author: Graupner Trammell,

text:
    Appeal of GAULEY MOUNTAIN COAL CO.
    Docket No. 1463.
    Submitted October 9, 1925.
    Decided February 9, 1926.
    Where the taxpayer agreed to sell coal to a railway company at 25 cents per ton less than the market price for a period of 10 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 taxpayer may not include in its invested capital the amount of $250,000, representing the difference betwéen market and selling prices for the 10-year period.

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

      M. N. Fisher, Esq., for the Commissioner.
    Before Gbaupnee, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1918 in the amount of $71,-393.79, of which $31,483.64 is in controversy. The deficiency arises from the refusal of the Commissioner to permit (1) the inclusion in invested capital of the value of certain rights acquired under a contract between the taxpayer and the Chesapeake & Ohio Railway Co.; and (2) the reduction of invested capital by adjustments to plant equipment. The controversy on the latter point was settled by a stipulation filed.
    FINDINGS OP PACT.
    The taxpayer 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 coal mines in Fayette County, W. Va.
    Prior to the organization of the taxpayer, 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 Railway Co., as party of the first part, and the taxpayer, as party of the second part, entered into an agreement, the material parts of which are as follows :
    1. Tbe said party of the second part being the assignee of William N. Page of Fayette 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, Fayette 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 ears 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 completed to supply to the said Coal Company its due proportion of cars for the prompt delivery of its product without delay, except such as may be caused by unavoidable accidents. The said Railway Company also agrees that the rates on coal to any iron or steel works shall at all times be reasonable and equitable as compared withWhe 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 River section of the railroad.
    5. It is further agreed that in case the selling price of the New River 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 Railway 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 River section should exceed one dollar per ton, the said Coal Company shall be paid by the said Railway Company a corresponding pro rata additional allowance upon the rate of sixty cents per ton hereinbefore specified.
    6. The said Railway 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.
    $ ⅜ ⅜ ⅜ ⅜ $ ⅜
    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 Railway 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 Railway 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 4 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 taxpayer. The taxpayer has not paid taxes upon this branch line, which has always been managed, maintained, and operated by the Railway Company.
    During the 10-vear period in which the agreement between the two companies was effective, the taxpayer supplied the Railway-Company with at least 100,000 tons of coal each year, at 25 cents per ton under the prevailing market price.
    The Commissioner, in adjusting the taxpayer’s plant and equipment account, erroneously reduced the invested capital for the year 1918 by the sum of $234,381.33.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Graupner

: The petition in this appeal contains two allegations of error, one of which was disposed of by stipulation, in accordance with which the taxpayer’s invested capital should be increased in the amount of $234,381.33, as set forth in the findings of fact.

The basis of the other alleged error is the contention of the taxpayer that it should be permitted to include in invested capital the amount of $250,000, representing the difference between the market price of coal and the price at which it supplied coal to the Chesapeake & Ohio Railway Co. during the 10 years following the year 1889.

Section 326 of the Revenue Act of 1918 provides for the inclusion in invested capital of (1) cash paid in for stock; (2) tangible property paid in for stock; (3) paid-in or earned surplus and undivided profits; and (4) intangible property paid in for stock. These provisions are surrounded by circumstances with which we are not immediately concerned. Our problem is to determine under which of the above provisions, if any, the taxpayer is entitled to have the amount of $250,000 included in its invested capital. Clearly, it can not be included as cash paid in, as there was no cash involved in the transaction.

Can it be included under the second provision, which relates to tangible property paid in for stock or shares? We think not. The contractual rights which afforded the taxpayer the means for marketing its coal.can, at best, only be considered as an intangible right. Even though these rights operated to the advantage of the taxpayer, they do not come within the provisions of section 326 (a) (4) of the 1918 Act, because they were not paid in for stock or shares.

The principal contention of the taxpayer as to this item is that it should be included in invested capital as earned surplus, on the theory that the sacrifice made in the reduction in price at which it delivered coal to the Railway Company represents a value to be capitalized. The actual result of the contract was that the taxpayer obtained a customer, which, in consideration of the low price which it obtained, constructed a road to receive delivery of coal at the mine. The taxpayer thus gained a certain purchaser for its product and a means of shipping surplus coal mined. What it obtained was really a service and not a capital asset. If any gain accrued to the taxpayer from the construction of the railroad, it was reflected in an increase in the value of its property, and this can not be included in invested capital. LaBelle Iron Works v. United States, 256 U. S. 371.

