author: Smith:

text:
    Coon Auto Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9330, 10116.
    Promulgated October 11, 1927.
    1. Alter the petitioner had closed its books for the calendar year 1918 it arbitrarily reduced its perpetual inventory as of December 31, 1918, by $9,234.07. The inventory was always carried at cost and the market value of merchandise included in the inventory was in excess of cost. No physical inventory was taken at the close of either 1918 or 1919. The Commissioner added to the net income reported for the year 1919 the $9,234.07 in question. Held,, that the evidence does not show that the Commissioner was in error in making such addition to net income.
    2. In 1918 and 1919 the petitioner issued capital stock in the amount of $95,000 for cash and in the amount of $95,000 to the same stockholders and received therefor certain noninterest-bearing promissory notes payable five years after date. The notes were not paid at maturity but were renewed for another five-year period and finally canceled in December, 1926, at which time the stockholders surrendered the stock for which they had given notes. Held, that the discounted value of said notes was not includable in invested capital.

      J. II. Kirby, Esq., and P. J. Gofey, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.

      The above-entitled proceedings, involving deficiencies in income and profits tax for the years 1919 and 1920 in the respective amounts of $5,685.52 and $4,474.67, were consolidated for the purpose of hearing and decision. The errors alleged in the petition are (1) that the Commissioner excluded from invested capital for the taxable years the present worth of notes given in payment for capital stock, said notes having a face value of $95,000, and (2) that in determining the taxable net profits for the year 1919 the Commissioner erred in including in taxable income the sum of $9,234.07, which was an arbitrary write-down of petitioner’s inventory at December 81, 1918.
    FINDING'S OF FACT.
    The petitioner is a South Dakota corporation organized in October, 1918. It took over an automobile business which had been established for several years. For the business it paid the book value of the assets. The predecessor business kept a perpetual inventory of merchandise on hand and took no physical inventory immediately prior to the sale to the petitioner. The petitioner’s books of account were kept in accordance with the recommendations of the Ford Motor Co. and the perpetual inventory was kept on the basis of cost. After its books were closed on December 31, 1918, the board of directors met on January 13, 1919, and upon motion 'made and duly seconded, directed an arbitrary write-off of the book inventory as of December 31, 1918, amounting to $9,234.07. This action was prompted by a desire on the part of the directors that the assets of the business should not be overstated in the inventory. No physical inventory was taken either in 1918 or in 1919. The market price upon all items contained in the inventory ivas in excess of the cost during both years. In the audit of petitioner’s return for 1919 the Commissioner added to the net income returned the amount of the reduction in the inventory, namely, $9,234.07, and the deficiency determined for the calendar year 1919 is predicated partly upon such addition to net income.
    The authorized capital stock of the petitioner corporation was $200,000, of which amount $45,000 was issued for cash at par in 1918. On January 2, February 1, and April 1, 1919, $10,000, $2,000 and $18,000, respectively, additional stock was issued for cash at par, and on August 1 the stockholders of the $75,000 stock then outstanding subscribed pro rata for $75,000 additional capital stock and gave in payment therefor noninterest-bearing promissory notes of a face value of $75,000, maturing five years from date. On October 18, 1919, an additional $20,000 capital stock was issued for cash at par and on November 1, 1919, those stockholders subscribed for $20,000 additional stock and gave in payment therefor non-interest-bearing promissory notes of a face value of $20,000 maturing five years from date. The noninterest-bearing notes thus received in the face amount of $95,000 were not paid upon maturity but were renewed for another five-year period. These notes were never paid. They were canceled in December, 1926, and the stock that was issued therefor was turned back to the corporation. The makers of the notes were all responsible individuals and the notes on several occasions were used as collateral by the petitioner in the borrowing of money. In its tax return for 1919 and 1920 the petitioner included in invested capital the amount of the notes in question from the dates they were received. In the audit of the returns the Commissioner excluded the $95,000 represented by the notes from invested capital.
   OPINION.

Smith:

1. The first question presented is the correctness of the action of the respondent in adding to the net income reported for 1919, $9,234.07 representing an arbitrary write-down of the inventory at the beginning of that year. The petitioner kept a perpetual inventory; the purchases of merchandise were charged to the inventory and sales of merchandise were charged out of the inventory at cost price. The only tax years involved are the calendar years 1919 and 1920. The* evidence shows that the mark-down of the inventory was entirely arbitrary and no physical inventory had been taken to show that the merchandise listed in the perpetual inventory was not on hand at the date when the write-down was made. The evidence is conclusive that the market value was in excess of cost. The effect of the write-down was the unwarranted reduction of the inventory at the close of 1919 in the amount of $9,234.07. It is the contention of the petitioner that if the inventory at the close of the year is to be increased by the amount of $9,234.07 there should be a like increase in the inventory at the beginning of the year, and that if such an increase were made the net income would not be affected. The returns of the petitioner for the years 1918 and 1919 were not introduced in evidence and the Board is without information as to the amount of the perpetual inventory shown by the books of account on December 31, 1918, before the write-down was effective, or the amount of the inventory used by the petitioner as of December 31, 1918, and January 1, 1919, in making its income-tax returns for 1918 and 1919. Without such information the Board is unable to determine whether the respondent erred in adding to the net income reported the $9,234.07 in question. If the amount of the inventory used in the return for 1919 as of January 1, 1919, was the same as that shown by the petitioner in its return for 1918 as of December 31, 1918, the action of the respondent in adding the $9,234.07 was not in error, and we have no evidence to show that this was not the case.

2. The petitioner claims the right to include in invested capital the face value of noninterest-bearing promissory notes maturing five years from date, received by the corporation for shares of stock, or the discounted value of such notes. It makes this contention upon the basis of the decision of the Board in Hewitt Rubber Co., 1 B. T. A. 424, wherein it was held that notes received by that corporation in payment of capital stock were in the circumstances of the case properly included in invested capital.

The Revenue Act of 1918 permits a corporation to include in invested capital, “Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment.” (Sec. 326(a) (2).)

Under the provisions of the statutes of South Dakota a corporation is permitted to issue capital stock in exchange for promissory notes. See Deerland Turpentine Co., 4 B. T. A. 1236, and cases there cited.

