author: Love :

text:
    E. M. F. Leflang, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7309.
    Promulgated February 1, 1927.
    Income taxes assessed against a corporation and paid by a stockholder after he has received his final liquidating dividend, should be charged against such dividend and his return made for the year in which such dividend was received should be adjusted to express the true amount of such dividend.

      Andrew T. Smith, .Esq., Virgil Y. Moore, Esq., and Letois E. Barnes, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    This is a proceeding to redetermine the deficiency asserted by the Commissioner in petitioner’s income tax for the year 1919, such asserted deficiency being in the amount of $5,508.43.
    The petitioner assigned three errors, stated briefly as follows:
    (1) The refusal of the Commissioner to recognize the continuity of organiz?ition, in the reorganization of the old Lexington Mill & Elevator Co. into the new Lexington Mill & Elevator Co.
    (2) The refusal of the Commissioner to allow depreciation on buildings at the rate of 3 per cent.
    (3) The refusal of the Commissioner to adjust the amount of a liquidating dividend received by petitioner in 1919 from the Wyoming Nebraska Telephone Co., by deducting from the amount received and reported in that year an amount paid by petitioner, in 1925, as a stockholder’s part of income tax assessed against the company for 1919.
    At the hearing the petitioner abandoned his first and second assignments of error, leaving only the third for consideration.
    FINDINGS OP PACT.
    The petitioner is an individual residing in Omaha, Nebr. In 1919 he owned 46.6 per cent of the capital stock of the Wyoming Nebraska Telephone Co. In 1919 he received a final liquidating dividend from that company of $49,908.97. In 1925 the petitioner was called upon as a stockholder to pay Federal income tax due by that company for the year 1919, and in July, 1922, did pay in response to that demand, as his part of the tax due, $7,945.23. The Commissioner refused to readjust his 1919 return so as to show the amount of liquidating dividends received as $49,908.97 less the $7,945.23 tax paid in 1925.
   OPINION.

Love :

Assignments of error Nos. 1 and 2 having been abandoned by petitioner, those assignments and the questions raised by them are not here considered. The facts in the instant case place it within the purview of the Board’s decisions in Appeal of O. B. Barker, 3 B. T. A. 1180, and in E. F Cremin v. Commissioner, 5 B. T. A. 1164.

We therefore sustain petitioner’s assignment of error No. 3. In all other respects the determination of the Commissioner is approved.

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


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Gauley Mountain Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13205.
    Promulgated February 1, 1927.
    Petitioner agreed to sell coal to a railway company at 25 cents per ton less than the market price for a period of ten years, in consideration of the railway company constructing a branch line to its mine and purchasing at least 100,000 tons of coal per year for that period. Held, that the petitioner may not include in its invested capital the amount of $250,000, representing the difference between market and selling prices for the ten-year period.

      Francis J. Sweeney, Esq., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax of $55,245.43 for the calendar year 1920. The issues in this proceeding concern invested capital and amortization of railway facilities.
    The invested capital issue is whether the Commissioner erred in refusing to permit the inclusion in invested capital of the value of certain rights acquired by petitioner under a contract between it and the Chesapeake & Ohio Railway Co., which is the same question as was involved in the appeal of this petitioner, Docket No. 1463, decided by the Board February 9, 1926. See Appeal of Grnley Mountain Goal Go., 3 B. T. A. 655.

      The next issue in this proceeding is whether the petitioner is entitled to a deduction for 1920 of $3,571.43 as amortization of railway facilities, and is dependent upon the allowance of the petitioner’s claim under the first issue.
    The' parties stipulated that the facts concerning the questions involved in this proceeding are the same as the facts found by the Board in the Appeal of Gauley Mountain Goal Go., Docket No. 1463, and that such facts may be found by the Board to be the facts in this proceeding. The petitioner admits a deficiency of $42,645.43.
    FINDINGS OF FACT.
    The petitioner is a West Virginia corporation with its principal place of business at Ansted. It was organized about 1889 and is engaged in the operation of a coal mine in Fayette County, West Virginia.
    Prior to the organization of the petitioner, several attempts had been made by its predecessors in interest to operate the mine here involved, but all such efforts had resulted in failure, due to the lack of transportation facilities for the mined coal.
    On October 24,1889, the Chesapeake & Ohio Kailway Co., as party of the first part, and the petitioner, as party of the second part, entered into an agreement, the material parts of which are as follows:
    1. The said party of the second part being the assignee of William N. Page of Payette County, West Virginia, of a lease taken by the said Page from J. M. Payne, Thomas D. Hanson and George Couch, Commissioners, of certain property near Ansted, Payette County, West Virginia, known as the property of the Hawk’s Nest Coal Company, Limited, hereby agrees to supply the said Railway Company with the run of mine coal from the said mines at the rate of sixty cents per ton of 2240 pounds, free on board cars at the mines to the extent of the full capacity of the mines if required by the said Railway Company, except as hereinafter provided.
    2. The said party of the first part agrees to guarantee orders and transportation for not less than one hundred thousand tons of the said coal per annum for the period of ten years, provided the said coal shall be suitable for railroad use, which in case of dispute is to be determined by arbitration as hereinafter provided.
    3. Nothing in the agreement shall be held to restrain the said Coal Company from supplying coal to parties other than the Chesapeake & Ohio Railway Company, so long as the quantity thus supplied shall not interfere with the furnishing of one hundred thousand tons per annum to the said Railway Company as above provided.
    4. The said Railway Company agrees to begin to construct before the first day of December, A. D. 1889, and to complete with all possible diligence, a line of standard gauge railway from the main line of the Chesapeake & Ohio Railway at Hawk’s Nest, West Virginia, to the said mines, and to maintain and operate the said road without any charge or freight rate additional to the regular New River charges on coal and coke, and when the said road is com-pie ted to supply to tlie said Coal Company its due proportion of ears for tlie prompt delivery of its product without delay, except such as may be caused by unavoidable accidents. The said Bailway Company also agrees that the rates on coal to any iron or steel works shall at all times be reasonable and equitable as compared with the rates on coal or coke from other points, and that the said party of the second part shall be entitled to and accorded as favorable rates and facilities as may be enjoyed by or accorded to any agency, individual or corporation engaged in the coal business in the New Biver section of the railroad.
    5. It is further agreed that in case the selling price of the New Biver coals as a section shall fall below and be furnished at less than eighty-five cents per gross ton free on board cars, then the said Coal Company is to reduce the price pro rata to the Bailway Company; but in no event shall any reduction be made which will bring down the net profit on the said coal to less than twenty cents per ton, and if there be any dispute as to what the net profit is, the question shall be submitted to arbitration in the manner hereinafter provided. And in the event that the selling price of coals from the New Biver section should exceed one dollar per .ton, the said Coal Company shall be paid by the said Bailway Company a corresponding pro rata additional allowance upon the rate of sixty cents per ton hereinbefore specified.
    6. The said Bailway Company agrees to pay for the coal sold to or through it by the said Coal Company in cash on or before the twentieth day of the month succeeding the month in which the deliveries are made.
    *******
    8. The said party of the first part guarantees in the event of its failure to take or sell the total product of the mine or mines that the said party of the second part may sell or dispose of the same upon the same footing with any agency established or controlled by the said Bailway Company or any other individual to whom cars or facilities shall be furnished, and shall be allowed the same commission per ton towards the expense of selling as is paid to the New York coal agency of this Company, if it shall then have any and so long as it shall continue, in addition to the selling price upon all sales so effected by the Coal Company independently of the Bailway Company and its agency.
    The price of 60 cents per ton, specified in the above contract, was 25 cents less than the then prevailing market price, and has at all times since been at least 25 cents less than the prevailing market price.
    The Chesapeake & Ohio Railway Co. commenced the construction of the branch line, which was about four miles in length, in 1889, and completed it in 1890, at a cost of approximately $100,000. The full length of this branch line traverses the property of the petitioner. The petitioner has not paid taxes upon this branch line, which has always been, and still is, managed, maintained, and operated by the Railway Company.
    During the ten-year period in which the agreement between the two companies was effective, the petitioner supplied the Railway Company with at least 100,000 tons of coal each year, at 25 cents per ton under the prevailing market price.
   OPINION.