From the evidence in this appeal, we can not find that the taxpayer embarked anything in the construction of the railroad or risked any of its capital in the enterprise, and we accordingly approve the action of the Commissioner in excluding the claimed amount of $250,000 from the invested capital of the taxpayer,

Trammell,

dissenting: The 25 cents per ton under the market price for coal which the taxpayer gave up to the Railway Company, in consideration for the railroad facilities and rights, was in substance the payment for those facilities and rights. Instead of receiving that money, it allowed the railroad to retain it and received the intangible asset in lieu thereof. This, in my opinion, is the acquisition of the intangible asset, that is, the rights in the railroad facilities, for the consideration paid out of earnings. That part of the earnings used in acquiring that asset should be included in earned surplus.


source: Caselaw Access Project

author: MaRquette:

license: Public Domain

text:
    Appeal of NELLIE KENEFICK, Executrix of the Estate of WILLIAM KENEFICK, Deceased.
    Docket No. 523.
    Submitted April 10, 1925.
    Decided February 11, 1926.
    1. Where stock was sold in 1918 at a price equal to the fair market value of the stock at the date of its acquisition, on exchange for other stock in 1917, held,, no loss was sustained in 1918 on such sale.
    2. Certain debts held properly deductible as worthless in the year 1918.

      Arthur Miller, Franklin 0. Parks and Alton Gumfmer, Esqs., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before MaRquette and Ivins.
    This is an appeal from the determination of a net deficiency in income tax for the year 1918 in the amount of $20,123.40. Two questions are raised. (1) Whether the decedent sustained a loss on the sale of certain stock in 1918; and (2) whether a partnership of which the decedent was a member was entitled to a deduction for a bad debt in 1918.
    FINDINGS OF FACT.
    The taxpayer is the executrix and sole residuary legatee of the estate of William Kenefick, who died in 1921 and was a resident of Kansas City, Mo.
    The decedent and his wife (the executrix and taxpayer in this appeal) had separate and independent estates, the estate of Mrs. Kenefick being greater in 1917 than the estate of her husband. They conducted their respective affairs and made their investments separately and independently, and kept separate records.
    In 1906, Mrs. Kenefick invested $100,000 out of her own funds in stock of the Banque Franco Americaine, a French banking corporation of Paris, France, which was organized and operated with an extensive foreign' investment department, having for its main purpose the underwriting and placing in France of issues of American, English, Italian, and Spanish industrial and railroad securities; and it had large investments in the Asti Chevasso Railway in Italy. One Day, a son-in-law of the Keneficks, was the American representative of the bank. Mrs. Kenefick made the investment upon the advice of her husband, and for some years up to 1913 annually received dividends of 5 per cent on the stock. '
    In 1913, owing to the unsettled condition of European affairs and the resulting loss of interest by foreign investors in securities of the bank, it was decided to liquidate the bank’s affairs during solvency. The commercial department of the bank was sold in 1913, prior to the appointment of the liquidator, to an English bank at a profit of $250,000. Thereafter, the liquidation continued and is still in process. The advent of the European War in 1914 and the moratorium decreed by the French Government caused a suspension of the liquidation during the war years.
    In March, 1911, the decedent invested $100,000 of his own funds in stock of the Blue Mound Mining Co., a corporation which was engaged in the mining of zinc.
    From 1913 on, Mrs. Kenefick frequently complained to the decedent because the French bank 'stock paid her no dividends and held him to blame for the unprofitable investment which she had made. In August, 1917, the decedent made an exchange with Mrs. Kenefick of his Blue Mound Mining Co. stock — which was paying dividends and gave promise of being a safe investment — for the stock of Banque Franco Americaine which Mrs. Kenefick owned.
    The stock of neither company was listed on any stock exchange. That of the Blue Mound Mining Co. was closely held by some half dozen individuals. That of the Banque Franco Americaine was sold through Day, and no sales occurred between 1913 and 1918, prior to August, when the decedent sold the Banque Franco Americaine stock to Day for $10,000, receiving Day’s note in payment therefor. The only payment made by Day on the note was on March 13, 1925, when $1,709.46 was paid on account of the principal of the note. No interest payments have been made.
    The first report of the liquidator of the bank’s affairs was made in 1919, and the first dividend in liquidation was paid in 1924, when Day received the equivalent of approximately $1,400.
    The fair market value in August, 1917, of the stock of the Banque Franco Americaine, which the decedent then received on the exchange of stock with Mrs. Kenefick, was $10,000.
    In his return for 1918 the decedent claimed a loss of $90,000, resulting from the sale by him of the stock of the Banque Franco Americaine.
    The decedent was a partner with one Hoffman, his son-in-law, doing business under the name of Hoffman Tie & Timber Co. Their interests were one-half each. The M. O. G. Land Improving Co., a corporation of which Hoffman was president and a stockholder, owned land in Oklahoma which was believed to be valuable for its oil content. In 1918 the corporation owed the partnership a little over $29,000, which amount the partnership charged off on its books in 1918 as worthless and uncollectible. The corporation did no business after 1917, and the entire indebtedness of $29,000 was incurred prior to 1917. In 1916 the corporation had liabilities of some $47,000 and assets of about $4,000, not including real estate. With reference to all of the corporation’s real estate, tax certificates had issued by 1916 by reason of the nonpayment of taxes imposed on the land under the laws of Oklahoma. In 1918 the land was sold for nonpayment of taxes and deeds were delivered therefor. After the tax sales of the land in 1918 the partnership considered the debt as worthless, and the decedent claimed as a bad debt deduction, in his return for 1918, one-half of the indebtedness owing the partnership.
    The M. O. G. Land Improving Co. was also indebted to the decedent in the sum of $2,000. Of this sum $1,000 had been loaned by him to the corporation prior to 1916, and the other $1,000 arose from the payment by the decedent in 1911 of a note of the corporation, on which note the decedent was an endorser. The decedent claimed the amount of $2,000 as a bad debt 'deduction in his return for 1918.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on Y days’ notice, under Rule 50.
   OPINION.