In Ready Auto Supply Co., 2 B. T. A. 730, this Board held that certain notes given for shares of capital stock could not be included in invested capital. The evidence there showed that no use was ever made of the notes; that no cash payment was ever made thereon; and that when the notes fell due they were canceled. In that opinion we said:

Considerable testimony was taken as to tbe financial standing of tfie parties who were the makers of the notes in question. The testimony so given only strengthens the general impression that the notes were not given in good faith in payment either of the stock or of an assessment constituting a paid-in surplus. The Board is not disposed to extend what it believes to be the sound rule indicated in the Appeal of Hewitt Rubber Co., supra, to cases generally involving indebtedness of stockholders to corporations on account of their stock. Only transactions clearly evidencing good faith may be so recognized.

In Wall & Ochs, Inc., 4 B. T. A. 1093, the Board refused to allow certain notes given for capital stock to be included in invested capital. The evidence there showed that the notes bore no interest; that they were nonnegotiable; that no payments were ever demanded on the notes; and that no payments were ever made.

The fact that a Soutlr Dakota corporation may issue shares of stock upon the basis of notes given by the stockholders in payment therefor, is not decisive of the issue in the case at bar. The question is whether the notes were bona fide paid in for shares of stock. The evidence shows that the makers of the notes were responsible for their payment; also that the notes were used in some instances as security in the borrowing of money. The notes were noninterest bearing and the evidence does not show what their discounted value might be at the date received by the corporation. The evidence also shows that when the notes matured they were not paid, but were renewed by other noninterest-bearing notes running for a period of five years, and that these notes were never paid. We think that this negatives the idea that they were bona fide paid into the corporation within the meaning of the statute. Although the corporation was in need of money and had to borrow from the bank, it did not discount the notes at the bank but at the most used them as a basis for credit. The action of the respondent in excluding the face value of the notes from invested capital is approved.

Judgment wül be entered on IB days' notice, u/nder Rule 50.

Considered by Littleton and Love.


source: Caselaw Access Project

license: Public Domain

text:
    Karges Hosiery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11384.
    Promulgated October 11, 1927.
    Petitioner consistently took its inventory at tbe close.of each year from 1914 to 1921, inclusive, on the basis of “ cost or market, whichever is lower.” Held, that the action of the Commissioner in charging the petitioner’s inventory at December 31, 1920, from a cost or market, whichever is lower, to a cost basis was in error.

      Alton Gwnbiner, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920, in the amount of $8,077.61, only $6,418.23 of which is in controversy. All allegations of error stated in the petition have been withdrawn, except that the Commissioner erred in increasing the petitioner’s inventory at December 31, 1920, in the amount of $16,623.11.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation, with its principal place of business at St. Louis, and is engaged in the retail hosiery business. Its main store is in St. Louis. It operates a branch store at Kansas City, Mo. The petitioner keeps its books of account and makes its income-tax returns upon the basis of a calendar year.
    Ever since 1914 the petitioner has taken inventory of merchandise at the close of the year consistently on the same basis, which has been “ cost or market, whichever is lower.” Regular par value merchandise was never valued at cost unless the cost was lower than the market. And conversely, it was valued at market only when the market was lower than the cost. The under' par merchandise was based upon selling price, less 25 per cent, which the experience of the petitioner had shown was the approximate cost of selling.
    In the taking of an inventory each item or unit was counted, slipped, and the officers in charge of the inventorjr removed the slips out of the boxes, recopied the numbers and called the numbers aloud to the other officers in charge who wrote down the numbers, description and quantity, and set down the cost as taken from the bottom of the boxes, the cost having originally been placed on the bottom of the boxes from the original invoice when the goods were first received. In the first column of the inventory appeared the style number, next the description, next the quantity, then the cost which was entered for comparison with the valuation or with the market. The stock was at that time physically examined by two or more of the officers in charge and the condition of the particular lot was noted as to whether the sizes were in salable condition, whether it had a full range of colors, whether it was par or under par merchandise, whether it was damaged, and whether or not the colors and styles were salable at their normal prices. The decision as to whether or not a given lot of merchandise was subnormal or under par was the result of conferences between experienced officers of the company drawing upon their knowledge of the hosiery business and their experience in the selling of the merchandise, from knowledge of the then present demand for colors and styles and their practical experience in the retail selling of merchandise of this class. The decision was made in a conference held at the time the inventory was taken. These officers fixed the price of the subnormal or under par merchandise with the idea of the best j)rice at which it could be sold, in mind. The under-par merchandise was inventoried at 75 per cent of the estimated selling price and was immediately placed on sale at the estimated selling price.
    As to the normal merchandise, where the market was higher than cost, the lower of the two was extended and if the cost was lower, cost would be used. In the summation of the inventory, if market was lower, market would be used. The market price was obtained from constant contact with the market. Close contacts were maintained at all times with the market, and especially during the inventory period.
    In the hosiery business, such as operated by the petitioner, the normal condition of a hosiery stock on December 31 is depleted. After the holiday trade much that is left is odds and ends and undesirable patterns, colors, and last year’s styles which have been abandoned. There are innumerable small lots in broken sizes and discontinued colors and all these are under par merchandise. Much of the merchandise has been damaged by handling during the holiday period. Some of the merchandise could be redyed and made more salable thereby. There was always a danger, however, that redyed merchandise would be streaked and the mercerized hosiery might be weakened by redying. Heavy woolen fancy hose became under-par merchandise after January 1, along with fancies, embroideries, laces, and elaborate styles which can only be sold for gifts. All these factors were taken into consideration in determining the estimated selling prices of such hosiery.
    The cost of hosiery showed an upward trend from the pre-war years until after January 1,1920. The result was that a comparatively small quantity of the under-par merchandise was reflected in the inventories taken prior to 1920 at less than cost. There was a severe slump in the market about the middle of 1920 and although the inventory taken at December 31, 1920, was taken on the same basis as the inventory taken at the close of the preceding year, the inventory taken was in many instances at less than cost.
    In the examination of the petitioner’s tax return for 1920 the Commissioner increased the original inventory reported from $45,-241.48 to $61,764.59. This was for the purpose of bringing the inventory at the close of the year up to cost. In making his adjustment the Commissioner assembled all available purchase invoices for the year 1920 and applied to stock numbers shown on the inventory the cost thereof. Only a portion of such stock numbers could be traced to purchase inventories. The percentage of mark down shown on certain selected items of the inventory was applied to the whole inventory and the Commissioner determined cost in this manner, and added to the net income reported by the petitioner for 1920 the above indicated amount of $16,523.11.
   OPINION.

