author: Teammell :

text:
    Dallas Athletic Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1310.
    Promulgated October 29, 1927.
    Petitioner purchased contracts for the services of certain professional baseball players during the year 1922, each contract being renewable from year to year at the option of the petitioner or its assignee. Held, that the amounts paid for such contracts represent capital expenditures, and that, since the rights acquired by the petitioner thereunder are not shown by the evidence to have been exhausted or lessened by the passage of time, it is not entitled to any deduction for exhaustion.

      Hart Willis, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $4,235.72. In the same letter respondent also asserted a deficiency in income tax for the year 1921, but no errors are alleged by petitioner as to that year. There is no controversy with respect to the facts. The only issue presented is whether certain amounts paid by petitioner during the taxable year as a bonus for the contracts of baseball players purchased from other clubs are deductible as ordinary and necessary business expenses or constitute capital expenditures, and if the latter, whether petitioner is entitled to a deduction for the exhaustion thereof.
    FINDINGS OF FACT.
    Petitioner is a corporation, organized under the laws of Texas, with its principal office at Dallas. During the year 1922, it was engaged in operating a professional baseball club, known as the Dallas Baseball Club in the Texas League, which was a member of the Rational Association of Professional Baseball Leagues. During the taxable year involved, the petitioner purchased contracts of players from other clubs in the National Association, as follows:

    All members of the National Association of Professional Baseball Leagues used a uniform player’s contract, approved by the National Association. In the case of each player referred to above, whose contract was purchased by petitioner in 1922, the uniform contract was used, and contained the following provisions:
    Contract
    Approved by the
    National Association of Professional Base Ball Leagues Uniform Player’s
    Contract

      Parties

    Tbe-herein call the Club and-oí
    _herein called the Player.

      Recital

    The Club is a member of the National Association of Professional Baseball Leagues. As such, and jointly with the other members of the National Association of Professional Baseball Leagues, it is a party to agreements with the American League of Professional Baseball Clubs and its constituent clubs and with the National League of Professional Baseball Clubs and its constituent clubs. The purpose of these agreements is to insure to the public wholesome and high-class professional baseball by defining the relations between club and player, between club and club, between league and league and by vesting in a designated Commissioner and National Board broad powers of decision in cases of disputes.

      Agreement

    In view of the facts above recited the parties agree as follows:

      Employment

    1. The Club will pay the Player a salary for his skilled services during the
    playing season of 1922 at the rate of $_per month.

      Salary

    2. The salary above provided for shall be paid by the Club as follows:
    In semi-monthly installments after the commencement of the period covered by this contract, unless this contract shall be terminated by the club while the Player is “Abroad ” with the Club for the purpose of playing games, in which event the amount then due shall be paid on the first week-day after the return “ home ” of the Club.

      Loyalty

    3. The Player during said season will faithfully serve the Club or any other Club to which, in conformity with the agreements above recited, this contract may be assigned, and pledges bimself to the American public to conform to high standards of fair play and good sportsmanship.

      Service

    4. The Player will not play during 1922 otherwise than for the Club or for such other Clubs as may become assignees of this contract in conformity with said agreements.

      Assignment

    5. In case of assignment of this contract to another Club each successive assignee shall become liable to the Player for his salary during his term of service with such assignee, and the Club shall not be liable therefor. If the transaction of transfer of services is between two clubs of the same classification in the National Association of Professional Baseball Leagues, the salary rate shall be as first specified in contract. If the assignee is any other club, the salary rate shall be the same as that usually paid by said club to other players of like ability.

      Discipline

    6. (a) The Player accepts as part of this contract the regulations printed on the third page hereof and such reasonable modifications of them as the Club may announce from time to time.
    (b) This contract may be terminated at any time by the Club or by any assignee.
    (e) The Player submits himself to the discipline of the National Board and the discipline of the Commissioner and agrees to accept all decisions rendered pursuant to the Major-Minor League Agreement.

      Renewal

    7. (a) Any time prior to March 1st, 1923 by written notice to the Player, the Club or any assignee thereof may renew this contract for the term of that year except that the salary rate shall be such as the parties may then agree upon, or, in default of agreement, such as the club may fix.
    (b) In default of agreement, the Player will accept the salary rate thus fixed or else will not play during said year otherwise than for the Club or for an assignee hereof, subject to the right of appeal as provided in paragraph 8.
    (c) The reservation to the Club of the valuable right thus to fix the salary rate for the succeeding year and the promise of the Player not to play during said year otherwise than with the Club or an assignee hereof, have been taken into consideration in determining the salary specified herein and the undertaking by the Club to pay said salary is the consideration for both the reservation and the promise.

      Disputes

    8. In case of dispute between the Player and the Club or any assignee hereof the same shall be referred to the National Board or the Commissioner as the case may be, as an umpire, and the decision shall be accepted by all parties as final. *

    Signed this_day of_A. D. 192__.
    [seal.] -
    By-
    President for the Club

    Player sign here

    Player’s Home Address
    Witnesses:

      On March 6, 1923, petitioner filed its income-tax return for the calendar year 1922, in which it took a deduction from gross income of the full amount paid for the contracts of all players released during that year, and in the cases of three players whose contracts were sold for less than their cost, it took a deduction of the difference between the cost and the sales prices. The petitioner now contends that it is entitled to deduct as a business expense the full amount paid for each contract purchased during the taxable year, whether or not the contract was sold or was terminated by release of the player during the year. The deduction taken by petitioner in its return included the following:

      Ball players released, charged off, 19&S

    The respondent, upon audit of petitioner’s income-tax return for 1922, deducted from gross income the cost of the contracts of such players as were released during the year 1922, and computed gain or loss upon the sales of the contracts of such players as were sold during that year, but refused to permit the petitioner to deduct the cost, or any part thereof, of the contracts of such players as were neither released nor sold. It is the cost of the contracts last mentioned which petitioner now seeks to deduct as expense.
   OPINION.

Teammell :

The petitioner contends that the entire cost of the contracts involved herein is an ordinary and necessary business expense for the year 1922, which it is entitled to deduct in computing its net income for that year. The respondent, however, urges that each of those contracts constitutes a capital asset; that petitioner acquired under each contract a property right in the nature of an option which continued and remained valuable after the year 1922, in the case of each contract not terminated in that year, and that no deduction of any part of the cost of the contract is allowable until the player who is a party thereto is released, or until the contract is sold, in which latter event gain will be realized or loss sustained, depending upon whether the sale price is greater or less than the cost of the contract.

It is well settled that if these contracts represent capital assets and were exhausted by the passage of time or otherwise, the petitioner is entitled to spread the amount paid for each contract over the determinable period of its life, and to deduct an aliquot part thereof in each year. Appeal of Grosvenor Atterbury, 1 B. T. A. 169; Appeal of Atlantic Carton Corporation, 2 B. T. A. 380; Philip Henrici Co. v. Reinicke, 3 Fed. (2d) 34.

From a consideration of the facts, we are convinced that these contracts represent capital expenditures and may not be treated as an ordinary and necessary business expense, chai’geable against current income. Paragraph 1 of the uniform contract provides as follows:

Renewal
7. (a) Any time prior to March 1st, 1923 by written notice to the Player, the Club or any assignee thereof may renew this contract for the term of that year except that the salary rate shall be such as the parties may then agree upon, or, in default of agreement, such as the club may fix.
(6) In default of agreement, the Player will accept the salary rate thus fixed or else will not play during said year otherwise than for the Club or for an assignee hereof, subject to the right of appeal as provided in paragraph 8.
(e) The reservation to the Club of the valuable right thus to fix the salary rate for the succeeding year and the promise of the Player not to play during said year otherwise than with the Club or an assignee hereof, have been taken into consideration in determining the salary specified herein and the undertaking by the Club to pay said salary is the consideration for both the reservation and the promise.