Littleton:

The facts are not in dispute and have been stipulated to be as found by the Board in the Appeal of Gauley Mountain Coal Co., 3 B. T. A. 655. The petitioner claims that the application of law to these facts by the Board in its former opinion was erroneous and “ that for the calendar year 1920 the Commissioner erroneously and illegally decreased petitioner’s invested capital by disallowing the cost of.railway facilities based on its contract with the Chesapeake & Ohio Railway Company amounting to $250,000 or the unamortized portion thereof amounting to $149,999.96.”

We have carefully reconsidered this question in the light of the argument of counsel and brief filed. We are of opinion that the conclusion reached in the Appeal of Gauley Mountain Coal Co., 3 B. T. A. 655, was correct and we therefore approve the action of the Commissioner in excluding the amount claimed from invested capital for the year 1920. In view of this conclusion, the petitioner was not entitled to a deduction for 1920 of $3,511.43 as amortization.

Judgment will he entered for the Gommissioner.

Trammell dissents.


author: Teussell:

text:
    Appeal of The Niles Fire Brick Co. Appeal of Margaretta T. Clingan. Appeal of Mary T. Waddell. Appeal of W. Aubrey Thomas. Appeal of Estate of Thomas E. Thomas.
    Docket Nos. 2028, 4227-4230.
    Promulgated February 2, 1927.
    1. Partnerships. — When the heirs of John R. Thomas, under the terms of his will, acquired the property known as The Niles Fire Brick Oo. and continued the operation of the same as a going business, they thereby became, in the view of the law, a partnership.
    2. Although these same heirs later joined in some of the acts required for the formation of a corporation, the property and the business of the partnership were not conveyed to the corporation, and the evidence does not support the Commissioner’s claim that the income of the business should be taxed as the income of a corporation or association.

      W. W. Spalding, Esq., for the petitioners.

      E. G. Lake, Esq., for the Commissioner.
    These appeals were consolidated at the hearing by agreement of counsel. They involve the following determinations by the Commissioner:

    The sole question involved in these appeals is whether The Niles Fire Brick Co. was, a corporation during the years in question and the distributions made by it were dividends., or whether the business was a partnership and the profits therefrom should be taxed to the individual members as partnership profits.
    EINDINGS OE EACT.
    The Niles Fire Brick Co. was Organized as a partnership in 1872 by John It. Thomas and Lizzie B. Ward, for the purpose of engaging in the manufacture of fire brick. The business is located at Niles, Ohio, where it has operated since the date of organization. In 1819, John ft. Thomas acquired the interests of his partner and, thereafter, until the date of his death, January 25, 1898, owned and conducted the business as an individual enterprise. So much of the will of John It. Thomas as relates to the issues here involved reads as follows:
    Item 6th
    After payment of the charges and legacies as provided in the prior items of my will have been made, I give and devise all the rest and residue of my estate, of every kind and wherever situate, including the one-third devised as aforesaid to my wife, on the termination of her interest in the use thereof by death or marriage to my five children, viz: John M. Thomas, Thomas E. Thomas, William A. Thomas, Mary A. Thomas and Margaretta Thomas Clingan, and their heirs, share and share alike; and in case of the death of either of them, their children to take the parents share.
    In the division of my estate under my will, amongst my said children, I direct that no account or charge be made against either of them for any moneys or property heretofore received from me. It is further my wish and I so direct that so far as practicable, all my property, except that part given to my wife, for her life or so long as she remains my widow, be divided amongst my said children within two years after my decease.
    Item 7th
    I do hereby nominate and appoint my wife Margarett Thomas, and my sons John M. Thomas, Thomas E. Thomas and William A. Thomas, Executors of this my last Will and testament.
    I hereby authorize and empower my said Executors to carry on my business of operating the furnace in the City of Niles, Ohio, known as The Thomas Furnace Company, and my business of manufacturing fire brick known as The Niles Fire Brick Company, for a period of not to exceed two years after my decease, Hereby authorizing my said Executors to employ in said business the capital that I have invested and employed therein at my decease, but no more. It being my desire and I hereby direct that my estate shall be fully settled up within two years after my decease.
    Under this will the five children named therein acquired the business known as The Niles Fire Brick Co. and the assets thereof in equal shares. In December, 1900, they filed with the Secretary of State of Ohio the following articles of' incorporation:
    These Articles of Incorporation of The Niles Eire Brick Company
    Witnesseth, That we, the undersigned, a majority of whom are citizens of the State of Ohio, desiring to form a corporation, for pro’flt, under the general corporation laws of said State, do hereby certify:
    First. The name of said corporation shall be The Niles Eire Brick Company.
    Second. Said corporation is to be located at Niles in Trumbull County, Ohio, and its principal business there transacted.
    Third. Said corporation is formed for the purpose of mining, quarrying, manufacturing, buying, and selling fire clay, coal and stone and products of clay, coal and stone contracting to build and repair furnaces of various kinds and all things incident to either or all of the foregoing objects and purposes.
    Fourth. The capital stock of said corporation shall be sixty thousand dollars, ($60,000.00), divided into six hundred (600) shares of one hundred dollars, ($100.00) each.
    In Witness Whereof, We have hereunto set our hands, this twenty-eighth day of December, A. D. 1900.
    John M. Thomas
    Thomas E. Thomas
    W. Aubrey Thomas
    Margaretta T. Clingan
    Mary A. Thomas
    No further steps were taken to complete a corporate organization. No stock was issued and there is no record that any payments were made for stock. Nor is there any record of transfer or attempted transfer of property for stock. No directors or officers were elected and no by-laws were adopted until 1918. There were no meetings or pretended meetings of stockholders until March 80, 1918, when a formal meeting of the heirs of John R. Thomas was held and by-laws were adopted. The minutes of this meeting were designated as minutes of the meeting of the stockholders and minutes of the meeting of the directors of The Niles Fire Brick Co.
    Upon the death of John R. Thomas, management of the business passed to Thomas E. Thomas. From that time until his death in 1920 he had absolute control over the business and conducted it as he saw fit. John M. Thomas, who had been known as treasurer of the company during the period of his father’s proprietorship, went into business in Duluth, Minn., in 1899, and later in Milwaukee, Wis., while W. Aubrey Thomas was first in business in Milwaukee and later at Jenifer, Ala. Neither of these men took an active part in the management of The Niles Fire Brick Co. during the lifetime of Thomas E. Thomas. The remaining heirs of John K. Thomas were daughters and have never at any time participated in the conduct of the business.
    From 1898, Thomas E. Thomas assumed the title of general manager and was designated on some of the company stationery as president. David S. Parry, who was first employed in 1917, was known as secretary and treasurer and became manager upon the death of Thomas E. Thomas in 1920. These were the only official titles used in connection with the business. The company ledger for 1894 to 1906 was labelled “Ledger — Niles Fire Brick Company,” while the ledger for the years 1906 to 1913 was designated “Ledger A — The Niles Fire Brick Company.” The word “ Incorporated ” was never at any time used in connection with the name of the company. Letterheads have practically all been in the following form “The Niles Fire Brick Company.” In some instances the words “ Established 1872 ” have been added.
    When money was borrowed for use in the business, notes were signed by Thomas E. Thomas, as general manager, and then endorsed by him personally. At times notes were also endorsed by John M. Thomas.
    Capital stock and surplus accounts were opened on the books in 1894. On April 20,1899, a notation explanatory of the capital stock account was made on the books to the effect that it had been contemplated that the company should be incorporated “ which was not done as contemplated.” At the time the capital stock account was opened, $60,000 was credited to that account. In 1899 this account was reduced in the amount of $23,202.46, and in December, 1906, it was restored in that amount and has'since remained -at $60,000.
    Since the death of John K. Thomas, it has been customary for his heirs to withdraw money from the business whenever they desired. No specific authorization was deemed necessary and when the drafts or checks were presented for payment they were always honored and the individual account of the person ‘ making the withdrawal was charged with the amount. There was never any regularity or uniformity in connection with such withdrawals.
    The company books for 1909 show an entry of $2,000 on account of salary. The explanation is “ Directors salary for 1909.” Similar entries appear on the books for the years 1910, 1911, and 1912.
    For the years involved in these appeals, corporation forms were used in making income-tax returns for The Niles Fire Brick Co. A power of attorney filed with the Bureau of Internal Revenue authorizing an accounting firm to represent the company in tax matters was executed in the manner of a corporation, thereby conforming to the form of the return previously filed. On the estate-tax return of Thomas E. Thomas appears an item of 120 shares of stock in The Niles Fire Brick Co. valued at $72,000. The basis of this valuation was the net worth of the business.
    Prior to January 1, 1918, there had been no distribution of the profits of the business among the owners and, with the exception of the withdrawals referred to above, they had received nothing from the company. The accumulated earnings were used in purchasing certain stock in the Trumbull Steel Co., the Youngstown Sheet & Tube Co., the Niles Trust Co., the Brier Hill Steel Co. and the Mahoning Valley Steel Co. These purchases were made prior to January 1, 1918, and the stocks so purchased were distributed in 1918 equally among the owners of the business in the amount of $77,600 each.
   OPINION.