Smith:

The point involved in this proceeding, namely, whether the inventory at December 81, 1920, was taken upon a proper basis was substantially covered by the Board in Appeal of Thomas Shoe Co., 1 B. T. A. 124. In that case it was held that inventories used in computing the cost of goods sold must be computed both at the beginning and end of each year on substantially the same basis. At page 127 the Board said:

Even if tlie entire practice of the taxpayer had been erroneous, if the discounts were in fact cash discounts, the Commissioner clearly erred in insisting upon a change in method at the close of the year without making and allowing a compensatory change at the beginning. What the inventory practice is, is of some importance; that the practice should be uniform is of the highest importance.

In this proceeding there is no contention that the basis of cost attempted to be reached by the respondent is the same basis upon which the inventory was taken at the close of the preceding year. The evidence of record indicates that the respondent’s agent who investigated the taxpayer’s books of account refused to consider an adjustment of the inventory at the close of 1919 for the reason that the statute of limitations had operated to bar the assessment of any additional tax if such might be found for that year.

In Appeal of The Buss Company, 2 B. T. A. 266, the Board said at page 267:

The sole purpose of inventory valuation is to reflect income as clearly as possible. The result of the Commissioner’s computation is obviously to distort the true situation, * * * However faulty the taxpayer’s method was, we believe that greater weight should be given to consistency than to any particular method of inventorying or basis of valuation so long as the method or basis used substantially reflects the income. This rule has been given great weight both by the Commissioner and the Board. Appeal of The Thomas Shoe Company, 1 B. T. A. 124, and Appeal of George C. Peterson Co., 1 B. T. A. 690.

See also Appeal of C. Willenborg & Co., 5 B. T. A. 788.

It appears to us that the only material question involved in this proceeding is whether the inventory on under par merchandise, taken in the manner in which it was taken by the petitioner, was the taking of an inventory at “market” within the meaning of the statute, and the regulations. The respondent has particularly covered this question in article 1582 of ^Regulations 45, as amended by Treasury Decision 3296, the amended article reading in part as follows:

Any goods in an inventory which are unsalable at normal prices or unsalable in the normal way because of damage, imperfections, shop wear, changes of styles, odd or broken lots, or other similar causes, including secondhand goods taken in exchange, should be valued at bona fide selling price less cost of selling whether basis (a) or (b) is used, * * *. In respect to normal goods whichever basis (a) or (b) is adopted must be applied with reasonable consistency to the entire inventory. Taxpayers were given an option to adopt the basis of either (a) cost or (b) cost or market, whichever is lower, for their 1920 inventories, and the basis adopted for that year is controlling and a change can now be made only after permission is secured from the Commissioner.

This ruling of the Commissioner appears to us to be in conformity with the intendment of the statute that income be correctly reflected. The evidence shows that the petitioner .took its inventory at the close of 1920 strictly in accordance with the regulations of the Commissioner as amended. The action of the respondent in increasing the inventory at December 31, 1920, in the amount of $16,523.11, was in error.

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

Considered by Littleton and Love.


author: Smith :

text:
    C. Wildermann Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8289.
    Promulgated October 11, 1927.
    1. During the taxable years the petitioner corporation under an arrangement with a bank paid certain amounts to a trustee for the bank in liquidation of certain indebtedness of the president of the petitioner corporation to the bank. Held., that the amount paid constituted additional compensation for the services of the president and is deductible from gross income.
    2. The petitioner corporation paid a pension to its retired president. Held, that the amount is legally deductible from gross income.
    3. The action of the Commissioner in reducing invested capital by $40,000 for good will was in error.