It seems clear to us that the foregoing provisions vested in the Club much more than the mere right to negotiate with the player for his services during the succeeding year. By the provisions above quoted, petitioner acquired, for a valuable consideration, the right to renew the contract for the succeeding year upon the same terms and conditions, except that the salary rate should be such as the parties might agree upon, or in default of agreement, such as the petitioner might fix, subject only to the player’s right of appeal as provided in paragraph 8. And the player was obligated by the agreement to accept the salary rate thus fixed and play for the petitioner or its assignee, or to refrain from playing during said year. Thus, the contract might be renewed by petitioner, or its assignee, from year to year throughout the professional life of the player. That this right was regarded by the parties as very valuable, is not only evidenced by the wording of paragraph 7 of the contract, but is established by other facts and circumstances in the record before us. The contracts in question covered only the playing season of 1922, yet we find that petitioner purchased the contract of Player Sealy on September 11, 1922, for $490, and the contract of Player Hamilton on September 12,1922, for $1,000, when the playing season for that year was then rapidly approaching its end. Also, on December 18, 1922, after the close of the playing season for that year, petitioner purchased the contract of Player Jack Adams for $2,500. These facts justify the conclusion that petitioner purchased said contracts, solely because it thereby acquired the right to renew them for the succeeding year at any time prior to March 1, 1923.

Having concluded that the amounts paid for the contracts represent capital expenditures, can it be said that these contracts were exhausted by the lapse of time? Each contract covered only the playing season the year in which or for which it was made, but was according to its terms renewable by the club or its assignee for the succeeding year. By virtue of the renewal provisions, the rights acquired under each contract extended beyond the year when the contracts were acquired. The ultimate result would have been the same if a single contract had been made with each player for an indefinite or undetermined period, subject to an annual salary adjustment under the conditions stated. While under certain facts and conditions contracts for an indefinite period may in fact become exhausted over a reasonably ascertained or estimated period of time, no evidence has been introduced in this case from which it can be ascertained when the contracts will become exhausted for the purpose of determining the allowance with respect thereto. The determination of the respondent must, therefore, be approved.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Joseph Garneau Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40.
    Promulgated October 29, 1927.
    Deduction for obsolescence or loss of good will disallowed. Appeal of Manhattan Brewing Go.f 6 B. T. A. 952; Red Wing Malting do. v. Willcwts, 15 Fed. (2d) 626.

      George B. Beneman, Esq., and Ferdinand Tawnenbaum, Esq., for the petitioner.

      E. G. Lake, Esq., for the respondent.
    Pursuant to the decision of the Board upon the preliminary motion as to jurisdiction (see 1 B. T. A. 75), this proceeding now comes on for consideration upon the merits. The petitioner seeks a rede-termination of deficiencies in income and profits taxes asserted by the Commissioner for the years 1918 and 1919 in the respective amounts of $5,705.92 and $41,688.76. It is alleged that the Commissioner erred in failing to allow a deduction from gross income for the loss of good will and trade-mark assets, resulting from the adoption and enforcement of national prohibition.

      FINDINGS OF FACT.
    The petitioner is a Few York corporation with its principal place of business in New York City. It was incorporated prior to the taxable years and has been in business since 1856, but operated under a different name for a portion of the time.
    Prior to January 16, 1920, the petitioner was engaged in the business of importing and selling wines and brandies for beverage purposes only. It dealt in special brands of wine, such as champagne, (particularly Cliquot), bordeaux, port, sherry, burgundy, and brandy. Over a period of years the petitioner built up a large business and succeeded in creating a demand for its brands of wine. It spent large sums of money in advertising and popularizing its goods. Its representatives visited leading hotels, clubs, and restaurants for the purpose of inducing the management of such establishments to list its wines. They mingled with people of means, acquainted them with its wines, and encouraged them to cultivate a taste particularly for its wines. A demand-for petitioner’s brands of wine had been created prior to and existed on March 1, 1913, and continued until the advent of national prohibition.
    In December, 1917, the Congress submitted the proposed prohibition amendment to the Constitution to the States for ratification. On January 16, 1919, it had been ratified by the requisite number of States and became effective January 16, 1920, and on the same date the National Prohibition Act for the enforcement of the amendment became effective. The War-time Prohibition Act, passed in November, 1918, prohibited the manufacture, sale, importation and exportation of intoxicating liquors effective July 1, 1919. The petitioner terminated its business of importing and selling intoxicating liquors on June 30, 1919, and engaged in no business whatever until October, 1920.
    In October, 1920, the petitioner, under a Government permit, began the importation of intoxicating liquors for nonbeverage purposes only, and the sale of warehouse receipts for the same, and is still engaged in such business. The liquors imported by petitioner since the prohibition law became operative have been stored in Government bonded warehouses, from which they are delivered to the purchasers of its warehouse receipts, upon Government permits. Of approximately 900 customers appearing on its books since prohibition became a law, only five were numbered among approximately 1,500 customers on its books prior to that date. Its business of dealing in nonbeverage liquors was limited to the sale of warehouse receipts to holders of Government permits, such as druggists, churches, and manufacturers. There was no demand for its particular brands of liquors, and the reputation and demand for special beverage liquors that had been built up and existed prior to January 16, 1920, did not contribute to its nonbeverage liquor business after that date. Prior to prohibition petitioner did not handle whiskey, but subsequent thereto whiskey has been the largest item of its business.
    During the five years preceding 1918, the petitioner spent for advertising, the following sums:

    During the same period it spent the following additional sums in promoting and popularizing its particular brands of liquor:

    The capital and surplus employed in the business, as of January first of each of the five years preceding 1913, was:

    Of the capital and surplus for each of these years, there were credited to the accounts of the stockholders, in proportion to their stock holdings, pursuant to the regular declaration of dividends, and charged to surplus account, the following respective amounts, which were left in the business, but subject to withdrawal by the stockholders :

    As of January 1 for each of the years 1913 to 1917, inclusive, the capital and surplus employed in the business was:

    The net income for each of the five years preceding 1913 was:

    For each of the years 1913 to 1917, inclusive, the net income was:

      On and prior to March 1, 1913, the petitioner possessed a valuable good will asset, which continued until the termination on June 30, 1919, of its business of importing and selling intoxicating liquors for beverage purposes. No independent value of trade-marks was proven.
    The national prohibition amendment to the Constitution and national prohibition legislation rendered the good will asset of no value to the petitioner after June 30, 1919.
   OPINION.

Van Fossan:

The petitioner seeks a deduction from income for either the obsolescence of good will under section 234 (a) (7) or the loss of good will under section 234 (a) (4), due to the operation of the prohibition law in the United States. That good will is not propei’ty subject to obsolescence for which a deduction may be allowed under section 234 (a) (7) has been heretofore decided. Appeal of Manhattan Brewing Co., 6 B. T. A. 952, and Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626.

Nor do we believe a deduction as a loss is allowable. Good will has been defined as—

The advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessity or even from ancient partialities or prejudices. Metropolitan Bank v. St. Louis Dispatch Co., 149 U. S. 436, 446.

Good will, though constituting property, has no existence as an isolated or segregated capital asset. It is not tangible and does not exist, except as an incident of a going business. It is inherently part and parcel of a going and established business, and of tangible, physical property actively employed in business. It can not be separated from the business and property to which it is attached and be dealt with or disposed of separately. Its value is reflected in the value of the business and property of which it is an inseparable part, and can be realized only upon a sale of the business and property. It may be said to be nothing more than an element or factor of the value of the business and property. See Metropolitan National Bank v. St. Louis Dispatch Co., 36 Fed. 722; President Suspender Co. v. MacWilliam, 238 Fed. 159; Kaufman v. Kaufman, 239 Pa. 42; 86 Atl. 634; Commonwealth v. Kentucky Distilleries & Warehouse Co., 132 Ky. 521; 116 S. W. 766.

Good will being merely an incident of a going business, inseparably attached to tangible property and incapable of segregation and independent disposition, it is difficult to conceive upon what theory an allowance for the loss of its alleged value can be made as a deduction under section 234(a) (4), independently of the tangible property or business to which it is attached. If, and when, the business or property of which the good will is an incident, is disposed of, the gain derived or the loss sustained by reason of the value, or loss of value, of the good will must of necessity be reflected in the return received from the disposition of such business or property. In the instant case the business or property was not disposed of but was continued and in use, and although its value may have been materially reduced, due to the operation of the prohibition law, no deductible loss has been sustained by the petitioner. See Frederick C. Renziehausen v. Commissioner, 8 B. T. A. 87.