Teussell:

In the case of McFarlane v. McFarlane (1894), 31 N. Y. S. 272, the court said:

Tile mere fact of the bequest to them, by will, of the net estate in question, and of the business, did not constitute them partners, but merely made them joint owners; but their election to continue the business, each contributing thereto his share of the property so bequeathed to him-, rendered the relation between them that of copartners, and the property copartnership property.

This rule of law has been long established and is supported by many decided cases. It must therefore be taken as established that when the heirs of John R. Thomas acquired, under his will, the properties and the going business known as The Niles Fire Brick Co. and continued -to operate the same they thereby became a partnership and continued in the relation of partners until such time as they, by definite and specific acts, changed their relation of partners to some other legal relationship. Has such a change been made, and, if so, when ? It has been shown that in December, 1900, nearly three years after the partnership relation became established, these same heirs of John R. Thomas joined in the execution of articles of incorporation and filed the same with the proper officers of the State of Ohio. The statutes of the State of Ohio, as then existing, required that persons forming a corporation must do certain acts and things, among which are subscriptions for capital stock; the payment of not less than 10 per cent of such subscriptions; the holding of corporate meetings; and the election of directors and officers. None of these things were done by the parties connected with the business here under consideration. In State ex rel. Attorney General v. Fidelity & Casualty Ins. Co. of New York, (1892), 49 Ohio St. 440; 31 N. E. 658, the court held that the making and filing of articles of incorporation in the office of the Secretary of State did not make an incorporated company, and that no company existed within the meaning of the statute until the requisite stock had been subscribed and paid in and the directors chosen.

In the case of American Ball Bearing Co. v. Adams (1915), 222 Fed. 961, the court said:

* * * The Ohio law differs from the law of many states, in that the mere filing of articles of incorporation in due form does not create or bring into existence a corporation, notwithstanding the provision of G. C. § 8029, that a certified copy of articles of incorporation shall be prima facie evidence of the existence of the corporation therein named. * * *

And in the same case the court, referring to these specific requirements of the Ohio statutes, continued:

That these are not merely directory provisions of law, but are mandatory, and must be complied with before a corporation can come into existence under Ohio law, is sufficiently established by Telephone Company v. Cincinnati, 73 Ohio State 64, 76 N. E. 392 [1905] * * *.

It thus seems that The Niles Fire Brick Co., by virtue of the action of its owners in December, 1900, did not thereby become a corporation.

The only other act of the owners of The Niles Fire Brick Co. in respect to the formation of a corporation was taken some time in the year 1918 when such owners apparently held a meeting and went through the form of adopting corporate by-laws. This action in connection with the previous action in December, 1900, was equally ineffective of establishing a corporation within the view of the Ohio statutes. After carefully considering all the facts shown in the record of this case and the provisions of the statutes of the State of Ohio governing the organization of corporations and the interpretation placed upon such statutes by the courts, we are forced to the conclusion that the owners of The Niles Fire Brick Co. never perfected an organization as a corporation.

Furthermore, if it could be held that the form of articles of incorporation executed by the five heirs of John R. Thomas and filed with the Secretary of State of Ohio in December, 1900, together with the other things done in respect thereto, did actually create and bring into being a corporation, can it be found that such corporation was, during the years 1918, 1919, and 1920, a living entity engaged in carrying on any business and producing income and profits subject to tax under the then existing income-tax legislation? The record of this proceeding shows clearly that the answer to that question is in the negative. No going business and no property of any nature whatsoever was ever transferred or conveyed to such a corporation. No shares of such a corporation were ever issued, and no person ever became a tona fide stockholder of such a corporation. No one was ever elected a director and no one was ever elected an officer of such a corporation. If then in fact such a corporation was created and existing, it was a mere empty shell, with no capital, with no stockholders, with no directors, and with no officers. It did no business of any nature or kind whatever and produced no income subject to any income-tax law.

The record is equally silent respecting any act or thing done by the owners of The Niles Fire Brick Co. which could be construed to bring them within the category of an association within the meaning of paragraph 2 of section 1 of the Eevenue Act of 1918.

We are thus brought irresistibly to the conclusion that the partnership, made up of the heirs of John E. Thomas, when they acquired the business known as The Niles Fire Brick Co. in 1898, has never changed its character; has never become a corporation; has never been merged into a corporation or an association; that the partnership relation between the owners of this business has never changed; that the duties, responsibilities, and liabilities of partners still rest upon each member of that partnership; and that both the partnership organization and the partners individually wore, during the years here under consideration, required to comply with those provisions of the Eevenue Act of 1918 imposing duties and responsibilities upon partnerships or the members of partnerships, and that they are equally entitled to the benefits, if any such exist, under such Act in respect to partnerships and members thereof, and that during said years the gains and profits and income produced by the business of The Niles Fire Brick Co. must be taxed as the income of the members of such partnership.

Our attention has been called to the case of the McDonald Coal Co. v. Heiner, 9 Fed. (2d) 992, in which case the decision of the District Court has been affirmed by the United States Circuit Court of Appeals for the Third Circuit. 16 Fed. (2d) 274. The McDonald Coal Co. was in court suing to recover income and profits taxes paid by it under the corporate tax provisions of the Eevenue Acts of 1917 and 1918, claiming that during the years in question the McDonald Coal Co. was a partnership and not a corporation. The trial court found that in 1906 three persons formed a partnership and procured leases on certain coal lands; that they operated these leases as a partnership until 1909, when the same three persons became the incorporators of a corporation known as the McDonald Coal Co., and that from 1909 until the time when the case was on trial the corporation had operated the same coal land leases procured by the former partnership; that said leases had never been assigned to the corporation for the reason that the lessor refused to consent to the assignment, although the lessees had persistently tried to procure such consent. The court further found that at the organization of the McDonald Coal Co. the incorporators paid in to the company an operating plant said to have cost $50,000, and received in exchange therefor capital stock of the corporation of a par value of $6,000. During the years in question the McDonald Coal Co. reported the income from the operations of the coal land leases as its income; paid corporate taxes thereon; made various representations concerning the corporate records, and at one time secured an abatement of taxes based upon a showing of certain corporate actions in respect to officers’ salaries. The corporation had continually held itself out to the world as a corporation carrying on the business of operating these coal leases, and it had permitted itself to be sued as a corporation in a damage suit in the state courts of Pennsylvania and raised no question as to its corporate existence or liability.

The record of the instant case is very different from that disclosed by the reported decision in the case of the McDonald Coal Co. In the case of The Niles Fire Brick Co. it is established that no corporate stock was ever issued; nothing was ever paid in for any such stock; it never held itself out to the world as a corporation; and, so far as the record discloses, the only thing which it ever did in the guise of a corporation was the making of its income and profits-tax returns upon corporate forms.

We are, therefore, of the opinion that for the year 1919 there is no deficiency in income taxes against The Niles Fire Brick Co. as an organization, and that the deficiencies and overassessments recited in the deficiency letters as against the other four petitioners herein must be recomputed in accordance with the foregoing opinion.