      Walter H. Dodd, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ended June 30, 1920, and June 30, 1921, in the respective amounts of $2,461.96 and $2,821.39. The petitioner alleges as errors, (1) disallowance as expenses of payments to Herbert E. Benjamin as trustee pursuant to a contract with the Second National Bank of Hoboken, N. J., (2) disallowance as expense of pensions paid to a retired employee, and (3) reduction of invested capital by $40,000 for good will. At the hearing counsel for the Commissioner moved to increase the deficiency for the fiscal year ended June 30, 1920, to conform to the proof and to disallow $1,500 of the salary allowed as a deduction for Herbert E. Benjamin, since the proof showed that he was paid a salary of only $500 during the year.
    FINDINGS OF FACT.
    Petitioner is a New York corporation, organized in 1901 to take over the business of Charles Wildermann, which was established in 1883. Charles Wildermann, prior to immigrating to the United States in 1882, had been engaged in the business of buying and selling church goods. In 1883 he established a similar business on Barclay Street, in New York City, and began dealing in Catholic Church supplies, religious articles, prayer books, bibles, etc. He made certain European connections and imported some of these goods. He also took orders for church vestments which were manufactured in Europe.
    In 1901 Charles Wildermann visited Europe, but before doing so organized the petitioner corporation to continue his business in the United States. The corporation was organized with a capital stock of $100,000. The minute book of the corporation, under date of June 19, 1901, shows as follows:
    The Secretary then reported:
    That there have been issued to Mr. Charles Wildermann five hundred ten (510) shares of the capital stock of said Company, calculated at the rate of One Hundred ($100) Dollars per share, for which said Charles Wildermann has paid in cash.
    That there have been issued to Jean Weil ten (10) shares of the capital stock of said Company, for which said Jean Weil has paid by draft on Bowery Savings Bank, signed by Josephine Weil, on account No. 490,999, of said bank, in favor of Charles Wildermann, for One Thousand ($1,000) Dollars.
    That there have been issued to Ferdinand Wildermann two hundred forty (240) shares of the capital stock of said Company, calculated at the par value of One Hundred ($100) Dollars each, for which said Ferdinand Wildermann has paid as follows:
    Ten Thousand ($10,000) Dollars in cash; and
    Fourteen Thousand ($14,000) Dollars in one hundred forty (140) shares of said Company issued to said Ferdinand Wildermann and by said Ferdinand Wildermann to said Charles Wildermann delivered, together with a written order upon Frederick Hiiffer and Anton Hiiffer, of Munster, Westphalia, Germany, said Charles Wildermann to surrender to said Frederick Hiiffer and Anton Hiiffer the said one hundred forty (140) shares of stock upon the receipt by him of said sum of Fourteen Thousand ($14,000) Dollars, in money of the United States.
    That there have been issued to Clement Vonnegut two hundred forty (240) shares of the capital stock of the said C. Wildermann Company, calculated at the par value of One Hundred ($100) Dollars each, for which there was paid Five Thousand ($5,000) Dollars and one hundred ninety (190) shares of stock of said Company, which said Charles Wildermann agrees to deliver to Felix Vonnegut, at Munster, Westphalia, Germany, upon receipt by said Charles Wildermann of the sum of Nineteen Thousand ($19,000) Dollars, calculated in currency of the United States, or other consideration agreeable to said Charles Wildermann.
    Furthermore resolved that said Charles Wildermann be, and he hereby is authorized to collect said One Thousand ($1,000) Dollars upon said draft No. 490,000, issued by Jean Weil in payment of the ten (10) shares of stock, the balance of Fourteen Thousand ($14,000) Dollars due upon the two hundred forty (240) shares of stock issued to Ferdinand Wildermann; and the balance of Nineteen Thousand ($19,000) Dollars due upon the shares issued to Clement Vonnegut; and to apply the same on the sum of One Hundred Thousand ($100,000) Dollars due from said C. Wildermann Company to said Charles Wildermann for the transfer by said Charles Wildermann to said 0. Wilder-mann Company, made in pursuance to said agreements of August 18, 1800, and the 19th day of June, 1901, and that the Treasurer be directed to pay to said Charles Wildermann the balance remaining unpaid of said One Hundred Thousand ($100,000) Dollars.
    The Secretary further reported that in accordance with the agreement entered into on the 18th day of August, 1900, between Charles Wildermann, Ferdinand Wildermann and Clement Vonnegut, and the agreement entered into on the 19th day of June, 1901, between Charles Wildermann, Ferdinand Wilder-mann, Clement Vonnegut and Jean Weil, the said Charles Wildermann had transferred to said C. Wildermann Company, the good will of the business of said Charles Wildermann, and all the trade-marks, copyrights, and all his right, title and interest in and to a lease of the premises No. 17 Barclay Street, in the Borough of Manhattan, City of New York, and all transferable agencies, rights and privileges to said business belonging, in the sum ^o£ Forty Thousand ($40,000) Dollars, the fair and reasonable value thereof; and the stocks, fixtures, plates, outstanding accounts and dioses in action of the business of said Charles Wildermann, as the same appears by the inventory of said business of said Charles Wildermann, as in said agreement provided, of the reasonable value of Sixty Thousand ($60,000) Dollars.
    Upon motion made, seconded and carried, it was unanimously
    Besolved that the said report be adopted and said transfer and bill of sale be placed on file, ratified and accepted.
    In the absence of the Secretary, Mr. Ferdinand Wildermann reported that Elise Wildermann and said Charles Wildermann have permitted to remain in said business, as per said inventory, the additional sum of $45,764.97.
    On motion made by Mr. Ferdinand Wildermann and seconded by Mr. Jean Weil, it was unanimounsly
    Besolved that the said inventory, up to the amount of Sixty Thousand ($69,000) Dollars be accepted by said C. Wildermann Company, in fulfillment of said agreement.
    On motion made by said Ferdinand Wildermann and seconded by Jean Weil, it was unanimously
    Besolved that the said sum of $45,764.97 appearing in excess upon said inventory, be, in accordance with said proposition accepted by said C. Wilder-mann Company as a loan and placed to the credit of Elise Wildermann, said loan from said Elise Wildermann to carry six per cent, interest, and that said C. Wildermann Company will give to said Elise Wildermann a note for the sum of $5,764.97, dated the 19th of June, 1901, and payable seven months after date, with six per cent, interest, and the balance of $40,000 as a loan in the business, in compliance with the correspondence heretofore had between said Charles Wildermann, Ferdinand Wildermann and Clement Vonnegut.
    The notes of the corporation to the extent of $40,000 which were given in payment of good will were paid off as follows:

      Although at organization the capital stock of the petitioner was $100,000, a stock dividend of $50,000 was later paid and $50,000 of capital stock was sold for cash at par. By reason of losses sustained by the corporation the capital stock was later reduced to $150,000 to wipe out the deficit.
    In 1917 the petitioner was in a desperate financial condition because of its inability to procure funds with which to conduct its business. Its indebtedness to many of its merchandise creditors was long overdue and they were threatening suit. Manufacturers in France refused to ship any more goods until their past shipments had been paid for and their refusal was a particular hardship to the company because the very goods ordered had already been sold to the company’s customers in America to be paid for on delivery. Other merchandise which the company had ordered from European suppliers had been shipped to New York, but was being held there in bond because the company had not sufficient funds with which to pay the customs duties. The rent of the company’s store and office was in arrears and the salary of its president was unpaid. It was indebted to banks for loans already made and practically all of its accounts receivable had been pledged to the banks and others to secure these loans. Although its stock of merchandise on hand had cost about $60,000, the amount for which it could have been disposed of at the time was only about $25,000 and constituted a most doubtful asset upon which to negotiate a loan. Its liabilities were greatly in excess of its assets.
    In this situation it endeavored to obtain credit from two banks but credit was denied on its financial statement. Ferdinand Wilder-mann, the then president of the corporation, was indebted to the Second National Bank of Hoboken, N. J., for approximately $25,700, and Fritz Wildermann, the son of Charles Wildermann and president of the corporation during the taxable years, was indebted to the same bank to the extent of approximately $9,600. The only securities which the bank had for these loans were shares of stock of the petitioner corporation and life insurance policies, upon which the insured had borrowed money. This bank was finally induced to extend credit' to the petitioner, but only upon condition that the company would make as its vice president one Herbert E. Benjamin, who was to act as the bank’s representative, and pay to Benjamin, as trustee for the bank, the amount of $115 per week. The corporation was to retire Ferdinand Wildermann as president and cease paying him a salary of $6,000. In lieu of this payment the $115 per week was to be paid to Benjamin as trustee for the bank. A part of this weekly payment was to be used in paying premiums upon the policies of insurance held by the bank as collateral and interest upon the loans made by the insurance company to the insureds, another part to pay interest upon the bank’s loans to the individuals, and the balance to be used to reduce the principal of the loans to the individuals. This agreement was entered into on August 10,1917, and immediately thereafter the bank advanced money to the corporation to enable it to continue in business. Ferdinand Wildermann ceased to be president in October, 1917, and Fritz Wildermann was made president in his stead. During the taxable years involved herein Fritz Wildermann’s salary was $400 per month, plus $100 Christmas bonus, or a total annual salary of $4,900.
    Of the $115 pajd weekly to Benjamin as trustee during the fiscal years ended June 30, 1920, and June 30, 1921, $2,177.88 was used to pay premiums and interest for the fiscal year ended June 30, 1920, and to reduce the principal of the indebtedness of Fritz Wilder-mann, and for the succeeding year $1,952.91 was paid in his behalf and applied in similar manner. In his individual tax returns Fritz Wildermann accounted for the money thus paid in his behalf as additional compensation paid to him for services rendered to the corporation.
    In its income-tax returns for the fiscal year ended June 30, 1920, the petitioner deducted from gross income as salary of its president $4,875 and an additional $6,810.01 representing amounts paid to Herbert E. Benjamin as trustee and as salary for services performed by him as vice president. The amount paid to him for services rendered was $500. The excess amount of $6,310.01 was paid to him as trustee. The Commissioner disallowed the deduction of $4,810.01, but allowed the deduction of $2,000 paid as compensation to Benjamin.
    In its return for the fiscal year ended June 30, 1921, the petitioner deducted from gross income $4,900 for salary of its president, $2,000.04 as salary of Herbert E. Benjamin, and $5,980 representing the amount paid to Benjamin as trustee for the bank. Of this amount the Commissioner disallowed the deduction of $5,980 as not representing an ordinary and necessary expense deductible from gross income.
    On August 21, 1912, the board of directors of the petitioner corporation adopted the following resolution:
    Resolved, that after July 1st, 1912, an annuity of <$100.00 per month be paid to each and every member of the Wildermann family who shall have been for the term of fifteen years continuously employed by The O. Wildermann Company, or in the business which was carried on- by C. Wildermann in his lifetime and was taken over by The C. Wildermann Company, or his widow or eldest child after he dies.
    Said annuity shall be payable monthly, commencing with the expiration of said term of fifteen years, but not before July 1st, 1912, and shall be paid to said member thereafter during the remainder of his or her natural life and shall be in addition to any other income which he or she might be then receiving from The C. Wildermann Company or elsewhere * * *.
    Further Resolved, that these resolutions shall be construed to be an obligation on the part of The C. Wildermann Company which shall continue in force for the period of fifty years from and after July 1st, 1912.
    During each of the taxable years the petitioner paid $100 per month to Ferdinand Wildermann under authority of the resolution above referred to and claimed the same as a deduction from gross income in its income-tax returns. In determining the deficiencies for the taxable years the Commissioner disallowed the deduction of $1,200 for each year.
    The balance sheets of the petitioner for the fiscal years ended June 30,1919, and June 30,1920, were as follows:

    In determining invested capital for each of the taxable years the Commissioner excluded from assets $40,000 for good will on the ground that there was no proof that the good will had any value at the time it was paid into the corporation for shares of stock. The invested capital shown by the deficiency letter for the year ended June 30, 1920, is $110,000.
   OPINION.

Smith :

1. Petitioner claims the right to deduct from gross income in its tax returns the amounts paid to Herbert E. Benjamin as trustee of the Second National Bank of Hoboken, N. J., to be applied on the indebtedness to that bank of Ferdinand Wildermann and Fritz Wildermann. It is claimed that these amounts represent additional compensation to the officers of the corporation and as such are deductible from gross income as ordinary and necessary expenses. The evidence is to the effect that Fritz Wildermann, president of the corporation, reported in his individual income-tax returns the amounts paid on his behalf by the corporation to the bank. He testified as follows:

Q. And were these amounts that were paid by you, by the company, rather, the $115 a week disbursed by Mr. Benjamin for the purpose of paying the insurance premiums and interest on your individual indebtedness and en account of principal?
A. Yes, sir.
Q. They were?
A. Yes.
Q. The amounts that were paid for the account of your indebtedness to the bank which were paid by Mr. Benjamin, were they reported by you in your income tax returns during these years?
A. They were.
Q. Every year in your individual return?
A. Yes, everything that Mr. Benjamin paid for my loan or insurance premium, I included as'regular income in my income-tax returns.

There is no evidence that Fritz Wildermann returned in his income-tax returns the amounts paid to Benjamin on his behalf. And if they were it does not appear that they would be deductible from gross income in the corporation’s tax returns for the reason that Ferdinand Wildermann rendered no services to the corporation during the taxable years and we can not consider that the amounts paid to Benjamin as trustee were ordinary and necessary expenses. We are, therefore, of the opinion that the only amounts paid to Benjamin as trustee which are deductible from gross income for the fiscal years ended June 80, 1920, and June 30, 1921, are $2,177.88 and $1,952.91, respectively, which constituted additional compensation paid to Fritz Wildermann.

In the determination of the deficiencies the respondent permitted the corporation to deduct from gross income in its return for the fiscal year ended June 30, 1920, $2,000 as salary for Herbert E. Benjamin, vice president of the corporation. The evidence discloses that the only amount paid to him as salary during such fiscal year was $500. The motion of the respondent to disallow the deduction of $1,500 of the amount allowed by the respondent in determining the deficiency is allowed.

2. The evidence shows that the petitioner paid during each of the taxable years $1,200 as a pension to its retired president. The payments were made pursuant to a resolution of the board of directors of the corporation in 1912. The amounts are clearly allowable as deductions from gross income as ordinary and necessary expenses.

3. The respondent disallowed $40,000 claimed as the value of good will acquired by the corporation from Charles Wildermann, the vendor of the business. The facts appear to be that Wildermann turned over his business, consisting of tangibles of $105,764.97 and good will and intangibles of an estimated value of $40,000 for $100,000 cash and promissory notes of $45,764.97. The predecessor business appears to have been profitable. Charles Wildermann had accumulated a considerable fortune from the conduct of the business and he had persuaded a number of individuals to purchase stock in the corporation at par upon the basis that the good will had a cash value of $40,000 at the date acquired by the corporation. We are satisfied by the evidence that the Commissioner was in error in disallowing any amount from invested capital for good will. It was acquired for $40,000 cash. The notes given therefor were paid prior to the taxable years in the amount of $40,000, representing good will, and the $40,000 should therefore be included in invested capital.

Judgment will be entered, on 16 days’ notice, under Rule 60.

Considered by Littleton and Love.


text:
    Clarence D. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7398.
    Promulgated October 11, 1927.
    In the development of a coal mine acquired subsequent to March 1, 1913, the petitioner found after carrying on mining operations that the coal deposit was more valuable than was known to exist at the date of purchase. Held, that the petitioner is not entitled to revalue the estimated coal content and to base a depletion deduction upon such enhanced value rather than on the cost.

      Leon F. Gooper, Esq., R. F. Garrity, Esq., F. J. Neuland, Esq., and R. E. Glessner, Esq., for the petitioner.