In the Red Wing Malting Co. case, although it did not squarely decide whether or not a deduction for the loss of good will is allowable under section 234(a) (4), the court indicated its view upon the question:

We have heretofore pointed out that good will has no existence separate and apart from an established business. With the termination of that business it is ended. While a capital asset, it is not the subject of purchase, sale, or assignment separate from the business itself. It is not an assignable asset distinct from the business. It is different in this respect from such intangibles as patents, contracts or franchises which may be sold. When a business is disposed of its value and realized selling price may be enhanced by the existence of good will. If sold at a loss, the loss of good will is reflected in the transaction. The claim is somewhat novel, therefore, and rather startling, that loss of good will can be made the subject of an independent claim for a tax deduction, separate and distinct from the business of which it is an incident. * * * To hold that a claimant is entitled to segregate good will from the property and business to which it is attached as an incident, and from which it is inseparable, and permit a separate deduction for its loss, might result in a double deduction and have farreaching consequences. If the court is to open the door to claimants for tax deductions under the statute for the loss of good will apart from the tangible property with which it is connected, the right should clearly appear from the statute. We think it does not so appear. (15 Fed. (2d) 628, 633.)

We are of the opinion that petitioner was not entitled to a deduction from income either for. the obsolescence of good will, under section 234(a)(7), or for the loss of good will, under section 234 (a) (4).

Beviewed by the Board.

Judgment will he entered for the respondent.


author: Lansdon :

text:
    Council Tool Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9443.
    Promulgated October 29, 1927.
    Alleged value of good will acquired in exchange for the stock of the petitioner is not established by the evidence.

      P. D. Hutchison, O. P. A., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    The respondent has determined deficiencies in income and profits taxes for the years 1920 and 1921, against the Council Tool Co., in the respective amounts of $621.23 and $1,243.05, and overassessments for the years 1919 and 1922, in the respective amounts of $2,061.04 and $406.82. The overassessments for the years 1919 and 1922 are not in controversy. The only error alleged by the petitioner is the exclusion from invested capital of the amount of $25,000, alleged to be the statutory limitation at which good will claimed to have been acquired in 1905 for stock, may be included in invested capital.
    FINDINGS OF FACT.
    The petitioner was incorporated in 1905, under the laws of the State of Florida, with its principal office at Wananish, 1ST. C.
    For some 20 years prior to 1905, one J. P. Council had been conducting an individual business in the manufacture of tools for gathering turpentine from pine trees. His manufacturing plant was at Wananish, 1ST. C. This individual business had had its good periods and its bad periods, but at its best had never been able to operate throughout the year. The turpentine industry is peculiar to the southeastern section of the United States. There is a limited business in the manufacture of tools for gathering turpentine. This industry was financed at that time by what are known as factors. When Council started in the business, he depended upon one factor to distribute his products. As the business of manufacturing turpentine tools expanded, other factors came in and later they established another tool-manufacturing plant in the State of Florida. There was not enough business to keep the two plants in operation. Owing to the influence of these competing factors in the trade, it became necessary that they and Council associate their interests in order to operate profitably. The incorporation of the petitioner herein in 1905 was the outgrowth of this situation.
    A few days prior to, and, as a step in the incorporation of the petitioner, the competitors in business of Council acquired a two-thirds interest in his business, paying him therefor the sum of $30,000 in cash. The basis of this transaction was that the tangible assets of the Council plant at Wananish, N. C., were tentatively ascribed a value of $30,000, subject however to an accurate inventory or appraisement thereof. If the final appraisement of said tangible assets disclosed a value in excess of $30,000, Council was to receive the difference. The tangible assets of the Council plant were finally appraised at $38,314.06 and Council was paid the difference by a promissory note of the petitioner corporation for $8,314.06.
    The minutes of a special meeting of the board of directors of the petitioner, held on May 12, 1905, recite that the turpentine tool plant, real estate (including buildings and 40 acres of land), all the stocks, tools and materials on hand, good will, and other assets of the business of Council, located at Wananish, hi. C., are appraised by the directors of said corporation at a value of $100,000. They also contain a resolution of the same date that this corporation shall purchase the said business, all its assets and good will, and pay for the same $100,000 par value of its capital stock to be issued to J. P. Council and his associates. This resolution was carried into effect simultaneously with the special meeting of May 12, 1905, or shortly thereafter. Council personally received 333 shares of the petitioner’s capital stock, having a par value of $33,300, and his associates received the balance thereof in varying proportions. The outstanding capital stock of the petitioner at date of incorporation, and on March 3, 1917, was $100,000 par value.
    The first debit entries appearing on the original journal of the petitioner under date of February 13, 1905, are: merchandise, $18,-468.61; machinery and equipment, $9,687.95; real estate and buildings, $10,157.50; and bonus, $61,685.94; total, $100,000. The corresponding credit entry in said journal is, capital stock, $100,000. The journal debit entry of bonus, $61,685.94, was carried forward to the original ledger of the petitioner by an entry dated February 13,1905, and has never been closed out of the petitioner’s books. Shortly after incorporation the double-entry system of accounts was dropped by the petitioner and a single-entry system used until 1918, when the double-entry system was again installed. Under the single-entry system, only the physical assets in sight about the plant were carried forward on the books. On January 5, 1922, the item of bonus, $61,-685.94, was written up on the current books as of December 31, 1921. There did not appear in the balance sheets of the petitioner for the taxable year 1920, and prior years, an asset item in the amount of $61,685.94 of any description, whether as bonus or good will.
    The Council plant at Wananish, N. C., was sufficient in size to meet its own manufacturing requirements and those of the competing plánt in Florida. The Florida plant was abandoned in 1905, after the incorporation of the petitioner. The plant at Wananish was thereafter operated 12 months a year, and the cost of goods manu-factored was considerably reduced. The minute books of the petitioner show dividends declared and paid from date of incorporation in 1905 to December 31, 1918, in the total amount of $200,000. The total earnings of the petitioner over the same period, according to its balance sheets, were $309,020.66.
   OPINION.

Lansdon :

The only issue in this proceeding is whether at the date of its incorporation, the petitioner, in exchange for its stock, acquired good will which it is entitled to include in invested capital during the taxable years, subject to the statutory limitation provided in section 326(a) (4) of the Revenue Acts of 1918 and 1921. If such an asset was acquired at the date of incorporation, it must have been an asset of the individual business of Council, having a separate and demonstrable actual cash value. Insufficient evidence was introduced as to the fact, or the extent of profits of the individual business conducted by Council for years prior to 1905. The record does show, however, that from the date of its incorporation the petitioner was highly successful. It is the theory of the petitioner that a substantial part of the large profits earned subsequent to incorporation should be ascribed to the earning power of good will purchased from the predecessor business. We are unable to agree with this contention on the showing made. It is much more reasonable, on the evidence in this case, to assume that the profits of the petitioner resulted from the elimination of competition in the business of manufacturing and selling turpentine tools and from the combined influence and efforts of Council and his new associates who included all the parties theretofore engaged in the production and marketing of tools used in the production of turpentine.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Teammell:

text:
    Schilling Grain Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5939.
    Promulgated October 29, 1927.
    1. Where the respondent in determination of a deficiency allowed a deduction representing a commission incurred and paid by a corporation to its president for the negotiation and sale of the corporation’s business and certain of its assets and the respondent in his answer alleges that he erroneously allowed such deduction, held, that the burden of proof is on respondent to show that the deduction is not allowable.

      2. An amount allowed by respondent as a commission paid by a corporation to its president for tbe negotiation and sale of corporation’s business and certain of its assets beld to be deductible.
    3. Value of good will on March 1, 1913, determined.
    4. Where good will was acquired without cost prior to March 1, 1913, and it together with other assets thereafter was sold as one transaction, the value of the good will at March 1, 1913, should be considered in determining the taxable gain or deductible loss from the transaction.