An order of redetermination in each case will be made upon 15 days’ notice, pursuant to Bule 50, and judgment will be entered in due eou/rse.


author: Phillips:

text:
    Charles Ward Hall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11650.
    Promulgated February 2, 1927.

      James H. Hoffnagle, Esq., for the petitioner.

      A. H. Murray, Esq., for the respondent.
   Phillips:

Petitioner appeals from the determination by the respondent of a deficiency of $2,516.31 in income tax for 1920, arising from the computation of a gain from the sale of certain real estate.

FINDINGS OF FACT.

In 1920 the petitioner sold 8 twenty-foot lots on Eastern Parkway, Brooklyn, N. Y., for $38,025. On March 1, 1913, the fair market value of such lots was $35,000. Said lots were acquired by the petitioner in 1903 and their cost was less than the March 1, 1913, value. Subsequent .to March 1, 1913, petitioner paid $52.00 for assessments upon such Jots for local improvements.

In 1920 petitioner sold for $9,050 a fifty-foot plot on the corner of President Street and Kingston Avenue, Brooklyn, N. Y., which property had a fair market value on March 1, 1913, of $12,500. Subsequent to March 1, 1913, the petitioner paid assessments upon such property of $752.08 for local improvements. Such j>roperty was acquired by the taxpayer in 1903 and the cost was less than the selling price.

In 1920 the petitioner sold a fifty-foot plot of land on President Street, Brooklyn, N. Y., for $10,745, which plot had a fair market value on March 1, 1913, of $9,000. Subsequent to March 1, 1913, the petitioner paid $565.45 for assessments upon said plot for local improvements. The property was acquired by the petitioner in 1903 at a cost less than the value on March 1, 1913.

Upon such sales, the petitioner realized taxable gains of $4,151.89.

Decision will be entered, on %0 days' notice, under Rule 50.


author: GREEN:

text:
    Appeal of William T. Reynolds Co., Inc.
    Docket No. 3547.
    Promulgated February 2, 1927.
    3. The Board will not review the action of tho Commissioner in excluding assets from invested capital for a taxable period in the absence of a determination by Mm of a deficiency for tliat period.
    2. Where notes and accounts receivable conrpj’ising a part of partnership assets transferred to a corporation for stock are regarded by the incorporators as not being worth their face value, a reserve for anticipated losses thereon, set up at the time of the transfer to reflect their actual value on the books of the corporation, may not bo included in surplus in computing invested capital.

      8. In the absence of evidence as to the value or useful life of depreciable assets, the Commissioner's computation of an allowance for depreciation will not be disturbed.

      H. A. Mihills, O. P. A., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    The petitioner herein seeks a redetermination of its income and profits taxes for the six months ending December 31, 1917, and for tbe calendar years 1918, 1919, and 1920. For the period ending December 31, 1917, the Commissioner determined an overassessment of $200.89; for the year 1918 a deficiency of $5,681.52; for the year 1919 a deficiency of $4,583.07; and for the year 1920 a deficiency of $544.21. There is involved in this proceeding only such parts of the deficiencies as result from certain alleged errors on the part of the Commissioner. The petitioner estimates the amounts involved to be $4,000. The errors alleged are as follows:
    (1) The Commissioner has excluded from petitioner’s invested capital for the six months ended December 31, 1917, the sum of $15,000, alleged to represent a note received in payment of subscription to capital stock.
    (2) The Commissioner has excluded as part of petitioner’s invested capital of each period a reserve for doubtful notes receivable in the amount of $7,000 and a reserve for doubtful accounts receivable in the amount of $22,328.36.
    (3) The Commissioner has used an erroneous basis for the computation of depreciation of certain permanent assets.
    FINDINGS OF FACT.
    The petitioner herein is a New York corporation engaged in the wholesale grocery business. It was organized on July 1, 1917, to take over the business theretofore owned and operated by a partnership.
    The record does not disclose the exact method of effecting the exchange of stock for property and it can not be determined therefrom whether the shares of stock were exchanged for the assets of the partnership or whether they Were exchanged for the interest of the partners in the partnership. It appears that stock of the par value of $400,000 was issued. Of this amount 115 shares were issued against the stock subscription of Paul I. Reynolds and the remainder found its way into the hands of the other incorporators, and in return the corporation ultimately found itself possessed of the assets previously owned by the partnership. The corporation took over and continued the partnership books of account. In these books it appeared that the corporation had assets of the value of $523,999.85, of which amount $400,000 was allocated to capital stock and the remainder to surplus. In his computation of invested capital, the Commissioner reduced this surplus by the amount of $65,000, by reason of his determination that certain property entered upon the books of the corporation as having a value of $150,000 had in fact a value of $85,000, such last-named value being the amount at which such property was appraised in the inheritance tax proceeding had in the City of New York. The petitioner takes no exception to this reduction of valuation.
    When the petitioner took over the assets of the partnership it acquired, among other things, certain notes and accounts receivable in an amount not disclosed by the record. Because it was believed that these accounts and notes receivable were not worth their face value, there was set up against them a reserve for anticipated losses thereon totaling $29,328.36. Subsequently it was ascertained that such reserve was excessive and that it had been necessary to charge against it only from $1,200 to $1,500, and the amount of the reserve, less the amounts charged against it, was in 1919 restored to surplus.
    At the time of the transfer of the assets, the corporation took over machinery and equipment which had been acquired by the partnership at a cost of $87,190.54. On the books of the partnership the value of these assets had been reduced by the amount of depreciation charged against them, so that at the date of their transfer their book value was $23,294.65. The Commissioner computed the corporation depreciation allowance upon the book value of the assets at the time they were taken over, using the rates of depreciation theretofore allowed to the partnership.
    The Commissioner, in his computation of invested capital for the period ending December 31, 1917, excluded the note of Paul I. Reynolds given in payment of his obligation evidenced by the stock subscription agreement. For the remaining years there was no reduction of invested capital by reason of the exclusion of said note.
   OBINION.

GREEN:

Inasmuch as the Commissioner has not determined a deficiency for the period ending December 31, 1917, it is not necessary for us to determine whether the note of Paul I. Reynolds was properly excluded in the computation of invested capital for that year.

It appears that the notes and accounts receivable taken over by the corporation were not, in the opinion of the incorporators, worth their face value and that the reserve was set up to make the books of account reflect accurately the actual value of the notes and accounts receivable. This being true, the Commissioner’s action in excluding from invested capital the amount of the reserve was correct.

The petitioner offered no evidence as to the value of the depre-ciable assets or as to their remaining life, and while it may be that the Commissioner’s computation of depreciation is erroneous, the petitioner has not provided us with the data upon which we may correctly compute the depreciation allowance, and we must, therefore, affirm the Commissioner upon this point.

The deficiencies heretofore determined by the Commissioner are redetermined to be the correct deficiencies and judgment will enter accordingly.


author: Phillips;

text:
    Appeal of Clarence Strecker, Executor of Estate of Edward Strecker.
    Docket No. 5382.
    Promulgated February 2, 1927.
    By bis will decedent devised bis real estate to bis executor in trust for tbe use of bis widow during her life, and directed the executor, upon her death, to sell such real estate and divide the proceeds among bis children. Held, that while the interest of the children vested at the death of decedent, their sole interest, in the absence of any election to take the real estate, was in the proceeds of sale and was personal property, and that the gain from the sale was taxable to the executor as income to the corpus of the estate.

      Samuel Freedman, C. P. A., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax in the amount of $2,446.21 for the calendar year 1920. The question involved is whether the executor is subject to tax on the profit realized from the sale of real estate in 1920.
    FINDINGS OF FACT.
    The appellant is a resident of Greenfield, Mass., and is the duly appointed executor of the estate of Edward Strecker, who died testate on December 2, 1913.
    By his will the decedent devised certain real estate to the executor in trust for the use of his widow during her life, and directed the executor, upon the death of the widow, to convert the property into cash and distribute the proceeds equally among the decedent’s nine children, or their representatives.
    The widow died December 8, 1916. The real estate was sold by the executor in 1920.
    In computing the deficiency the Commissioner has included the profit from the sale as income of the estate.
   OPINION.

