5,000 as was paid him for services rendered within the United States, or $2,083.33, being five months’ salary. Deducting from this the exemption of $1,000 allowed a nonresident alien leaves taxable income of $1,083.33, upon which the tax at 8 per cent would be $82.67, or $1.33 less than the amount assessed upon the original return.


text:
    Appeal of M. PARISH-WATSON.
    Docket No. 4684.
    Submitted November 25, 1925.
    Decided February 17, 1926.

      James H. Hayes, Esq., for tlie taxpayer.

      J. A. Adams, Esq., for the Commissioner.
    Before Littleton, Smith, and Trttsseld.
    This is an appeal from the determination of deficiencies in income tax for the calendar years 1920 and 1921 in the amounts of $846.64 and $418.19, against which is offset an overassessment of $340.59 for the calendar year 1919, arising entirely from the disallowance by the Commissioner of deductions claimed by the taxpayer of $3,000 for 1920 and $2,500 for the year 1921 for traveling and entertaining expenses paid in carrying on his business as a salesman of art objects during those years.
    BINDINGS OB BAOT.
    During the years 1920 and 1921 the taxpayer was president of Parish-Watson & Co., a corporation, engaged in the sale of Chinese porcelains and antiques. He was also associated with the firm of Dreicer & Co., Inc., engaged in the sale of jewelry, precious stones, and porcelains.
    In carrying on his business it was necessary for the taxpayer to expend considerable sums in traveling and entertaining. He received a salary and commission from the respective corporations, but was not reimbursed by them for expenditures made in this connection.
    During the year 1920 he expended at least $3,000 in entertaining customers and for traveling,expenses, and in the year 1921 at least $2,500 for the same purpose, as evidenced by 111 canceled checks drawn in 1920 and 63 canceled checks drawn in the year 1921, supported by his testimony as to the purpose for which the amounts were expended.
    The amounts claimed constituted ordinary and necessary expenses.
   DECISION.

The deficiencies determined by the Commissioner are disallowed.


author: James:

text:
    Appeal of MARKET SUPPLY CO.
    Docket No. 5381.
    Submitted December 12, 1925.
    Decided February 18, 1926.
    Taxpayer purchased the business, the store location, and the right to use the name of its competitor during the period of two years. Held, that the amount paid in excess of the inventory of merchandise and equipment can not be written off and claimed as a deduction from gross income over the two years during which the right to use the competitor’s name continued.