MaRquette:

The first question presented relates to an alleged loss of $90,000, claimed to have been sustained in 1918, upon the sale of stock of the Banque Franco Americaine to Day. It is the contention of the taxpayer that, at the time of the exchange in August, 191Y, the stock had a value equal to its par value of $100,000, and that this value should be used as the basis for determining the loss on the sale in 1918. The Commissioner held that the stock had no value at the time of the exchange in 191Y in excess of the sales price realized in 1918, and disallowed the deduction. The value of the stock at the time of the exchange is, therefore, the point upon which the taxpayer’s case hinges. The testimony offered to prove the fair market value of the stock of the bank in 191Y was that of Day, a son-in-law of the decedent, who had been the representative of the bank in the United States. His evidence consisted principally of his opinion as to how the bank would pay out on liquidation and the history of the institution. His only expression of value in August, 191Y, is found in the following quotation from his testimony on cross examination:

Q. So, you think that the stock would have been worth about as much in August, 1917, as it was in 1918, when it was sold to you?
A. Yes, sir.
Q. About the same value?
A. Yes, sir.
Q. You placed about the same value on the stock?
A. Yes, sir.

No actual sales of the stock occurred prior to that by the decedent to Day. No evidence was produced by the taxpayer to show the financial condition of the Banque Franco Americaine, or otherwise, to assist in a determination that the fair market value of the bank stock at the time of the exchange in 1917 was other than as testified in the above quotation.

The decedent knew from investigation, and from conversations with Day, the condition of the Banque Franco Americaine. He had sent his attorney to Europe on at least two occasions to bring back a report on the situation. The attorney was produced as a witness, but declined to express any opinion as to the value of this stock. There were no other sales than the one to Day in 1918. Day certainly knew the situation, at least as well as the decedent did. We have Day’s testimony that the value in 1917 was no different than when he purchased the stock in 1918. True, there was no market in 1917, in the sense of there being a willing buyer and seller, but there is nothing in this appeal to show that the 1917 value was any greater or less than the value in 1918, and, upon the record as it stands before us, we can come to no other conclusion than that the sale in 1918 and the testimony of Day express the fair market value of the stock in 1917. It follows that the $90,000 was not deductible as a loss sustained in 1918. Whether the loss, if any, was deductible in 1917, is not before us for determination.