Phillips;

It is the contention of the petitioner that no part of the profit resulting from the sale of the real estate in question is taxable to the estate of the decedent. The only authority cited by counsel for the petitioner is the opinion of the Solicitor of Internal Revenue, No. 35, published in Cumulative Bulletin No. 3, p. 50. It appears that the facts before the Solicitor were substantially the same as those involved in the present proceeding. The principal question under discussion in the opinion was the basis for measuring the gain or loss. It appears, however, that the Solicitor also had under consideration the question whether any taxable gain resulted to the beneficiaries of. the will for, after quoting the provisions of law governing the measurement of gain or loss, the opinion reads:

In applying the statutory rule in this case it is necessary to determine the character of the respective interests involved and when they were acquired. The problem is somewhat confused by the fact that the testator directed the sale of the land and the distribution of the proceeds among his children after the death of the life tenant instead of devising to them the laud itself, subject to the life estate, without any direction for its sale. While, under the doctrine of equitable conversion, the interest of the children is regarded as personalty instead of realty, yet the estate which they acquired was a remainder and vested at the death of the testator. Cropley v. Cooper, 19 Wall. 167; Kelly v. Gonce, 49 Ill. Ap. 82; DeVaughn v. McLeary, 10 S. E. 211. Also, their interest was such that if they had so elected prior to its sale they could have taken the actual land itself after the death of the life tenant instead of the proceeds from its sale. Jarman on Wills, p. 562 and cases there cited. It is believed, "therefore, that the question is the same for the purposes of our present inquiry as if the land itself had been devised to the widow for life with remainder in fee to the children and without any direction for its sale.

There is nothing in the opinion from which we may learn under the laws of which State the case before the Solicitor arose, nor has counsel for the petitioner cited any authorities which might help us in determining what is the legal effect in Massachusetts of the provisions of the will of this decedent. The investigation which we have been able to make of the Massachusetts decisions leads us to believe that the position taken by the Commissioner in the instant appeal in assessing gain to the executor of the estate is correct.

Under the Revenune Act of 1918 estates and trusts are taxable as separate entities under certain circumstances. Section 219 of that Act provides that the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary in the following instances: (1) Income received by estates of deceased persons during the period of the administration or settlement of the estate; (2) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests; and (3) income held for future distribution under the terms of the will or trust. In the case of income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, the income is to be returned and the tax paid by the beneficiary. There are certain refinements of these provisions with which we are not here concerned.

It appears to be the theory of the Solicitor’s opinion, cited above, that the property which was sold belonged to the children of the testator and that the sale was in effect a sale by them and not a sale by the fiduciary of the estate. With this theory, certainly as applied under the decisions of Massachusetts which we have examined, we can not agree. While the children might by joint action have elected to receive the real estate in lieu of the proceeds thereof, until such an election was made the property remained a part of the decedent’s estate, and so far as the estate was concerned was personalty for all purposes. Prior to any such election a sale by any of the children of his interest in the estate would not have made the purchaser a tenant in common of the land or given such purchaser any right to convey an interest in the land, but would have given only an interest in the proceeds of the sale. In the event of the death of any of the children his rights under the will would have passed to his next of kin as personalty and not to his heirs-at-law as realty. Lawrence v. Crane, 158 Mass. 392; 33 N. E. 605; Kendall v. Gleason, 152 Mass. 457; 25 N. E. 838.

No election to take the real estate having ever been made by the children, and the property having been sold by the executor pursuant to the terms of the will, it appears that any gain or loss is to be accounted as a gain or loss to the corpus of the estate and taxed to the executor as income received during the period of settlement of the estate.

Decision will he entered for the Commissioner.


author: Marquette :

text:
    Appeal of Julius Forstmann.
    Docket No. 2521.
    Promulgated February 2, 1927.
    Deduction of amounts as ordinary and necessary business expenses allowed.

      Thomas G. Haight, Esq., and W. A. Bolinger, Esq., for the petitioner.

      Bruce A. Low, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1917 to 1921, inclusive, in the amount of $104,283.79.

      FINDINGS OF FACT.
    The petitioner is an individual residing at Passaic, N. J. He filed an original, an amended, and a second amended income and profits-tax return for the year 1917 and deducted from gross income therein the amount of $18,000, on account of ordinary and necessary business expenses claimed to have been incurred and paid in that year, under the circumstances hereinafter set forth. The Commissioner disallowed the deduction and on March 30, 1923, advised the petitioner by letter that there was a deficiency in tax for the year 1917 in the amount of $16,842.44, and that immediate assessment thereof would be made in order that the collection of such additional tax might not be jeopardized by the delay incident to giving the usual thirty days’ notice provided for by section 250(d) of the Eevenue Act of 1921. The additional tax was assessed in March, 1923. On April 27, 1923, the petitioner filed a claim for the abatement of the additional tax and alleged in support of his claim that he was entitled to the deduction of $18,000 for ordinary and necessary business expenses taken in his returns for the year 1917. On August 2, 1924, he was advised by the Commissioner of the proposed rejection of his claim for abatement and of the allowance of thirty days within which to file a protest against the proposed rejection. On August 25, 1924, the petitioner filed a protest against the proposed rejection of his claim for abatement and on January 15, 1925, was advised that his claim for abatement had been allowed in the amount of $1,033.12, and disallowed for the remainder thereof.
    The petitioner has for many years been connected with the Forst-mann-Huffman Co., a New Jersey corporation engaged in the manufacture of fine woolen textiles, at Passaic, N. J. During the years 1917 to 1921, inclusive, he was president of the corporation. In the year 1908 the petitioner, who was then a minority stockholder of the company, pointed out to the board of directors that he was continually incurring expenses in the interests of the company by entertaining in his home and elsewhere prospective buyers and others with whom the company was dealing and in traveling for the purpose of buying and selling merchandise and in keeping in touch with the fashions in the United States and foreign countries, and that it was extremely difficult for him to keep an accurate and detailed account of his expenditures for those purposes. The board of directors thereupon agreed to and did allow him the amount of $10,000 per annum for entertainment and traveling expenses. In the year 1910 the allowance was increased to $15,000 per annum. In the year 1913 the allowance for traveling and entertainment was found to be inadequate and was increased to $18,000 per annum, and it remained at that amount during the years 1913 to 1921, inclusive. The amounts set aside to be expended by the petitioner in traveling and entertainment for the benefit of the corporation during the years 1917 to 1921, inclusive, were drawn by him and were expended by him for those purposes in those years. In addition, he paid, during the year 1918, the amount of $14,500 to one Charles F. H. Johnson, as the corporation’s share of the compensation and expense of Johnson as representative of the Passaic, N. J., industries in Washington during the year 1918. For this expenditure he was reimbursed by the corporation.
    In his income and profits-tax returns for the years 1917 to 1921, inclusive, the petitioner included in his gross income the amounts allowed him for traveling and entertainment, as herein set forth, and also the amount of $14,500, received from the corporation to reimburse him for the amount, paid to Johnson, and deducted the amount of $18,000 in each year as expenses actually incurred for traveling and entertainment, etc., and also the amount of $14,500 paid to Charles F. H. Johnson. The Commissioner disallowed the deductions.
   OPINION.

Marquette :

The Commissioner filed a plea in bar to the right of the petitioner to maintain his appeal as to the year 1917, on the ground that “ there has not, since the enactment of the Eevenue Act of 1924, been a determination by the Commissioner that a deficiency in tax is due from the taxpayer for the year 1917.”

The tax herein was assessed prior to the enactment of the Eevenue Act of 1924 and the amount of the deficiency was finally determined by the Commissioner after the enactment of that Act. An appeal from the final determination of the deficiency was taken to this Board and the appeal was pending before the Board at the time of the enactment of the Eevenue Act of 1926. That we have jurisdiction of the appeal is settled by section 283 (f) of the Eevenue Act of 1926, which provides:

If any deficiency in any income, war-profits, or excess-profits tax imposed by the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or the Revenue Act of 1921, or by any such Act as amended, was assessed before June 3, 1924, but was not paid in full before that date, and if the Commissioner after June 2, 1924, but before the enactment of this Act finally determined the amount of the deficiency, and if the person liable for such tax appealed before the enactment of this Act to the Board and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal. * * *

See also Appeals of Elizabeth W. Stranahan, 4 B. T. A. 1141; Nice Ball Bearing Co., 5 B. T. A. 484; and William A. Slater Mills, Inc., 5 B. T. A. 971.