      John J. Ba%ry, G. P, A., for the taxpayer.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1918 in the sum of $Y,400.65. Only so much of the deficiency is in controversy as results from the disallowance of a certain deduction of $6,000 from gross income, which the Commissioner determined to be a capital expenditure.
    FINDINGS OF FACT.
    1. The taxpayer is a Massachusetts corporation with its principal place of business at Boston.
    2. During the year 1918 the taxpayer corporation occupied the place of business at 67 Long Wharf, Boston. As a war measure, the United States Government required the erection of gates to the wharves and only permitted persons to enter who had proper credentials. As this interfered with the business of the taxpayer, it sought another location, which resulted in the purchase of the business of M. J. Gallagher & Co., a competitor.
    On account of the favorable location, existing contracts, good will, and an agreement not to enter into the same business, and the use of the trade name, the taxpayer paid $6,000, in addition to the inventory value of the machinery, merchandise, etc., so acquired. There was no lease to the new premises and the tenants occupied the premises as tenants at will. However, no tenant had ever been ejected to give preference to others. The pertinent parts of the bill of sale are as follows:
    Know all men by these presents that I, Martin J. Gallagher of Arlington in the County of Middlesex and Commonwealth of Massachusetts, in consideration of one dollar and other valuable consideration to me paid by the Market Supply Company, a corporation duly established under the laws of said Commonwealth, and having a usual place of business in Boston, Suffolk County, Massachusetts, the receipt whereof is hereby acknowledged, do hereby sell, assign, transfer and set over unto said Market Supply Company, all of the goods, wares, merchandise, machinery, stock in trade, fixtures and furniture used by me in the business of dealer in market supplies, market boxes, shooks, nails, paper, etc., under the name of M. J. Gallagher & Co., at No. 24 Mercantile Street in said Boston, and in the storehouse at 20 Fulton place in said Boston, and now situated on said premises on Mercantile Street occupied by me in connection with said business or in said storehouse and including also all goods now in transit, and the horse, wagon and harness used by me in said business, together also with the good will of said business, and all of my right, title and interest as tenant of said premises.
    And I do further assign to said Market Supply Company, all contracts which I have for delivery of shook to me, the said Market Supply Company to assume payment on all shook delivered to it under said contract, arid to pay to the parties entitled thereto for all goods now in transit and sold by the bill of sale, and to hold me harmless from any liability on account of shook contracted for by me, but delivered to said Market Supply Company; and I agree with said Market Supply Company to deliver to it all bills of lading received by me, or made out to me, for shipments of shook as aforesaid, and to deliver to said Market Supply Company all necessary or appropriate orders or endorsements to secure delivery to said Market Supply Company by the railroad or carrier of all shook shipped to or consigned to me.
    *******
    And for the consideration aforesaid, I do further covenant and agree with said Market Supply Company, and its successors and assigns that I will not either directly or indirectly (except as a stockholder in said Market Supply Company) engage in or become financially interested in, or permit or allow my name to be used in connection with any business of the kind or character formerly conducted by me as aforesaid, for a period of ten years from the date hereof, in either the States of Maine or Massachusetts, and I further covenant and agree not to do any act or thing to injure or affect the grant of good will of said business herein made.
    It is further understood and agreed that said Market Supply Company shall have the right to use the name of M. J. Gallagher or M. J. Gallagher & Co., in connection with the business herein transferred, whether at the same location, or elsewhere, for a period of two years from the date hereof, and at all times whether within said two years period or not, shall have the right to use the name of M. J. Gallagher & Co., in connection with its own name, when used with appropriate words indicating that the Market Supply Company is successor to M. J. Gallagher & Co., or has succeeded to the business formerly conducted by M. J. Gallagher & Co.
    3. The taxpayer claims the $6,000 as a business expense, deductible from gross income. The Commissioner treated the amount as a capital expenditure.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, pursuant to Eule 50.
   OPINION.

James:

For some years prior to 1918 the taxpayer had been engaged in the mercantile business, occupying a store on what is known as “Long Wharf,” at Boston, Mass. Prior to June, 1918, the United States Government, as a war measure, required the erection of gates at the entrance to the wharf and permitted no one to enter without proper credentials. This so interfered with the taxpayer’s business that it found it necessary either to secure a new store location or practically to suspend operations. In seeking a new location, the taxpayer found that it could, and it finally did on June 17, 1917, purchase the business and the right to the store location of one of its competitors. In making such purchase, the competitor’s stock of merchandise and equipment was inventoried and valued, and the taxpayer paid such inventory value, plus the sum of $6,000, and accepted from said competitor a bill of sale in the form and language set forth in the foregoing findings of fact.

It appears from the foregoing bill of sale that the taxpayer acquired the right to occupy a store location as a tenant at will, the merchandise of the seller, his contracts, the good will of his business, the right to use the vendor’s name in connection with its business for a period of two years, and the abstention of the vendor from engaging in a like business for a period of 10 years. The benefits accruing to the taxpayer appear to be the benefit of continuing in business unembarrassed by war regulations, the retention of its own customers, the acquisiton of the customers of Gallagher, the abstention of Gallagher from business, and the right to use Gallagher’s name for two years. It is impossible under the evidence to separate the consideration paid for these various rights, some of which are presumably of permanent benefit to the taxpayer. It might be conceded that the tenancy in Gallagher’s location was of little permanent value. It might be conceded that the use of Gallagher’s name would also be of temporary benefit, but the acquisition of Gallagher’s business and customers, and the abstention of Gallagher from further engaging in business for a period so long as to take him practically permanently out of the field of competitors were benefits difficult to estimate at all, and the duration of which it is particularly difficult to estimate. Certainly, it can not be said that the benefit flowing from these provisions of the contract is limited, as claimed by the taxpayer, to the period of two years during which it was permitted to hold itself out as the successor to M. J. Gallagher & Co. We are, therefore, of the opinion that the amount paid in excess of inventory value of merchandise was a capital expenditure of such indefinite duration that it can not properly be said to exhaust over any particular period, and no deduction for such exhaustion may be allowed, unless or until a definite loss can be and is established.