      Samuel A. Dew, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $4,380.47 for 1920. The deficiency results from the respondent’s refusal to include an amount of $10,560.60 as the value of good will on March 1, 1913, in determining the profit on the sale by the petitioner of its business and assets.
    At the hearing the respondent amended his answer so as to allege that a deduction of $4,500 taken by the petitioner as a commission had been erroneously allowed in the determination of the deficiency.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation organized in 1905 with its principal office at Kansas City.
    In 1886, C. H. Schilling opened a feed and seed business in the “ West Bottoms ” section of Kansas City, Mo. Schilling bought feed and grain and sold it to transfer companies, livery stables, retail feed stores, dairies and similar businesses in wagon-load lots or less. Solicitors were employed to obtain orders. About 1890 state regulations made it advisable to acquire a warehouse and a weighing machine, both of which were acquired.
    About 1889, Schilling took his son, H. J. Schilling, into the business, which thereafter operated under the name of C. H. Schilling & Son. The general nature of the business remained the same. In 1898, the elder Schilling died and the business was conducted by the son.
    In 1905, the business was incorporated under the name of the petitioner. The company acquired title to a part of the real estate where its warehouse was located and leased a part of the real estate. The equipment owned and used by the company in the operation of its business consisted of horses, mules, wagons, buggies, machinery for grinding feed, a shop, elevators, and various other kinds of machinery of similar character. The company continued to conduct a local grain and seed business, supplying the class of trade it had theretofore served. Sales were made in amounts ranging from 10 cents upward to the company’s customers, who ran into the hundreds and were located principally in Jackson and Clay Counties, Missouri and Wyandotte County, Kansas. Jackson County includes Kansas City, Mo., a number of small towns, an area of good farming country and towns to the’ north, while Wyandotte County includes Kansas City, Kans., and farming country and towns west and north. Practically all deliveries could be made by truck or wagon and were within a radius of from 10 to 20 miles of Kansas City. Shipments by rail were infrequent and of little importance, since this class of business was not solicited. H. J. Schilling personally had membership on the board of trade at Kansas City, Mo., through which he made purchases for the Schilling Grain Co. as its needs required. Under the rules of the board of trade such membership had to be held individually and could not be transferred to a corporation or a partnership.
    Early in 1920 the petitioner through H. J. Schilling, its president, entered into negotiations for the sale of its business and certain of its property. These negotiations resulted in the execution on April 20,1920, of an agreement whereby C. C. McConnel and V. R. Miller were given an option for 30 days to purchase certain property of the company. The option was exercised and as a result the following agreement was entered into:
    This Agreement, made and entered into this 19th day of May, 1920, by and between Henry J. Schilling and Schilling Grain Company, a corporation, parties of the first part, and V. R. Miller and Charles C. McConnel, parties of the second part, Witnesseth :
    For and in consideration of the sum of Thirty Thousand ($30,000.00) Dollars, payable as follows: Five Thousand ($5,000.00) Dollars on June 1st, 1920; Ten Thousand ($10,000.00) Dollars on the first day of October 1920; Ten Thousand ($10,000.00) Dollars on the first day of October, 1921, and Five Thousand ($5,000.00) Dollars on the first day of October, 1922, the parties of the first part agree to sell, transfer and deliver to the parties of the second part on October 1st, 1920, the following described property, real, personal and mixed, being situated in the County of Wyandotte, State of Kansas, to-wit:
    Forty-eight (48) feet of ground and all buildings thereon, legally known and described as Lots Fifty-Two (52) and Fifty-four (54), in Ewing Street Addition in and to Kansas City, Kansas; also the lease now held by the parties of the first part on the ground and building known as No. 29 to 35 Ewing Street, Kansas City, Kansas; all of the machinery, mill and elevator equipment, spouts, furniture, fixtures and oifice equipment, platform and wagon scales, one Ford Motor Car, all teams and wagons, harness and delivery equipment in and about aforesaid buildings belonging to the Schilling Grain Company, a corporation organized and existing under the laws of the State of Missouri, together with the good will of the business of the Schilling Grain Company aforesaid (it being understood, however, that this does not carry with it to the parties of the second part the right to operate under the name of Schilling Grain Company) ; all of the machinery, tools and equipment aforesaid to be delivered to the parties of the second part in first class working condition. All of the property above set out, which is not conveyed by deed or assignment of lease to be set out in an inventory hereto attached and made a part thereof.

      It is further agreed by and between the parties hereto that should any damage result to the property above set out by reason of fire, flood, storm, riot, act of God or the public enemy, which would materially impair or interrupt the business to any great extent between the signing of this contract and the first day of October, 1920, then this contract and the obligation on the part of the parties of the second part shall cease and determine. Should damage result from any cause to the machinery, horses, wagons, automobiles, or other equipment, which would not necessitate an interruption of the business, then adjustment shall be made by and between the parties hereto based upon the inventory hereto attached.
    Parties of the first part hereby agree to employ W. K. Miller, one of the parties of the second part, from and after the first day of July to the 30th day of September, 1920, at a salary of Two Hundred Dollars per month, and agree to familiarize him in every respect with the business of the Schilling Grain Company, and acquaint him as far as possible with all of its customers.
    Parties of the first part agree that in the event that this contract becomes terminated by reason of any of the provisions hereof before October 1st, 1920, and the delivery of said property together with proper conveyance and transfer thereof to the parties of the second part, then the Five Thousand ($5,000.00) to be paid by the parties of the second part to the parties of the first part on June 1st, 1920, shall be refunded and repaid to the said parties of the second part.
    The parties of the first part agree that they will not enter into the wholesale or retail feed and seed business within the confine of the limits of Jackson and Clay Counties, Missouri, and Wyandotte County, Kansas, for a period of two years from the date of the transfer of said property to the parties of the second part. Nothing herein contained, however, shall be construed to prevent said first parties or either of them from operating on the Board of Trade of Kansas City, Missouri and from conducting the usual Board of Trade business, or from entering the hay business.
    Parties of the first part agree that they or each of them will not employ any of the present employees of the Schilling Grain Company within a period of six months from October 1st, 1920, without the written consent of the parties of the second part.
    It is agreed by parties of the first part that if for any reason the owners of the building and ground now occupied by the Schilling Grain Company at 35 Ewing Street, Kansas City, Kansas, will not consent to an assignment of the present lease, then this contract shall become null and void.
    It is also agreed by parties of the first part that the business of Schilling Grain Company between June 1st and October 1st, 1920, shall continue in the usual course and manner, with a view of increasing and building up the business as much as can reasonably be done, and that good faith and proper measures and methods shall be followed by the parties of the first part to keep the business and good will of the present customers of the Schilling Grain Company pending the consummation of the transfer of said property and business.
    It is agreed that if any additional machinery, furniture, fixtures, horses, wagons, or equipment of any kind is purchased by the Schilling Grain Company between April 30th and October 1st, 1920, then parties of the second part agree to take the same over at market value October 1st, 1920, or the parties of the first part will keep same as later agreed upon, it being understood that the present equipment, machinery, etc., shall be kept in a good state of repair by the parties of the first part up to October 1st, 1920.

      It is further agreed that upon the delivery of possession of the property herein mentioned to the parties of the second part, together with proper instruments of conveyance and transfer, then said parties of the second part will execute and deliver to the Schilling Grain Company their mortgage on the real property and chattel mortgage on the personal property to secure their promissory notes for the unpaid portion of said purchase price, which notes shall bear interest at the rate of six per cent per annum from date of October 1st, 1920, and shall be negotiable in form.
    The restraint on H. J. Schilling and the Schilling Grain Go. entering into the wholesale or retail feed and seed business in Jackson and Clay County, Missouri, and Wyandotte County, Kansas, was limited to a period of two years from the date of the transfer of the property, for the reason that the purchasers thought that in that time they could permanently retain the customers of the vendors.
    In accordance with the foregoing contract the purchasers paid the first installment of $5,000 on June 1, 1920. On June 28, 1920, all of the shareholders and directors of the Schilling Grain Co. having previously discussed the matter among themselves, met and formally authorized the sale of the property and said business. The minutes of the meeting of the directors held on June 30, 1920, were as follows:
    Kansas City, Mo., June SO, 1920.

    At a special meeting of the directors of the Schilling Grain Go. held on the above date there were present H. J. Schilling, Pres. M. S. Hailey, V. Pres, and B. O. Schilling, Sec. & Treas. representing all of the shares of the Corporation. This meeting was called to approve the steps which had already been made in connection with the sale of a part of the Capital Assets of the Corporation, and to authorize the payment to H. J. Schilling or through him a sum not to exceed Five thousand dollars ($5,000) in commissions for making this sale.
    (Signed) H. J. Schilling, Pres.

    (Signed) B. O. Schilling, See’y & Treas.