      Arthur H. Fast, Esq., and Julian G. Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1917 and 1918 of $21,644.12 and $6,763.34, respectively. The question in issue is the right of the petitioner to deduct from gross income an allowance for depletion based on a discovery value in excess of cost.
    FINDINGS OF FACT.
    The petitioner on November 27, 1915, acquired title by purchase to a certain coal mine known as the “ Davis Mine,” located near Fleming-ton, Taylor County, W. Ya. The purchase price was $35,000, and included approximately 28 dwellings, 75 mine cars, 9 head of live stock, and certain other equipment necessary to operating a mine. By the purchase the petitioner acquired about 124 acres of surface land and mining rights in 326.46 acres.

      At the time of purchase the mine was being operated to a small extent and had been operated for 15 years. The entire tract of land was underlaid by the Pittsburgh seam of coal. This is a well defined seam of coal in this section, in some places being 8 feet thick. In other places the seam contains faults and is mixed with veins of stone, clay, and sand. The predecessor owner, in the development of the mine, had run into these faults and because of the low prices at which coal was selling had operated to only a limited extent. As soon as the petitioner acquired the property and after he had made some inspections of the mine he determined to develop the mine along the easterly side and also along the westerly side in order to avoid some of the faults which had been encountered by the predecessor owner. A tramway was carried along the eastern side of the tract and certain pockets of coal were removed. In February, 1916, the petitioner acquired a tract from one Bartlett, consisting of approximately 4 acres immediately adjacent on the eastern side of the Davis Mine at the purchase price of $300 per acre. Some time in 1918, the exact date not being shown, he acquired a further tract from one Lawson, immediately adjacent on the westerly side, paying therefor approximately $1,500 per acre. He had theretofore mined coal from the Lawson tract. The reason that title was not acquired earlier was because the property was in litigation.
    The developments carried on by the petitioner on the easterly and westerly sides of the Davis Mine showed that the seam of coal improved as the mine deepened. By April, 1916, the developments showed that the 80 acres of land on the back side of the property were much more valuable than the part of the seam which had been mined by the predecessor owner.
    Within one month after the petitioner purchased the Davis Mine he "was offered $200,000 for it.
    The number of tons of coal removed from the mine during the years 1915 to 1918, inclusive, were as follows:
    Tons.
    1915_ 8, 851
    1916_ 60,548
    1917_ 43, 585
    1918_ 46,822.
    The operation of the mine continued up to about 1923, when operations were discontinued for a period of 2 or 3 years.
   OPINION.

Smith :

The petitioner alleges error on the part of the respondent in determining deficiencies in income and profits tax for the years 1917 and 1918 on the ground that he has refused to allow a discovery value as a basis for computing depletion.

The Revenue Act of 1916 permits an individual to deduct from gross income in his income-tax return, under subdivision eighth of section 5 thereof, the following:

* * * (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a)and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: * * *

Section 214(a) of the Revenue Act of 1918 permits the deduction from gross income in income-tax returns of the following:

(10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: * * * Provided * * * That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1918, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to he prescribed by the Commissioner with the approval of the Secretary.

Article 219 of Regulations 45, prescribed by the Commissioner with the approval of the Secretary pursuant to the above authority, reads in part as follows:

(b) Por the purpose of these sections of the Act a mine may be said to be discovered when (1) there is found a natural deposit of mineral, or (2) there is disclosed by drilling or exploration, conducted above or below ground, a mineral deposit not previously known to exist and so improbable that it had not been, and could not have been, included in any previous valuation for the purpose of depletion, and which in either case exists in quantity and grade suificient to justify commercial exploitation. The discovery must add a new mine to those previously known to exist and can not be made within a proven tract or lease as defined in paragraph (f) infra.
(c) In determining whether a discovery entitling the taxpayer to a valuation has been made, the Commissioner will take into account the peculiar conditions of each case; but no discovery, for the purposes of valuation, can be allowed, as to ores or minerals, such as extensions of known ore bodies, that have been or should have been included in “ probable ” or “ prospective ” ore or mineral, or in any other way comprehended in a prior valuation, nor as of a date subsequent to that when, in fact, discovery was evident, when delay by the taxpayer in making claim therefore has resulted or will result in excess allowances for depletion.
(f) In the case of a mine, a “ proven tract or lease ” includes, but is not necessarily limited to, the mineral deposits known to exist in any known mine at the date as of which such mine was valued for purposes of depletion, and all extensions thereof, including “ probable ” and “ prospective ores considered as a factor in the determination of the value or cost.

It is the contention of the petitioner that the common understanding of mining men in the particular locality of the Davis Mine in November and December, 1915, was that some coal might remain in the mine but that the conditions found in it made it doubtful and as to how much and as to the quality; that by exploring the property, necessitating going through tracts adjacent on both sides of it in order to get around and behind rock, faults, etc., he came upon and discovered approximately 80 acres of coal. This discovery of coal occurred in April, 1916; that the value of the 80 acres of coal was $300 per acre, and that in computing the amount of depletion deductible from gross income the respondent has erred in not allowing any “ discovery ” value in respect to this 80-acre tract. He argues that section 214(a) (10) of the Revenue Act of 1918 refers to “ purchase of a proven tract ” and not “ purchase m a proven tract ”; that there is a great difference between the terms and that the use in the statute of the word “ of ” is important in this case.

It will be noted from a reference to the provision of the statute last above referred to that the depletion allowance shall be based upon the fair market value of the property at the date of the discovery or within 30 days thereafter “in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of the purchase of a proven tract or leased (Italics ours.)

An examination of the reports of the hearings held before the Committees of Congress and also an examination of the Congressional Record prior to the approval of the Revenue Act of 1918-, fails to reveal any reference to the specific subject of depletion based upon “ discovery ” value as provided by the last provision of section 214(a) (10) of the Revenue Act of 1918. There were numerous hearings bearing on the general subject of depletion as relates to oil and gas wells and zinc mines, by various interests appearing before the Congressional committees, but none of them bear upon the specific subject of depletion based on a “discovery ” value. (See “Hearings, Briefs and Statements, Revenue Acts of October 3, 1917, and February 24, 1919,” at pages 172, 176, 370, 388, 476, 580, and 584.) A brief reference was made to the subject by Senator Penrose in submitting the minority report in the Senate, as appears on page 549 of the Congressional Record of December 17, 1918. This, although interesting, is not helpful in arriving at a definition of the term “ discovery.”