Trtjssell dissents.


author: Smith:

text:
    Appeal of WASHINGTON CADILLAC CO.
    Docket No. 4471.
    Submitted November 17, 1925.
    Decided February 18, 1926.
    Additional compensation paid by the taxpayer to its president in each of the fiscal years ended September 30, 1921, and September 30, 1922, held deductible from gross income.

      J. G. Peacock, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Smith, Littleton, and Trxjssell.
    This is an appeal from the determination of a net deficiency for the fiscal years ended September 30, 1921, and September 30, 1922, of $572.10. The point in issue is the right of the taxpayer to deduct from gross income for each year $4,800 additional compensation paid to its president. The additional deduction was allowed for the year ended September 30, 1922, but disallowed for the year ended September 30, 1921.
    FINDINGS OP FACT.
    The taxpayer is a corporation, with its principal place of business in the District of Columbia. It was formerly known as Cook & Stoddard Co., and Joseph M. Stoddard was president. Stoddard died in 1919, whereupon the name of the corporation was changed to Washington Cadillac Co., and Rudolph Jose was made president. On or about January 31, 1919, all of the stockholders entered into a verbal contract with Jose, whereby it was agreed that he was to receive $600 per month for his services as president and treasurer, and, further, that after the results of each year’s operations had been determined, provided the profits were sufficient, he was to receive additional compensation at the rate of $400 per month. This verbal contract has been carried out consistently to the present time. At a meeting of the board of directors held November 19, 1919, additional compensation was voted to Jose of $3,200 (being eight months at $400 per month), for the year ended September 30, 1919; and at a meeting held December 8, 1920, additional salary was voted of $4,800 for the year ended September 30, 1920; at a meeting held December 22, 1921, additional salary was voted of $4,800 for the year ended September 30, 1921; and at a meeting held December 28, 1922, additional salary was voted of $4,800 for the year ended September 30, 1922. The additional compensation voted for each year was paid forthwith.
    The taxpayer kept its books of account and made its income-tax returns upon the accrual basis. In its return for the year ended September 30, 1921, it reported the salary of its president, Rudolph Jose, as being $7,200, but claimed the deduction from gross income of that amount and, in addition, $4,800 for the bonus paid.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 7 days’ notice, in accordance with Rule 50.
   OPINION.

Smith:

In its return for the fiscal year ended September 30, 1921, the taxpayer claimed a deduction from gross income of a bonus of $4,800 paid to its president. The Commissioner disallowed the deduction of $4,800 from the gross income of the taxpayer for the fiscal year ended September 30, 1921, on the ground that the taxpayer kept its books of account upon the accrual basis and the bonus paid to the president for that year was not voted until December, 1921, which was after the close of its fiscal year.

This bonus was paid under an agreement made by the stockholders of the taxpayer with its president in 1919. This agreement was that, in addition to a salary of $7,200 per year, the president should receive a bonus for each fiscal year at the rate of $400 per month, provided the profits of the business for each year were sufficient to pay such bonus. The bonus was voted by the board of directors in December of each of the years 1919, 1920,1921, and 1922.

There was no element of distribution of profits in the payment of this bonus to the president. The regular salary of $7,200 per year, plus the bonus of $4,800 per year, was only a reasonable salary for him. As we understand the situation, the Commissioner has disallowed the deduction of any bonus from the gross income of the fiscal year ended September 30, 1921, on the ground that the taxpayer kept its books of account upon the accrual basis; that the bonus paid in December, 1921, did not accrue during the fiscal year ended September 30, 1921; and that the amount of $4,800 paid in December, 1920, was for services performed during the preceding fiscal year ended September 30, 1920, and was therefore not an accrual of the fiscal year ended September 30, 1921.

It will be noted that by this reasoning the taxpayer has been permitted to deduct less than the entire amount of compensation paid to its president merely by reason of the fact that it has kept its books of account on the accrual basis and not on the cash basis. We think that this reasoning is not logical. If the bonus paid in December, 1921, was not an accrual of the preceding fiscal year, then the bonus paid in December, 1920, was an accrual of that year. Appeal of Lihue Plantation Co., 2 B. T. A. 740.