    H. J. Schilling was paid $4,500 as commissions for negotiating and consummating the sale. This amount was taken as a deduction by the petitioner in its income and profits-tax return and allowed by the respondent in his determination of the deficiency involved herein. The petitioner’s income was computed and its return filed on the accrual basis.
    On July 1, 1920, Y. R. Miller, one of the purchasers, was taken into the office of the Schilling Grain Co., where for three months prior to the date of the transfer, October 1, 1920, he was given a desk and paid a salary of $200 per month by the company. During the three months he was perfecting his organization, familiarizing himself with the company’s business and was being taken around personally by Schilling and introduced to the customers of the company. During the three months the purchasers of the business were permitted to and did circularize the petitioner’s customers and others with notices and advertisements of a change of ownership by a circular entitled “Announcing — An Old Business Under a Ñew Name,” and which reads in part as follows: “ Miller-McConnel Grain Company Wishes to Announce The Purchase of the Plant, Equipment, and General Grain and Feed Business of the Schilling Grain Company.” At the time of the sale of the business the petitioner had very few hay transactions and after the sale had none of importance.
    On October 1, 1920, the petitioner transferred to the Miller-McConnel Grain Co., which had been incorporated during the preceding September, all of the property described in the contract of May 19,1920, except a horse which had died in the meantime. Some additional equipment acquired subsequent to the making of the contract, together with a list of petitioner’s customers, was also transferred. The total purchase price was $30,688.81, the petitioner taking notes and mortgages for the deferred payments. The Miller-McCon-nel Grain Co. thereupon took over the petitioner’s entire organization and employees except one man who was discharged. Immediately after taking over the business the Miller-McConnel Grain Co. found it necessary on account of insufficient finances to discontinue selling to certain former customers of the petitioner whose accounts were large and very profitable.
    After the sale, Schilling, acting under an agreement with Miller, had a desk placed in the office of the Miller-McConnel Grain Co., which he used for six or seven months, during which time he advised with Miller in regard to the conduct of the business and as to what he should buy. Schilling had no connection with or interest in the new firm, except to see that it paid the balance of the purchase money.
    After October 1,1920, Schilling, using his membership in the board of trade, began transacting a commission business on the floor of the board, buying for the Miller-McConnel Grain Co. and for two or three other customers that he had previously obtained. In conducting the commission business Schilling neither bought nor sold grain either for himself or for the Schilling Grain Co., but acting for the Schilling Grain Co., bought for others and in their names for a commission. When Schilling left the office of the Miller-McConnel Grain Co. he moved into an office in the Board of Trade Building. At that time he had no organization or equipment except a desk. From the date of the delivery of its business and property to the Miller-McConnel Grain Co., the petitioner had no feed business nor did it buy grain for itself for resale in either wholesale or retail. It did not have any warehouse, wagons, teams, and machinery, nor did it grind feed, but only carried on a commission business as agent on the board of trade, buying for others and in their names for commission.

      The Miller-McConnel Grain Co. continued to carry on the feed business taken over from the petitioner until it failed and quit business in the early part of 1926. The last of the purchase price was not collected by the petitioner until about March, 1927.
    The petitioner continued its commission business for a few months after the failure of the Miller-McConnel Grain Co., when, having lost its best customer and its business being about gone, Schilling sold his membership on the board of trade and went to California. The petitioner is not now in business and its corporate existence is being maintained only until the disposition of this proceeding.
    The petitioner’s balance sheets as at the dates indicated show the following:
    November 1, 1907.

    November 1, 1908.

    January 1, 1910.

      January 1, 1911.

    January 1, 1912.

    January 1, 1913.

      The following is a statement of petitioner’s surplus, profits, and dividends paid from December 31, 1907, to December 31, 1919:

    In its income and profits-tax return the petitioner took a deduction of $5,600.36 as a loss sustained in the sale of its assets, computed as follows:

      The value at March 1, 1918, of the good will was computed by the petitioner as follows:

    In an audit of the return, respondent reduced the March 1, 1913, value of the assets by $10,560.60 representing the value of good will.
   OPINION.

Teammell:

The petitioner contends that the respondent erred in disallowing the March 1,1913, value of good will claimed in its return in determining the loss on assets which it sold to the Miller-McCon-nel Grain Co. during 1920. The petitioner also contends that the deduction of $4,500 taken in its return as a commission was properly allowed in the determination of the deficiency.

The respondent denies that any error was committed and contends that the good will had no value on March 1,1913; that whatever good will the petitioner had on that date had not cost anything; that it was not properly a part of the cost of the assets sold, and that as a matter of law the good will could not under the facts in this case have been transferred to the Miller-McConnel Grain Co., since the petitioner continued in business. The respondent also contends that the facts in regard to the deduction of $4,500 paid Schilling by the petitioner as a commission for negotiating and consummating the sale of the petitioner’s assets and business are insufficient to warrant the allowance of the item.

In regard to the deduction of $4,500 taken by the petitioner and which was allowed in the determination of the deficiency involved herein, the respondent by an amendment to his answer filed at the hearing alleges that the allowance of this deduction by him was erroneous. The burden of proving this allegation is upon the respondent and unless it is shown by a preponderance of the evidence that his allowance was erroneous, we would not be justified in changing his previous action. In support of this deduction the petitioner submitted evidence showing that on June 30, 1920, its directors, who were also all of its stockholders authorized the payment of a commission not exceeding $5,000 to Schilling for his services in making the sale; and that $4,500 was actually paid to Schilling for his services in consummating the sale. The respondent introduced no witnesses nor did he develop from the petitioner’s witnesses any evidence to support his allegation that his allowance of the deduction was erroneous. Therefore, we hold that the deduction of $4,500 is allowable.

The petitioner’s other contention relates to the disallowance of the amount of $10,560.60 claimed in its return as representing the value on March 1, 1913, of the good will which it sold to the Miller-McConnel Grain Co.

In support of the contention that its good will had a value of $10,560.60 on March 1, 1913, the petitioner introduced in evidence its balance sheets and a statement of its surplus, profits and dividends as set out in our findings. From a careful consideration of these in connection with the other evidence in the case, we are of the opinion that the petitioner’s good will had a value of $10,000 on March 1, 1913.

On May 19, 1920, the petitioner and H. J. Schilling contracted to sell the petitioner’s lands, buildings, lease, mill, machinery, elevator equipment, office and delivery equipment, together with other property, including its good will, and agreed not to enter into the wholesale or retail feed and seed business in Jackson and Clay Counties, Missouri, and Wyandotte County, Kansas, for a period of two years from the date of the transfer of the above-mentioned property. The evidence shows that the petitioner transferred its physical assets to the purchasers and there is no controversy as to this, but the respondent contends that under the circumstances in this case as a matter of law the petitioner did not transfer its good will.

The respondent’s contention is based upon the conclusion that, as the purchasers were not given the right to use the petitioner’s name and as the petitioner under the contract was prohibited from engaging in the wholesale and retail feed and seed business for only a period of two years, the petitioner retained its good will. We do not agree with the respondent’s contention on either of the points raised.

In Piggly Wiggly Corporation v. Saunders, 1 Fed. (2d) 572, it was contended that Saunders, who had sold his business and certain other assets, including good will, had as a result of such sale conveyed to the vendee corporation the right to the use of his name. There the court said:

While one may, if lie so desire, convey to another the use of his name (Royal Baking Powder Co. v. Royal, 122 Fed. 337, 58 C. C. A. 499; Kidd v. Johnson, 100 U. S. 617, 25 L. Ed. 769; Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267, 28 Sup. Ct. 288, 52 L. Ed. 481, and authorities cited in these cases; Frazer v. Frazer, etc., Co. 121 Ill. 147, 13 N. E. 639, 2 Am. St. Rep. 73, and authorities cited; Goldwyn Pictures Cor. v. Goldwyn, 296 Fed. 391 U. S. Cir. Ct. App. Sec. Cir., decided Jan. 7, 1924], yet in the absence of an express provision in a contract so showing it would seem one will not be held to have conveyed his name or parted with the right to use it in business, even though he may have sold a business, together with the good will incident thereto.

As to the restraint against the petitioner reentering the feed and hay business, we are convinced that it did not prevent the petitioner from transferring its good will. Unless the contract of sale had contained some reasonable limitation as to the petitioner reentering its former business, there would have been nothing to prevent the petitioner from immediately competing with its vendee. In Piggly Wiggly Corporation v. Saunders, supra, it was said:

Between the two rules mentioned the weight of authority seems to be that, in the absence of an express contract not to re-engage in business, the vendor of a business and the good will thereof is not precluded from again engaging in competitive trade, provided he shall do no wrongful thing or be guilty of no wrongful intentional act to seek to draw from the old business its customers, or shall not engage in such business as that the vending of its wares or merchandise would fall within the rule governing unfair competition. Knoedler v. Glaenzer, supra, and authorities therein cited.