The only other issue raised herein is whether or not the petitioner, in computing his net income for the years 1917 to 1921, inclusive, is entitled to deduct in each year the amount of $18,000 drawn by him from the Forstmann-Hufi'man Co. to cover traveling and entertainment expenses incurred by him in behalf of and for the benefit of the company, and to deduct the amount of $14,500 paid by him in the year 1918 to Charles F. H. Johnson. The Commissioner does not contend that the expenses incurred by the petitioner in traveling and entertainment on behalf of the company are not deductible but urges that the petitioner has failed to show that the amounts drawn from the company for that purpose were in fact spent by him.

We have carefully considered the testimony adduced as to this issue which is at length and can not be set forth in detail here, and we are of the opinion that in each of the years 1917 to 1921, inclusive, the petitioner expended on behalf of and for the benefit of the Forstmann-Huilman Co. at least $18,000.for traveling, entertainment and other legitimate business purposes, and that, inasmuch as he has included in his income for those years the entire $18,000 drawn by him from the company for these purposes, he is entitled to deduct the amount thereof actually expended.

With regard to the amount of $14,500 paid by the corporation to the petitioner to reimburse him for the amount paid by him to Johnson as the corporation’s share of maintaining Johnson at Washington as a representative of the Passaic industries, a different situation exists. That was clearly a direct corporation expense and had no connection with the services which the petitioner rendered to the corporation and for which he received compensation. In our opinion, the amount so received by the petitioner from the corporation should not be included in his gross income; neither should he be permitted to deduct the amount paid to Johnson.

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


author: Giucen :

text:
    Appeal of Standard Refractories Co.
    Docket Nos. 3617, 3618.
    Promulgated February 3, 1927.
    1. Under section 234 (a) (8) of the Revenue Act of 1918, a taxpayer is entitled to a deduction for amortization on facilities acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war, notwithstanding some or all of such facilities may have been contracted for prior to that date or may have been acquired pursuant to a plan of expansion determined upon and entered into prior to that date. Appeal of Manville Jenclces Co., 4 B. T. A. 765.

      2. In determining the deduction to which the taxpayer is entitled on amortizable facilities which were continued in use in its postwar business, the evidence of the extent to which such facilities were used by another corporation after it acquired the taxpayer’s capital stock and assets is of little value.
    3. The value in use in a taxpayer’s normal postwar business of amortizable facilities may not be measured or determined solely on the basis of the physical use of such facilities by it during the postwar period.
    4. Supplies were purchased and their cost was charged to expense in prior years; the taxpayer, at the beginning of the taxable year, included in inventory the cost of supplies then on hand to' conform to a new accounting practice under which supplies were to be included in inventory when purchased and written off to expense only as and when they were used. Held, that the cost of supplies included in inventory account did not constitute income for the taxable year.

      G. J. McGuire, Esq., and James 0. Wynn, Jr., Esq., for the petitioner.

      A. R. Marrs, Esq., for the Commissioner.
    In this appeal the petitioner seeks a redetermination of its income and profits taxes for the years 1918 and 1919, for which the Commissioner has determined deficiencies in the amounts of $104,516.78 and $539.44, respectively. Separate appeals were filed for each of the years, but at the hearing they were consolidated by agreement of counsel. Two errors are alleged in the petition: first, the disal-lowance by the Commissioner of a deduction, in the sum of $128,-566.22, claimed by the petitioner in its return for the year 1918 as amortization of war facilities; and, second, the action of the Commissioner in refusing to reduce net income by an amount equal to a portion of a credit to surplus which appeared upon the petitioner’s books for that year and which aro'se out of an adjustment in the. inventory accounts.
    FINDINGS OF FACT.
    The Standard Refractories Co., the petitioner herein, is a Pennsylvania corporation with its principal office at Philadelphia. It was organized in 1913, and immediately thereafter engaged in the manufacture of silica fire brick and continued to be so engaged through the taxable years in question and down to and including a portion of the year 1922.
    Silica bricks are composed of ganister rock or quartzite to which in the process of manufacture there has been added about 2 per cent of lime. One of the principal characteristics of this kind of brick is the ability to resist high temperatures, and it is because of this that they are used extensively in the building of open-hearth furnaces used in the molding and refining of steel and in the construction of furnaces used in the molding and refining of copper. In these refining processes temperatures of 3,000° Fahrenheit are not unusual, and this intense heat, coupled with the destructive action of slag, tends to melt, break down, and destroy these silica brick so used as lining for furnaces, and it is necessary from time to time to repair the linings or reconstruct them completely. Silica brick is the only material which can be economically and efficiently used for lining such furnaces and is almost indispensable in the refining of steel and copper, which two processes absorb approximately 85 per cent of the total production.
    When the petitioner commenced operations in 1913, its plant, situated at Claysburg, Pa., was composed of four kilns with the necessary supplementary equipment. From its inception the company had a definite policy of expansion which contemplated an ultimate maximum production of 50,000 bricks per day. As the business grew and developed it became apparent that the contemplated enlargement of the plant, pursuant to this policy, would be, in the years to come, wholly inadequate to meet the demands, and prior to April 6, 1917, its policy of expansion had been revised so that it contemplated a plant with a maximum production of 100,000 bricks per day. Subsequent to April 6, 1917, and as the result of the growth of its business during the war period, which for the purposes of this case may be said to have terminated on December 31, 1918, there was a further modification of the plans for plant expansion with a view to reaching ultimately a maximum production of 140,000 per day.
    The petitioner’s business grew steadily and, pursuant to the plan of expansion, additional kilns were constructed from time to time so that by April 6, 1917, it had' 14 completed kilns and 4 additional kilns under construction. After April 6,1917, and prior to December 31, 1918, the 4 kilns under construction were completed and 2 additional kilns were constructed. During the same period work was done on the other kilns; certain construction work was done on office buildings; extensions were made to stock sheds; the drying tunnels were extended; additional machinery was installed in the plant; additions were made to quarry equipment, including tracks, cars, etc.; and a number of dwellings were erected for the use of laborers employed at the plant. Some of these additional facilities so constructed, erected, installed, or acquired, during the war period, were supplemental to and necessary for the efficient operation of the facilities constructed, erected, installed, or acquired prior to April 6, 1917. The operation of the petitioner’s plant as it stood on April 6, 1917, required the employment of more laborers than could be accommodated by the housing facilities then available in the vicinity of the plant.
    Immediately after this country became an active participant in the World War, the demand for silica brick increased with great rapidity and soon surpassed any demand which the industry had ever experienced. The abnormal demands for steel and steel products necessitated the continuance of operation of smelting and refining furnaces without the usual and customary intermissions for repairs and replacements. Because of this condition the silica brick linings of the furnaces were destroyed within comparatively brief intervals, with the result that replacements were required much more frequently than they would have been under normal operating conditions. Bepresentatives of the Government from various departments and bureaus which were interested in the production of war materials frequently visited the petitioner’s plant in an effort to induce its officers to increase the production to the maximum capacity of the plant. During the war period approximately 85 per cent of the petitioner’s production was consumed by producers of steel, steel products, and other similar war materials, and an additional 10 per cent thereof was consumed by producers of copper and copper products. Shipments of silica bricks were made under Class A-l priority certificates issued by the War Industries Board, and the petitioner, having been classified as an essential war industry, received shipments of fuel under that class of priority certificates.
    At the time of the signing of the Armistice the petitioner had on hand orders and contracts for a large number of silica brick. Almost immediately after that date the purchasers began to send in suspension orders and cancellations. Later practically all of the suspended orders were superseded by cancellations. In many instances the production of the brick necessary for the filling of these orders and contracts had been started, and as a matter of economy the manufacture of these brick was completed, since it was cheaper to complete them than it was to discontinue manufacturing and break them up in order to salvage the raw materials.
    During the course of the hearing the parties entered into a stipulation as follows:
    The Standard Refractories Company prior to and on and after April 6, 1917, and before December 31, 1918, constructed, erected, acquired certain buildings, machinery, equipment, and additions to plant and equipment and other facilities. Some of these facilities, for example, the four kilns, were in process of construction on April 6th, 1917. Other facilities may have been ordered or contracted for or authorized or contemplated prior to April 6th, 1917. Save for any legal argument to be drawn from such facts in the case of some of these facilities it is admitted and agreed that the schedule herewith submitted by counsel for the taxpayer gives the accurate costs of the facilities claimed by the' taxpayer to be amortizable, except perhaps in one respect, to wit, that the booh entries from which said costs are determined may or may not have been made until after the acquisition of the facilities, so that the dates of certain book entries may or may not be conclusive of the dates of construction, erection, installation or acquisition.
    If the Board should sustain the Government’s legal contention in whole or in part, then it is agreed, subject to the approval of the Board, that to the extent rendered necessary by the Board’s opinion, and before the-final settlement of the amount of deficiency, if any, to be calculated under the principle laid down by the Board in its decision, the taxpayer shall have a reasonable opportunity to obtain and submit to the Government evidence of the contract or order dates, segregation of all costs of additions in process of construction on April 6th, 1917, and such other evidence as books, essential under the decision of the Board; that an agreement thereon shall be reached by the parties, if possible, and if not that the evidence relating thereto be submitted to the Board in accordance with Rule 50 for a decision thereon, as to the correct amount of amortizable costs in connection with a settlement of the amount of such deficiency.
    In determining such deficiency under Rule 50, due effect must be given to depreciation already allowed by the Treasury Department for the years 1917 and 1918.
    The schedule of costs referred to in the foregoing stipulation contains 123 items relating to buildings, machinery, equipment, etc. These various costs have been divided into three groups in accordance with their dates of entry on the petitioner’s books. In the first group have been placed those costs incurred prior to April 6, 1917; in the second group those incurred between April 6, 1917, and December 31 of that year; and in the third group those incurred during the calendar year 1918. The aggregate amounts contained in each of these groups and the depreciation deductions for the year 1917 with respect to the facilities acquired after April 6, 1917, are as follows:
    Costs to April 6, 1917, as shown by dates of book entries---$415,059.60
    Costs from April 6 to December 31, 1917 according to dates of bookVtatries- 236, 751. 55
    Costs during the year 1918, according to dates of book entries- 257, 044.13
    Total costs to December 31, 1918_ 908,855.28
    Depreciation deducted for the year 1917, in respect of facilities acquired during the period April 6 to December 31, 1917_ 14, 230. 20
    The entire cost of the facilities constructed, erected, installed, or acquired on or after April 6, 1917, was borne by the petitioner.
    In the silica brick industry the kiln, with its complementary machinery and equipment, may be taken as a fair unit of measurement when determining the capacity of any particular plant. In the construction, erection, installation, or acquisition of additional facilities both before and after April G, 1917, the petitioner endeavored to maintain the usual and efficient ratio of kilns to machinery and equipment. During the war period the molding department was operated on the basis of three shifts in each twenty-four hours, and the other departments of the plant were operated on a night and day basis. Measured by the average production during the war period, the petitioner’s plant as it stood on April 6, 1917, was capable of producing 100,000 bricks per day. The postwar demand for silica brick could have been supplied by the plant and equipment as it stood on April 6, 1917. The postwar production has at all times been greater than prewar production. The production of the molding department and of finished burnt brick from January 1, 1916, to August 31, 1922, was as follows:

      Molding department.

    The petitioner’s business was the only industry in the vicinity of Claysburg. Under the stimulus of the war-time demand for its product, the petitioner greatly increased the number of its employees, with the result that during the war period the population of Claysburg increased from approximately 250 to approximately 1,200. At one time during the war period the company had on its pay roll between 840 and 850 employees. On April 6, 1917, the housing facilities in Claysburg were inadequate and many of the employees lived in houses described as “ shanties ” and in tents. After that the shortage in housing facilities became more acute and the company found it necessary to construct numerous cottages and tenement houses. A part of this construction was intended to remedy the shortage existing on or before April 6, 1917. After the war the petitioner made considerable reductions in the number of its employees, and as a result was able to rent only a few of the houses and tenements. Several of the cottages were offered for sale at prices as low as $100 but no purchasers could be found.
    During the month of October, 1922, all of the stock of the Standard Refractories Co. was acquired by a Pennsylvania corporation known as the General Refractories Co., and on or about November 1, 1922, the General Refractories Co. took over all of the assets and business of the petitioner and later caused the company to be dissolved. The General Refractories Co. owned and operated numerous plants. Shortly after its acquisition of the petitioner’s plant and equipment, it transferred a considerable part of its manufacturing activities to the Claysburg plant, and while this plant at no time prior to the close of the year 1924 was operated at its maximum capacity, it was at all times after November 1, 1922, operated at a much higher rate of production than it had been during the time of its ownership by the petitioner company.
    In its return for the year 1918 the petitioner claimed as a deduction from gross income the sum of $128,566.22 on account of amortization of facilities constructed, erected, installed, or acquired on or after April 6,1917. The Commissioner disallowed the entire amount of the deduction claimed, and the deficiency for the year 1918 results from such disallowance.
    During the years 1913 to 1918, inclusive, it had been the petitioner’s accounting practice to charge all purchases of parts and materials for the repair of plant equipment to expense for the year in which the purchases were made. In 1919 this practice was discontinued and thereafter such purchases were charged to miscellaneous stores’ accounts and entered into and became a part of the petitioner’s inventory accounts, and charges to expense were made only when and as the spare parts and materials were withdrawn from stores for actual use. In order to make the accounting records conform to the new accounting practice, an inventory of spare parts and materials was taken on January 31, 1919, and by journal entries as of that date the cost thereof, then computed to be $13,464.46 (later adjusted to $10,576.74), was set up on its books by sundry charges to miscellaneous stores’ accounts and a credit to surplus. The parts and materials thus inventoried had been acquired from time to time during the entire period of the company’s existence.
    In its return for the year 1919 the petitioner included the sum of $10,576.74 in gross income, with the notation that at least $5,000 of this amount should be exempt from tax for the reason that the minimum cost of the spare parts on hand at any time during the preceding four years was in excess of the amount of the exemption claimed. The Commissioner determined that the entire amount was taxable income for the year.
   OPINION.

Giucen :

The Standard Refractories Co. contends that it is entitled to a deduction under the provisions of section 234 (a) (8) of the Revenue Act of 1918, which provides for the deduction of a reasonable allowance for the amortization of facilities constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to prosecution of war against the German government. The Commissioner bases the disallowance of this deduction upon three grounds;

(1) The petitioner was not actively engaged in the manufacture of articles which contributed directly to the prosecution of the war.

(2) Facilities which the petitioner ordered or contracted for, or for which it made definite commitments, prior to April 6, 1917, though actually constructed, erected, installed, or acquired, on or after that date, and used for the production of articles contributing to the prosecution of the war, are not facilities acquired for the production of articles contributing to the prosecution of the war within the meaning of the provisions of section 234 (a) (8) of the Revenue Act of 1918.

(3) Facilities for which there may not have been any definite commitments prior to April 6, 1917, but which were acquired in pursuance of a plan of expansion determined and entered upon prior to that date, are not facilities acquired for the production of articles contributing to the prosecution of the war within the meaning of the provisions of section 234 (a) (8) of the Revenue Act of 1918.

Section 234 (a) (8) of the Revenue Act of 1918 reads as follows:

(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time within three years after the termination of the present war the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252.

The Commissioner at the hearing did not seriously contend that the petitioner was not actively engaged in the manufacture of articles which contributed directly to the prosecution of the war. The evidence upon this point is so clear and convincing that we have not thought it necessary to set it forth in detail in our findings of fact, and we are convinced that the petitioner was entirely engaged in the manufacture of articles contributing directly to the prosecution of the war. Since the petitioner was so engaged, we must hold that it is entitled to a' reasonable allowance for the amortization of such facilities as it constructed, erected, installed, or acquired after April 6, 1917, for the production of silica brick, which were articles contributing to the prosecution of the war.