The first draft of H. R. 12863, the proposed revenue bill of 1918, did not contain a provision for the specific subject of depletion based upon “ discovery value.” The Committee on Finance, by an amendment of section 214(a) (10), inserted the provision for depletion based upon “discovery” value (Congressional Record of December 11, 1918, page 297). This section in the amended form as above stated, was agreed to without debate in the Senate on December 17, 1918, as appears on page 554 of the Congressional Record of that date. It was finally approved in this form with the exception that the period of 12 months was changed to 30 days.

By reference to page 801 of the Congressional Record of December 23, 1918, it will be seen that Senator LaFollette’s proposed amendment to the Revenue Bill of 1918 did not include a provision for depletion based on “ discovery ” value. It did, however, provide for depletion according to the “ peculiar conditions in each case.” This feature of the bill was discussed by the Senate, as appears on page 829 of the Congressional Record of December 27, 1918. Incidentally, before final approval of the Act, comments on the operation of the provision for depletion based upon “ discovery ” value were made by the Honorable Claude Kitchen of North Carolina in his speech in the House on February 8, 1919.

These hearings before the committees and references to the subject in the Congressional Record, hereinbefore referred to, are helpful in arriving at what Congress evidently had in mind by inserting the following clauses into section 214(a) (10) of the taxing act:

According to the peculiar conditions in each case * * *

and—

* * * Such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the OommAssimier with the approval of the Secretary.

The term “ discovery ” is defined in Webster’s Dictionary as a “revelation; a disclosure; a finding out or ascertaining of something previously unknown or unrecognized.” In Mason v. Mining Co. (C. C. A.), 214 Fed. 32, 35, discovery within the meaning of the United States statutes governing the location of mining claims on the public domain is defined as the “ acquirement of knowledge that a vein or lode exists within the limits of the claim.” The statement of the court in Grand Central Mining Co. v. Mining Co. (Utah), 83 Pac. 648, 677, appears to be equally applicable to the discovery provisions of the revenue acts, i. e., “ It is the object and policy of the law to encourage the prospector and miner in their efforts to discover the hidden treasures of the mountains.” In Garibaldi v. Grillo (Cal. App.) 120 Pac. 425, 426, it is stated with reference to the location of mining claims that “ no arbitrary rule as to what will constitute a sufficient discovery can be stated which will govern in all cases * * *. And hence whether a discovery has been made is a question of fact for the jury to determine, under the guidance of the Court. The United States Statute does not prescribe what is necessary to constitute a discovery.” See Brownfield v. Bier (Mont.), 39 Pac. 461, 462; and Iron, etc. Company v. Mike & Starr Co., 143 U. S. 394, 405. A reference to the numerous cases wherein the courts have discussed the nature of a vein or lode for purposes of the discovery provisions of the statutes governing the location of mining claims and the various attempts therein to define such vein or lode will be of some aid in the consideration of the nature of a coal vein for purposes of section 214 (a) (10) of the 1918 Act. In Mining Co. v. Cheeseman, 116 U. S. 529, 536, the court said “ it is enough to say that a lode or vein is a body of mineral or mineral-bearing rock, within defined boundaries in the general mass of the mountain.” The court also quoted with approval (p. 533) from the Eureka case, Fed. Cas. No. 4548, where it is stated that a vein or lode “is applicable to any zone or belt of mineralized rock lying within boundaries clearly separating it from the neighboring rock.” See Fitzgerald v. Clark (Mont.) 42 Pac. 273; 30 L. R. A. 803; 52 Am. St. Rep. 665; Cheeseman v. Shreve, 40 Fed. 787; Hyman v. Wheeler, 29 Fed. 347; and Lindley on Mines (3d ed.) section 336. For a general discussion as to the law governing the acquisition and development of coal lands, see Lindley on Mines, ch. V. See also Reed v. Nelson, 29 Land Dec. 615, 619.

The case of St. Anthony Mining & Mill Co. v. Shaffra (Wis.) 120 N. W. 238, is of particular interest to the question under consideration. There the court had under consideration the meaning of discovery as used in the State statute relating to the discovery of ores or minerals. The court held, as stated in paragraph 5 of the syllabus, that the development and uncovering of a mineral deposit in a known mineral-bearing lot and alongside of the old workings which had existed long prior to the inception of defendants’ license from the land owner did not constitute a discovery within the meaning of the State statute. In the course of the opinion the court used the following language (p. 240) :

In Raisbeck v. Anthony, supra (73 Wise. 572, 586, 41 N. W. 72), it was held that the location of a new deposit of ore further along the vein and in the direction of the extension of an exhausted deposit and between the same rock walls was a continuation and expansion of the same vein, which has pinched out where the former workings were abandoned, and not the discovery of a crevice or range within the meaning of the statute. That was rather a stronger case for the licensee than the ease at bar, and if that case be accepted as law the defendants in this case have not brought themselves within the statute. For, as we view the evidence, the lots in question were known mineral ground and had been worked and mined long prior to the inception of the defendants’ license. The defendants or their predecessors in occupation uncovered and raised some ores of zinc called “ dry bone ” and “ Jack ” which were valuable and marketable, but the evidence leads us to believe as it led the circuit court to believe, that this was rather the development and uncovering of a mineral deposit in a known mineral-bearing lot and alongside of the old lead diggings rather than a discovery of a crevice or range, vein or lode. They do not bring their act of uncovering or disclosing this deposit within the meaning of the word “ discovery ” as used in this statute, nor do they bring that which they uncovered and disclosed within the meaning of the words “ crevice or range.” The evidence rather shows it to be a pocket or deposit some distance from the old workings, but part of the same mineralized band or zone running through these mineral-bearing lots. In one sense of the word it was a discovery that the particular ore was at that identical spot and not elsewhere, but it was not the discovery of a crevice or range. With reference to appellants’ claim that by reason of long-continued possession for mining purposes by them and by those under whom they claim the court should presume that there had been a discovery of a crevice or range, and that they were in possession pursuant to that discovery, not yet having exhausted the crevice or range, we must say that the evidence as we understand it negatives such a claim. The known mineral-bearing character of the land, the old workings theretofore discontinued or abandoned, and the appellants’ description of the land and their operations thereon and the deposit uncovered negatives such presumption, if we were permitted to indulge such presumption in any case.

The petitioner has attempted through the witness, John F. Phillips, to establish that a generally accepted definition of the term “discovery ” among coal men in the vicinity of petitioner’s mine is different from the meaning of that term as understood by the courts in the cases cited above. We are of the opinion, however, that the term as used in the taxing statute m'ust be given the same general connotation as has been given to it by the courts in the above cited cases.