In Counts v. Medley, 163 Mo. App. 546; 146 S. W. 465, the court said;

While the general rule is, that in the absence of an express agreement, the sale of a mercantile business, together with the good will thereof, does not import an agreement by the vendor not again to engage in a competing business, yet where the vendor expressly agrees not to engage in the same business at the same place for a specific time, or so long as the buyer continues in business, the obvious intention is to sell the good will of the business. (Shafer v. Sloan, 3 Cal. App. 335, 85 Pac. 162.)

We have found that the petitioner corporation took one of the purchasers of its assets into its office three months before the transfer of the assets, gave him a desk, familiarized him with the business, introduced him to its customers and during this time permitted him to circularize them with notices and an advertisement announcing the purchase of the business. This same purchaser testified that the restraint placed in the contract of sale was made for two years for the reason that the purchasers thought that'whatever good will of the petitioner they could not retain after two years they would never be able to retain.

In view of the foregoing, we are of the opinion that the petitioner sold and transferred to its vendee its good will which on March 1, 1913, had a value of $10,000.

The March 1, 1913, value of the assets sold should include this amount representing such good will. Appeal of Henry F. McCreery, 4 B. T. A. 967. If, when this amount is added to the March 1, 1913, value of the assets sold, the amount exceeds the cost of the assets, the deductible loss is the difference between the cost and the selling price. United States v. Flannery, 268 U. S. 98; McCaughn v. Ludington, 268 U. S. 106. The cost of the assets was not in dispute and no issue was raised with respect thereto.

Reviewed by the Board.

Judgment will be entered on 15 days'1 notice, vmder Rule 50.


author: Murdock : Van Foss an,

text:
    Wallace Plumbing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10450.
    Promulgated October 29, 1927.
    Commissioner’s determination approved for lack of evidence.

      Leon E. Williams, C. P. A., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
   Murdock :

This is a proceeding for the redetermination of a deficiency of $2,924.42 in income and profits taxes for the calendar year 1921. The only allegation of error is that “the taxable income has been overstated for the reason that the same has been erroneously computed on an accrual basis, whereas the books of the corporation are maintained on a cash receipts and disbursements basis.” The respondent admits that he has computed the taxpayer’s net income on the accrual basis.”

In the statement accompanying the deficiency letter the following appears:

Net Income reported_$3,709.10
Add:
(a) Purchases and direct labor-10,510.56
(b) Rentals_ 197.29
(c) Miscellaneous expense_ 1, 835. 05
(d) Life insurance- 492.28
16, 744. 28
Deduct:
(e)Sales_ 3,046.69
Taxable Net Income_ 13, 697. 59

Item (a) is explained by stating that from the payments for purchases and direct labor as shown by the cash book the reduction in accounts payable during the year has been subtracted. Item (b) is explained by a statement that the amount was omitted from the return; (c) is explained by a statement that the expenses as shown on the return were greater, by that amount, than the expenses shown by an analysis of the cash book; (d) is explained as an improper deduction from gross income under Regulations 45, section 294; (e) is explained by stating that from the receipts from business done as shown by an analysis of the cash book, the reduction in accounts receivable during the year was subtracted and the amount of the sales for the year was arrived at, which amount was $3,046.69 less than the sales shown on the return. The increase in net income as shown in the above statement gave rise to the deficiency. The correctness of the figures used by the Commissioner was not contested.

The secretary and treasurer of the petitioner was the only witness called. He stated that he knew almost nothing about bookkeeping, that he had not kept the petitioner’s books, that he had merely signed the income-tax returns, that the books had been kept by an employee who was not a practical bookkeeper, and that this employee had made the returns from the records which he kept. He further testified that the records kept by this employee consisted of a cash book, which was offered in evidence, and a journal, which was not offered in evidence but which showed the accounts receivable and the accounts payable. He stated that the records had been incompletely kept and had been the source of considerable trouble with both debtors and creditors. He also testified in regard to some other matters which are immaterial. The return was offered in evidence and it showed a deduction for bad debts in the amount of $1,221.30. The Commissioner in a statement accompanying the deficiency letter stated:

A careful examination of your original returns discloses that your books were kept on an accrual basis. Bad debts have been deducted on your return which must have been previously reported as income. Accounts receivable, accounts payable and inventories were carried on your books which accounts are kept in connection with accrual rather than cash receipts and disbursements basis. In view of the above it is held that your books reflect the accrual basis.

The evidence before us does not overcome the presumption that the Commissioner was correct in his determination of the deficiency, but on the contrary tends to sustain his contention that the records were kept by some accrual method.

Reviewed by the Board.

Judgment will be entered for the resfondent.

Van Foss an,

dissenting: I am unable to agree with the prevailing opinion in this case that the evidence is insufficient to sustain petitioner’s contention. Although the method employed by petitioner in keeping its books bore some resemblance to an accrual basis, I think it clear that petitioner was attempting to keep its books on a cash receipts and disbursements basis. The mere presence of certain additional records usually indicative of an accrual method of accounting is not, in my judgment, sufficient to warrant the conclusion that in this case petitioner’s books were kept on that basis.

It will scarcely be gainsaid that Congress intended to apply that method of accounting that will most accurately reflect true income. In 1920 petitioner’s sales Avere $218,148.22, while in 1921 they were but $119,051.86. As computed by the Commissioner on the accrual basis, taxes for 1920 amount to $1,342.42, while for 1921, with little over half the sales, taxes amount to $13,697.59. The existence of such a discrepancy in taxes, unless attributable to peculiar express factors, would seem to indicate a gross distortion of income.


text:
    Appeal of S. Stanwood Menken
    Docket No. 5771.
    Promulgated October 29, 1927.
    A taxpayer may not take as a deduction on bis individual tax return a proportionate part of a bad debt due to a partnership of which he was a member.

      B. B. Pettus, Esq., Edward Clifford, Esq., and Wilton H. Wallace, Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for the year 1918 in the amount of $2,715.20. The deficiency arises from the Commissioner’s action in refusing to alloiv as a deduction from petitioner’s gross income in 1918, an amount of $11,666.66 representing an alleged bad debt.
    FINDINGS OF FACT.
    Petitioner is an individual residing in the City of New York, where he is actively engaged in the practice of law as a member of a partnership in which he owned a one-third interest during 1918 and for many years prior thereto.
    During the fall of 1909 the law partnership was engaged by four individuals to render services in connection with the acquisition and consolidation of various independent telephone lines of the country and in the formation of the Continental Telegraph & Telephone Co. The four individuals were John A. Howard, Herman Stieffel, Max Koehler, and Samuel O. Harper. A large amount of time was spent on the matter by the partnership during 1909, 1910, and 1911. The proposed merger failed in 1911 and Avas abandoned. In 1911 Howard, one of the active parties, failed and Avent into bankruptcy. Some time in 1912 it was verbally agreed between the petitioner and John A. Howard that under the circumstances a reasonable fee for services rendered would be $35,000. Prior to the agreement in 1912, no definite fee for services had been agreed upon between the parties involved. The partnership was on a cash receipts and disbursements basis. It does not appear when, if at all, the account was charged on its books and it was never charged off. There is no evidence as to how, if at all, petitioner kept his personal books.
    No part of the fee of $35,000 was ever received by the partnership or petitioner. No statement or bill for services was ever rendered, and little effort was made to collect the account. No action at law was brought against any one to force collection. Howard was a bankrupt and unable to pay, but Stieffel, Koehler and Harper were men of considerable means.
    In his income-tax return for 1918, the petitioner deducted $11,-666.66, one-third of the fee of $35,000, from his gross income as a debt ascertained to be worthless and charged off during the taxable year. The Commissioner disallowed such deduction and determined the deficiency now in controversy.
   OPINION.

Van Fossan:

From the record of this case it appears that petitioner was a member of a partnership engaged in the practice of law, and that the alleged bad debt arose from the failure of a group of persons engaged in promoting a telephone merger to pay for legal services furnished them by the partnership. The agreed charge for services not having been paid to the partnership, petitioner deducted as a bad debt on his personal income-tax return for 1918 an amount equal to one-third of the charge, said amount being proportionate to his interest in the partnership.