The right of a taxpayer to an amortization deduction with respect to facilities constructed, erected, installed, or acquired, on or after April 6, 1917, though ordered or contracted for prior to that date, and the right to the same deduction with respect to facilities acquired on or after such date pursuant to a plan of expansion determined upon and entered into prior to that date, has heretofore been considered by the Board. Both of these questions were decided in the Appeal of Manville Jenekes Co., 4 B. T. A. 765. The arguments and contentions advanced by the Commissioner in this case are identical with those advanced by him in the Manville Jenekes case, and, in accordance with our decision in that case, we hold that the petitioner herein is entitled to an amortization deduction upon facilities acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war, notwithstanding the fact that some or all of such facilities may have been ordered or con.tracted for prior to that date, or that some or all of such facilities may have been acquired pursuant to a plan of expansion determined upon and entered into prior to such date.

Section 234 (a) (8) of the Revenue Act of 1918 provides “ that there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer.” Nowhere in the Revenue Act is there any provision with reference to the method of ascertaining the amount of this deduction. The Commissioner'has provided in his regulations as regards property the use of which was not limited to the period pf its operation as a war facility, that the deduction shall be the difference between the cost and the value of the property, which value shall be the estimated value to the taxpayer in terms of its actual use or employment in his going business,” with other limitations not here material. By common consent the parties hereto have presented this appeal upon the theory that the amount of the deduction to which the petitioner is entitled shall be determined in the light of the regulation, and neither has contested the correctness of the regulation in so far as it purports to outline the method for ascertaining the amount of the deduction. The disagreement between the parties here is as to the value in use of the amortizable facilities.

In the Appeal of Banna Manufacturing Co., 1 B. T. A. 1037, we said:

Taxpayers who produced, articles contributing to the prosecution of the late war and. who, on or after April 6, 1917, erected, installed or acquired buildings, machinery, equipment or other facilities for that purpose, are entitled to deduct from gross income, under section 234(a) (8) of the- Revenue Act of 1918, the difference between- the cost of such buildings, machinery and equipment, and their actual sale price or fair market value when discarded, with proper allowance for depreciation while used, or, if they are still in use, their value . to the taxpayer in terms of their use or employment in its going business.

In the Appeal of the Kirk Coal Co., 3 B, T. A. 755, in considering the evidence as to the amount of the deduction to which the taxpayer is entitled, it was said:

That the assets upon which amortization is claimed were employed in the business subsequent to the termination of the amortization period is clear, but no evidence has been presented to show the extent to which they were so employed, or the actual or estimated cost of the replacement of these assets under normal postwar conditions.

In considering a similar question in the Appeal of the Greenville Coal Co., 3 B. T. A. 1323, we said:

Taxpayer claimed amortization on the tenant houses erected’ by it during the war period. The' record discloses the fact that those tenant houses have been used by the taxpayer -since the close of the war. Neither the exact amount or comparative value of such use, nor the actual or estimated cost of replacing them under normal postwar conditions, is disclosed. It may be that taxpayer is entitled to some amortization on account of materially diminished useful value, but, because it is disclosed' that those hodses have' been and still are used,’ it is evident that they did not lose their entire useful value, and (here are no facts in the record that will enable the Board to determine’ to what extent their useful value was impaired. We , therefore approve, the determination of the .Commissioner on that-issue.

Again, in the consideration of a similar question in the Appeal of Standifer Construction Corporation, 4 B. T. A. 525, at page 555, we said:

The use to which facilities are put by a taxpayer during the amortization period as compared to the use to which they were put in the postwar period may bo taken into consideration in determining the gross amount of the amortization deduction which is to be spread over the different taxable years, * * *.

In the Appeal of Manville Jenckes Co., supra, p. 796, the petitioner and the Commissioner were in agreement as to the fundamental proposition “that capacity and production must be considered in some kind of a comparison in arriving at a determination as to the value in use of amortizable facilities.”

In this appeal the Commissioner does not agree that the deduction is to be measured by the postwar production and its relation to the prewar production, and we are thus called upon to determine whether the evidence adduced by the petitioner herein as to its production of brick before, during, or after the war, may be used as the measure of the value in use of the amortizable facilities and the amount of the deduction ascertained thereby. It should be noted that, while there was some testimony as to the extent to which the facilities were used after they were acquired by the General Refractories Co. following its acquisition thereof and the dissolution of the petitioner, such testimony is of little value and that, so far as the petitioner is concerned, the only evidence introduced by it bearing upon the value in use of its amortizable facilities in its normal postwar business, is that relating to the physical use of the facilities during the postwar period prior to October, 1922, that being the time when its capital stock was sold to the stockholders of the General Refractories Co.

The petitioner asserts that by this evidence it has established that its production of finished burnt brick during that portion of the postwar period between January 1, 1919, and August 31, 1922, was but 51.74 per cent of its production during the war period commencing April 6, 1917, and ending December 31, 1918, and contends that the value in use of its amortizable facilities is but 51.74 per cent of their original cost and asks us to find that it is entitled to an amortization deduction in an amount equal to 48.26 per cent of the cost of these facilities, which cost was $238,305.79. If we assume that the physical use to which the amortizable facilities were put in the normal peace-time business was but 51.74 per cent of their use during the war period, it does not necessarily follow that the value of these facilities to the petitioner is but 51.74 per cent of their original cost. Undoubtedly this is a factor which should be considered in determining what amount should be allowed as a reasonable deduction for amortization, but at best it is but one of the several factors. The cost of replacement, during the postwar period, of the same or other facilities which would produce the same results; any improvements or radical changes in the facilities; the salvage value of such facilities; their selling price if they have been sold; a proper discount for excess facilities which may be used because they are on hand but which in the ordinary conduct of the business would have been acquired only in the future; and all other similar factors, depending upon the facts in the particular case, must be considered in determining the amount of the deduction.

The evidence discloses that the General Refractories Co., in October, 1922, acquired all of the petitioner’s outstanding capital stock; that shortly thereafter it took over all of the petitioner’s assets including such of the amortizable facilities as remained on hand, and that the petitioner corporation was then dissolved. The evidence does not disclose the purchase price paid for the stock, and it is contended that this fact is not material and that it has no bearing upon the value of the petitioner’s assets at the time of the transaction. It seems to us that such facts are material and that, had we been advised of the price paid for this stock and of other factors bearing upon the value of the petitioner’s assets, we would have had facts which would have aided materially in the determination of the amount of the deduction. We are constrained to hold that the value in use of the petitioner’s amortizable facilities can not be measured or determined solely on the basis of postwar physical use; that the evidence here adduced is not sufficient to enable us to determine the value in use of the amortizable facilities; and that we can not compute or determine the amount of the deduction to which the petitioner is entitled.

Prior to 1919, under an accounting practice consistently adhered to, the petitioner had charged to expense all purchases of spare parts for the repair of the plant equipment. In 1919 a change in the method of accounting for supplies of this nature was adopted, which contemplated that purchases should thereafter be charged to an inventory account and written off to expense only as the supplies were withdrawn from stores and actually used. To correct the accounting records so that they would conform with this new accounting practice, the petitioner inventoried all supplies of this nature on hand at January 31, 1919, all of which had previously been charged to expense, and by journal entry of that date recorded the cost thereof, the sum of $10,576.74, on its books by charges to inventory accounts and a credit to surplus. This item of $10,576.74 was included by the petitioner in net income for the year 1919, but a notation on the return contained a claim that at least $5,000 of this amount should be exempt from tax at the minimum cost of spare parts which had been purchased in prior years. The Commissioner held that the entire amount of $10,756.74 was income for the year 1919. The issue is not a difficult one and is easily disposed of. Obviously, the petitioner could not realize any -income from a mere book entry recording in its accounts the cost of supplies on hand which had been purchased in prior years and charged to expense in those years. The income of the year 1919 was not affected in the least by this entry. Its sole purpose was to bring the books of account into conformity with the new system of accounting for spare parts. No part of the item in question constitutes income for the year 1919.

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

Milliken did not participate.