The evidence is so convincing in the case that there was no “ discovery” of a new ore body within the meaning of the statute and the regulations interpreting them, prescribed by the Commissioner with the approval of the Secretary, that we think it is unnecessary to consider the evidence in detail. J. F. Phillips, one of the witnesses for the petitioner, testified as follows:

Q. Would you then tbink that you could testify or swear that the Pitts-burg seam undoubtedly was underlying that mine?
A. Not the whole of it, in fact I know a good bit about the country. I own considerable coal above that and know it was faulty.
Q. You couldn’t say it was there, that the Pittsburg seam was under that property?
A. The surface told you that.
Q. That the Pittsburg seam was under there?
A. That the Pittsburg seam was under that hill because the outcrop was on all sides of that hill and country coal banks.
Q. So you think it would be possible for a man to make a discovery of coal in that property?
A. I know it would, there has been considerable coal discovered where they thought it was rock.
Q. What do you understand to be meant by the term “discovery”?
A. In other words, they didn’t think they had the coal and afterwards discovered they had when they thought they hadn’t, in fact we have the same thing right across the railroad track.

In our opinion a person who purchases a coal mine located, on a proven seam of coal and through mining operations finds that the mine is more valuable than he first supposed does not make a “ discovery ” of coal within the meaning of section 214(a) (10) of the Revenue Act of 1918. Furthermore, there is no basis whatever for a claim for depletion upon a “ discovery ” value for 1917, since the taxing act in effect for that year makes no provision for a deduction for depletion based on a “ discovery ” value.

Judgment will T)e entered for the respondent.

Considered by Littleton and Love.


author: Lansdon:

text:
    J. W. Lam, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1323.
    Promulgated October 14, 1927.
    Petitioner realized no taxable gain from the receipt of certain notes by him as consideration for debts due him by a liquidating corporation in which he was the principal stockholder.

      Chester A. Bennett, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    The Commissioner has asserted a deficiency in income tax for the year 1919 in the amount of $28,266.12. The only question at issue is whether the petitioner realized a taxable gain upon receipt of certain property assigned to him as a liquidating dividend.
    FINDINGS OF' FACT.
    The petitioner is an individual residing at Greenville, Ky., where he has long been engaged in the business of owning and operating coablands and coal mines. Prior to 1911 he had acquired all the coal rights in about 450 acres of coal-bearing lands, together with title to several acres of surface lands for use in mining such coal lands. In the development and operation of this property he opened up two fully equipped mines, erected 74 dwelling houses for occupancy by miners, and constructed one mile of surface railway for the purpose of facilitating the shipment of coal recovered in his mining operations. The value of such coal rights, lands, equipment, trackage, and other mining facilities at June 10, 1911, was not less than $125,000.
    On June 10, 1911, the petitioner sold the mining properties above described to the Hillside Coal Co. and received therefor all the common stock of such company of the par value of $25,000 and its 20-year 6 per cent bonds of the par value of $100,000. The bonds so received were secured by a first mortgage on all the property transferred. The fair market value or price of the securities received by the petitioner in exchange for the property transferred to the Hillside Coal Co., was not less than $125,000 at June 10, 1911, and at March 1, 1913.
    On April 17,1918, the Hillside Coal Co. deeded to the Liberty Coal Co., a small tract of land and a stone house located thereon, and received as consideration therefor, the amount of $3,500. On December 30, 1918, it sold one of its mining plants to the Saulsburg Coal Co., of Central City, Ky., and received therefor, the amount of $5,000 in cash, and a series of 6 promissory notes for $8,333.331/3 each, which by their terms were a lien on the property. On December 30, 1919, it sold the Oakland Coal Co. its remaining mining property, and received therefor, in 2 payments, the amount of $30,000 in cash and a series of 8 purchase-money notes in the amount of $7,500, each, and payable one at the end of each succeeding 12 months until all were discharged, with interest on deferred payments at the rate of 6 per cent per annum.
    Upon the completion of the sales above described, the Hillside Co. proceeded to liquidate. It applied all the cash proceeds received to its open accounts payable and assigned all the purchase money notes of the Oakland Coal Co. and the Saulsburg Coal Co. to the petitioner as consideration for his surrender and cancellation of its bonds and stock, which he had received at date of incorporation, and which he held and owned at date of liquidation. At date of the surrender and cancellation of the bonds no payments had ever been made on the principal amount thereof, and only the amount of $2,500 had been paid on the interest accrued from June 10, 1911, to December 1, 1918, a period of approximately 7 years and 6 months. At such date, the accrued unpaid interest thereon was approximately $39,000.
    The cash received by the Hillside Coal Co. from the Liberty Coal Co., the Saulsburg Coal Co. and the Oakland Coal Co., was not sufficient to pay its outstanding current obligations. Upon liquidation the petitioner received the assets of the Hillside Coal Co. subject to liabilities to creditors in amounts not disclosed by the record. At the date of liquidation such company had no surplus.
   OPINION.

Lansdon:

The only question to be decided here is whether the petitioner realized a taxable profit when he surrendered the stock and bonds of the Hillside Coal Co. at the par value of $125,000 and received therefor all the assets of such .company at the date of its liquidation in the taxable year.

We are convinced that the property paid in by the petitioner for the bonds and stock in question was worth not less than $125,000 and that such bonds and stock had a fair market price or value at date of acquisition and at March 1, 1913, of not less than such amount. The date of final liquidation is not in the record but the parties agree that it was some time in the taxable year. At January 1, 1919, the Hillside Coal Co. had no assets other than the deferred purchase money notes in the amount of $110,000, which it had received in part payment for its property. Upon liquidation such notes were assigned and transferred to the petitioner in consideration of his surrender and cancellation of its stocks and bonds. As the sole stockholder of the Hillside Coal Co. and therefore the sole distributee of its assets in liquidation, the petitioner became liable for all the outstanding obligations of the company which included interest due and unpaid on the bonds in an amount not less than $39,000 and certain other unpaid accounts of such company in amounts not disclosed by the record. The property received at date of liquidation, subject to liabilities in excess of $39,000 was worth less than $125,000. No taxable profit resulted from the petitioner’s receipt of such property received in liquidation of the Hillside Coal Co. in the taxable year.

Judgment will he entered for the fetitioner.

Considered by Stern hagen, Green, and Arundell.