Petitioner is claiming the deduction as an individual. The debt was one owing to the partnership. A partnership, under the law though not itself taxable, must file a return and should take the partnership deductions. After computation of the net income the individuals must include their distributive shares in their individual tax returns. In this case the record is silent as to how the partnership treated the account in its return. Presumptively, its return was correctly made. If so, this alleged bad debt, if deductible, was deducted in the partnership return and its deduction has been reflected in the reduced proportionate share of net income received by petitioner. We do not know this to be the fact. The record is wanting, but we can not presume to the contrary. We know of no provision of law allowing a partner to take as a personal deduction on his individual return a proportionate part of a bad debt owing to a partnership of which he is a member.

Though the above decision makes it unnecessary to consider the case further, attention is called to the fact that it does not appear that the account was ever charged off the partnership’s books or that it was ever carried into petitioner’s books, either as -a “ charge on ” or a “charge off.” (See Appeal of Charles Collin, 1 B. T. A. 305; J. Noble Hayes v. Commissioner, 7 B. T. A. 936.) Our decision makes it unnecessary to consider whether or not the New York statute of limitations had run against the collection of the account, as contended by petitioner.

Reviewed by the Board.

Judgment will be entered for the Commissioner.


author: Simfkin:

text:
    Wyoming Central Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9965, 20546.
    Promulgated October 29, 1927.
    1. As to tbe year 1919, the Commissioner sent a deficiency notice dated August 6, 1924, to a wrong address from which it was returned undelivered. In November, 1924, he made an assessment purporting to be under section 274 (c). Subsequently petitioner filed a claim in abatement as to such assessment, which was denied by the Commissioner’s letter of August 27, 1926, and as to which the petitioner asks the Board’s redetermination. Held, that the Commissioner has not determined a deficiency and that the Board has no jurisdiction for the year 1919.
    2. As to the year 1918, return was filed June 19, 1919, and jeopardy assessment made in March, 1924. Claims for abatement and refund were filed and appeal was taken from letter of October 28, 1925, rejecting said claims. Held, collection of the deficiency is barred.

      John E. Hughes, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    These appeals, which involve the taxable years 1918 and 1919 and which were consolidated for hearing and decision, came on for hearing on a motion filed by respondent to dismiss the appeal respecting 1919 for the reason that the Board has no jurisdiction to hear and determine said appeal. The petition (respecting the year 1919) was filed within 60 days after a letter, bearing the date of August 27, 1926, was mailed to petitioner by respondent. Such letter purports to deny a claim for abatement and notifies petitioner of his right to appeal to the Board within 60 days. In support of his motion, respondent asserts that petitioner was notified of a deficiency deter-ruination for 1919 by registered letter mailed August 6, 1924; that, upon petitioner’s failure to appeal to the Board within the 60-day period prescribed by section 274 (a), the deficiency proposed in said notice was regularly assessed in November, 1924, under section 274 (c); that subsequently, petitioner filed a claim for abatement relative to such deficiency; that, the assessment being a regular assessment (rather than a jeopardy assessment under 274 (d)), the respondent, through a mistake, erroneously and without statutory authority, accepted and considered the abatement claim; and that the statement contained in respondent’s letter of August 27, 1926, which letter rejected the claim for abatement, informing petitioner of his right to appeal before the Board under the provisions of section 283 of the Revenue Act of 1926, was erroneous, as the deficiency appealed from, being the same one that was regularly assessed in 1924, is not a deficiency under said section 283, which provides that deficiencies are amounts in excess of the tax returned plus any amount subsequently assessed as deficiencies. Petitioner asserts that the letter of August 26, 1924, was not delivered because improperly addressed; that the improper address being due to the negligence of the Bureau of Internal Revenue, the mailing of the letter did not constitute notice under section 274; and contends that if the petition is dismissed, the petitioner’s right of appeal to the Board will be defeated. No question of jurisdiction is raised respecting the year 1918.
    By amended petition, petitioner alleges the statute of limitations bars the deficiencies for both the years in controversy, and that question is also before us on a motion made by the petitioner. At the hearing it was stipulated, with respect to 1919, that the Board may decide whether the petition shall be dismissed for want of jurisdiction. If this question is decided in the negative, the Board may then decide whether the alleged deficiency is barred by the statute of limitations.
    FINDINGS OF FACT.
    Petitioner is a Wyoming corporation with its principal offices located at Casper, Wyo. Its return (Form 1120) for the taxable year 1919, was filed on May 27,1920, in the fourteenth New York district, petitioner at that time being located in Troy, N. Y. On November 5, 1923, respondent received a letter dated October 30, 1923, from petitioner notifying respondent of a change of address. The letter, insofar as here pertinent, follows :
    New York On. Company
    Casper, Wyoming
    Frank G. Curtis, Founder
    (letter-head)
    October 30, 1923.
    Mr. C. B. Allen,
    Acting Deputy Commissioner,
    Internal Revenue Bureau,
    Washington, D. C.

      Reference: IT: NRA: F-6: JL7-4962-App.

    Deae Sib: Your letter of October 15th, enclosing statement of the Income Tax of the Wyoming Central Association, was forwarded from Troy, New York, to the company’s office at Casper, Wyoming.
    Will you kindly change the address of the Wyoming Central Association to the following :
    Wyoming Central Association
    % New York Oil Company,
    Casper, Wyoming.
    We wish to advise you that the Wyoming Central Association was incorporated in 1891, was an existing company in 1913, and control of this company was purchased by the New York Oil Company in 1919, the New York Oil Company subsequently acquiring practically all of the outstanding stock of the Wyoming Central Association.
    The present officers of the Wyoming Central Association have scant knowledge of the affairs of the Wyoming Central Association prior to 1919. The Wyoming Central Association books, minutes and other papers are in our hands, and we can dig through the past records and work up the necessary data for you.
    The foregoing letter was signed by petitioner’s president, who, it appears from the letterhead on the stationery of the New York Oil Co. on which the letter was written, was also an officer of the latter company.
    On August 6, 1924, respondent mailed the usual 60-day letter by registered mail advising petitioner of a determination of a deficiency in his income-tax liability for the year 1919 in the amount of $6,388.88 and of his right to file appeal therefrom to the Board within the 60-day period prescribed by section 274 of the Revenue Act of 1924. Further facts respecting the letter, its attempted delivery and return, are set forth in detail in the following letter, the contents of which were fully supported by testimony:

      United States Post Oeeice,

      Casper, Wyoming, July SI, 1987,

    Wyoming Central Association,

      Bom 1099, Casper, Wyoming.

    Att: M. W. Winter, Asst. See’y.
    Gentlemen : Replying to yours of July 20th, relative to a registered letter from the Commissioner of Internal Revenue, Washington, D. C., addressed to the Wyoming Central Association during the month of August, 1924.
    Please be advised that this office finds that on August 9, 1924, we received from Chadron & Lander train 603 a register, No. 326602, Washington, D. C., from the Commissioner of Internal Revenue, addressed to the Wyoming Central Association, Casper, Wyoming, without further address. This office gave this letter directory service, being unable to find the Wyoming Central Association listed either in our directory, the city directory, or the telephone directory. Notice was placed in our General Delivery where it remained until the morning of August the 15th, covering the five-day return request, which was on the register. The same being returned to sender on August 15, 1924, marked “ unclaimed ”.
    We further find that this office did not have an address and did not know the whereabouts of the Wyoming Central Association until September 18, 1925, when an address was filed at this office for mail addressed to the above mentioned company to be placed in Box 1099.
    Trusting this will explain the matter as requested in your letter of above mentioned date, I am,
    Sincerely yours,
    (Signed) Edwin M. Bean,

      Postmaster.

    Thereafter, on November 20, 1924 (the 60-day period provided in section 274 (a) of the Revenue Act of 1924 having elapsed without an appeal being filed), the deficiency of $6,388.88 was assessed against the petitioner pursuant to the above-mentioned deficiency notice. The assessment was intended to be, and in fact was, a so-called “ regular ” assessment rather than a jeopardy assessment under section 274 (d). The assessment list on which said assessment was entered was received by the collector of internal revenue of the fourteenth New York district. On April 6, 1925, the matter was transferred to the collector at Cheyenne, Wyo., in whose district petitioner was located. Subsequent to such assessment, petitioner filed a claim in abatement which was accepted and considered as such by the Bureau of Internal Revenue. A letter, under date of August 27, 1926, notifying petitioner of the rejection of the abatement claim, reads as follows:
    Your claim for abatement of a deficiency in tax amounting to $6,388.88 assessed against you for the taxable year 1919 has been carefully considered by this office, and it is proposed to allow the said claim for $ none and to reject it for $6,388.88, as computed upon the enclosed statement.
    In accordance with the provisions of Section 283 (e) or Section 283 (k) of the Revenue Act of 1926, you are allowed 60 days (not counting Sunday as the sixtieth day) from the date of mailing of this letter within which to file a petition -with the United States Board of Tax Appeals, Earle Building, Washington, D. O. contesting in whole or in part the correctness of this determination.
    If you acquiesce in this determination and do not desire to file such petition, you are requested to execute waiver of your right to file a petition, with the United States Board of Tax Appeals on the enclosed . Form A, and forward it to the Commissioner of Internal Revenue, Washington, D. C., for the attention of IT: CR: G-5-60D-RD. In the event that you acquiesce in a part of the determination, the waiver should he executed with respect to the items to which you agree.
    Respectfully yours,
    D. H. Blair,

      Commissioner.

    By C. R. Nash,

      Asst, to the Commissioner.

    On October 13, 1926 (within 60 days of the date of the letter just quoted) petitioner filed a petition with the Board appealing from respondent’s determination of the deficiency of $6,388.88 for 1919.
    The facts pertaining to the taxable year 1918 are set forth in the following stipulation:
    The petitioner filed its income and profits tax return for the calendar year 1918 with the proper Collector of Internal Revenue on June 19, 1919.
    In March, 1924, the respondent made an additional assessment of tax against the petitioner for the year 1918 in the amount of $17,777.05. On November 28, 1924 the petitioner paid $1,000.00 of said additional tax and on January 3, 1925, the petitioner paid a further sum of $1,000.00 and on January 28, 1925 the petitioner paid a further sum of $1,000.00 of the said assessment, leaving an unpaid balance of $14,777.05 which has not been paid. The said assessment is the one in controversy in this appeal.
    The petitioner has not filed a waiver extending the time for assessment or collection of any deficiency for the year 1918. No suit or other proceeding in court has been begun for the collection of the tax nor has the Collector issued or served any warrant for distraint.
    On June 29, 1927 the petitioner, by its attorney of record, filed a motion with the Board of Tax Appeals moving, among other things, that its petition herein be amended in the following particular, to-wit: “(a) The collection of the alleged deficiency is outlawed by the statute of limitations.” It is further stipulated and agreed that the Board of Tax Appeals may allow the ameidment to the petition in the form above stated and it is further agreed that the said allegation is denied by the respondent.
    The petition, respecting the taxable year 1918, was filed on December 14, 1925, within 60 days of the mailing of a letter dated October 28, 1925, rejecting petitioner’s claims for abatement and refund in the amounts of $14,777.05 and $3,000, respectively, filed for the year 1918.
   OPINION.

Simfkin:

We are not persuaded by the reasons advanced by the respondent in support of his motion to dismiss the appeal taken for the year 1919. However, the chain of events leading to the appeal, when examined in the light of the statutory provisions conferring jurisdiction, leads us to conclude with respondent that the Board is without jurisdiction as to that year. The relevant facts will be briefly restated in considering the effect of the several events in the order of their happening.

In November, 1923, respondent received a notice from the petitioner of a change of address to “ % New York Oil Company, Casper, Wyoming:” When mail is directed to be sent in care of another, it is commonly understood that the one so directing has no address known to the postal authorities in a given locality and can be reached only by the use of the known address of another. Also, petitioner’s use of a letterhead of another corporation, and its statement that it was a subsidiary of such other corporation, further indicate the absence of a separate postal identity in petitioner corporation. Respondent neglected to address the 60-day letter of August 6, 1924, as instructed, and the insufficient address resulted in failure of delivery and return of the letter to the respondent. We have held in Walter G. Morgan, 5 B. T. A. 1035, and Utah Orpheum Co., 6 B. T. A. 343, that such a notice addressed to the wrong place is not notice under section 274 (a) of the Revenue Act of 1924. Inasmuch as the purpose of an address is to permit delivery in due course, an insufficient address is quite as faulty as a complete but erroneous one. Accordingly, we are of the opinion that, under the principles enunciated in the cited cases, the letter of August 6, 1924, was not notice to petitioner under the statutory provision which reads:

Sec. 274. (a) If, in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the taxpayer, except as provided in subdivision (d), shall be notified of such deficiency by registered mail, but such deficiency shall be assessed only as hereinafter provided. Within 60 days after such notice is mailed the taxpayer may file an appeal with the Board of Tax Appeals established by section 900.

The next action of the respondent was the assessment of the deficiency referred to in the above-mentioned 60-day letter. This assessment was made on November 20, 1924. It was not intended to be, and the assessment lists show it was not a jeopardy assessment but was an assessment made pursuant to section 274 (c), which provides:

(c) If the taxpayer does not file an appeal with the Board within the time prescribed in subdivision (a) of this section, the deficiency of which the taxpayer has been notified shall be assessed, and shall be paid upon notice and demand from the collector.

Section 274 (subdivision (a)) provides that assessment shall be made “ only as hereinafter provided.” The same section subsequently provides for assessment (except in cases of jeopardy) only after decision by the Board or upon failure to appeal from a determined deficiency within 60 days after notice has been mailed to the taxpayer. In view of these provisions, and our finding that statutory notice had not been mailed petitioner, the assessment in November was not made in compliance with the statute.

Respecting the assessment, suffice it to say that the action did not of itself constitute a determination of deficiency from which petitioner could appeal, for no notice thereof, other than the usual notice and demand for payment, was served upon petitioner. See Joseph Garneau Co., 1 B. T. A. 75.

At some time subsequent to the assessment, petitioner filed a claim for abatement which was accepted and considered by respondent. It should be noted at this point that the Eevenue Act of 1924 makes no provision for a claim in abatement from any assessment other than one in jeopardy. On August 27, 1926, respondent addressed a letter to petitioner notifying it of the rejection of the abatement claim. It was from this letter that the petitioner filed the appeal in question in accordance with the statement in the letter to the effect that an appeal was allowable under section 283 of the Eevenue Act of 1926.

It thus appears there was a determination of a deficiency in tax during August, 1924, of which petitioner received no statutory notice. There followed an unauthorized assessment in November of that year. Subsequently, petitioner filed an unauthorized claim of abatement with respect thereto. Later respondent finally decided the amount improperly assessed was the correct deficiency, and notified petitioner the claim for abatement was rejected — and petitioner appeals.

Does such a state of facts come within the purview of the statutory provisions prescribing the class of cases over which the Board is given jurisdiction? The Eevenue Acts of 1924 and 1926 provide for appeal to the Board in two classes of cases, which are distinguished by two designated and essentially different procedural bases. Under sections 274 (a), (b), and (c) of those Acts, appeal may be filed within 60 days after notice of a deficiency determination is mailed. Also, appeal is granted (under sections 274 (d) and 279 of the 1924 Act, and section 279 of the 1926 Act) in event of a jeopardy assessment followed by the rejection of a claim for abatement. Section 283 of the 1926 Act, which is referred to in the letter of August 27, 1926, does not enlarge upon the two prescribed procedural routes leading to appeal to the Board in any way pertinent to the case here presented.

It seems apparent from what has been said, that the facts of record do not present a case within either of the classes over which the Board has jurisdiction. It could not be an appeal from a jeopardy assessment for there was no such assessment. On the other hand, the letter of August 27, 1926, does not profess to be a notice of deficiency determination under section 274 (a). It is true, in a sense, that the letter does notify petitioner of a determination of a deficiency. But, in form and purport, the letter professes to be a part of the procedure leading to an appeal from a jeopardy assessment, while petitioner now contends that it represents a portion of the procedure essential to ground an appeal from a regular assessment. We do not think such a letter qualifies as “ such notice ” from which a taxpayer may appeal under the last sentence of section 274 (a). To hold otherwise would be to sanction appeals taken at the termination of a hybrid procedure created by the confusing of the two simple distinct types of procedure prescribed by statute as essential to the Board’s jurisdiction. The motion to dismiss the appeal relating to the year 1919 must be granted.

There remains the question whether the deficiency for 1918 is barred by the statute of limitations. The same question was considered on an analagous state of facts and decided adversely to the respondent in Reliance Manufacturing Co., 7 B. T. A. 583. That decision is conclusive of the issue at bar.

Reviewed by the Board.

The petition for the yeatr 1919 is dismissed. Judgment will he entered for the petitioner respecting the yeatr 1918.