The remaining questions relate to the deduction of bad debts owing to the decedent by a certain corporation, which was engaged in the business of the development of Oklahoma oil lands.

In 1916, the corporation had liabilities of some $47,000 and assets of about $4,000, without including among the assets any value for the oil lands which were owned by it. Those lands were subject to unpaid taxes accumulated through a series of years. Tax lien certificates had issued in 1916, but under the laws of Oklahoma the land could not be sold for the tax obligations until the expiration of two years. During the interim there was the possibility of the discovery of oil, which, .when availed of, would have offset the taxes and all other liabilities and quite probably netted a considerable amount in excess thereof.

' The decedent, being conversant with the situation, delayed any charge off of the obligations until there was a final certainty that they could never be paid. Such, in his opinion, occurred in 1918, when deeds for the property were delivered because of the nonpayment of the taxes.

The determination by the Commissioner disallowing the deductions for bad debts constitutes prima facie evidence that the debts were not ascertained to be worthless and charged off within the year 1918. The taxpayer has sustained the burden of proof by evidence showing the divestment of all title to the lands in 1918 and the possession of no assets by the debtor out of which the debts might be paid. It was then incumbent upon the Commissioner to submit to us the proper evidence showing that the debt was ascertained to be worthless in some year other than 1918. The Commissioner contends that the debt was ascertained to be worthless in 1916, because the debtor then had liabilities of $47,000 and assets of $4,000, without including the oil lands therein.

Assuming that the tax-lien certificate constituted a sale of the land, subject to the condition subsequent of redemption by the discharge of the lien within two years, that equity or right of redemption was an asset the value of which would be determined by the value of the land less the lien and other charges in connection therewith. We do not deem that it was incumbent upon the taxpayer, under our rules, to negative a contention by the Commissioner, but rather that the Commissioner should prove the worthlessness of the debt in a year other than 1918, in' contradiction of the proof by the taxpayer that the debt was ascertained by him to be worthless in 1918 and then charged off. The deduction of the bad debts should be allowed for 1918. See Appeal of Steele Cotton Mill Co., 1 B. T. A. 299; Appeal of Murchison National Bank, 1 B. T. A. 617; Appeal of Magnus, Mabee & Reynard, Inc., 1 B. T. A. 907; Appeal of G. C. Krack, 1 B. T. A. 1119.


text:
    Appeal of SAM ISRAEL.
    Docket No. 4045.
    Submitted October 1, 1925.
    Decided February 11, 1926.

      F. O. Graves, Esq., for the Commissioner.
    Before Marquette, Green, and Love.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $118.38.
    The deficiency arises ■ from the Commissioner’s refusal to allow the taxpayer a deduction of $3,000 as traveling expenses.
    FINDINGS OF FACT.
    . 1. The taxpayer, a resident of ISTew York City, was employed during the year 1923 as a traveling salesman, selling goods on a commission basis of 5 per cent on all orders delivered and paid for. The location and extent of the territory covered by him does not appear.

      2. The total amount received by the taxpayer from his employer during 1923 was $7,404.96, of which $2,700 represented advances for traveling expenses. These advances covered a period of 27 weeks during which he was traveling.
    3. The taxpayer’s traveling expenses consisted of disbursements for railroad fares, hotel rooms, meals, sample rooms, baggage transfers, excess baggage charges, sample carriers, tips, and entertainment of prospective buyers. He also made some expenditures entertaining customers in New York.
    4. The taxpayer kept no account of the expenses above described, and the amount of the deduction he claims is based upon his approximation of average weekly expenditures. No evidence was offered from which personal expenses could be segregated from the amounts expended.
   DECISION.

The determination of the Commissioner is approved. Appeal of Barnett Weiss, 3 B. T. A. 228.


author: GratjpneR

text:
    Appeal of W. F. SEVERA CO.
    Docket No. 1702.
    Submitted October 20, 1925.
    Decided February 11, 1926.
    Evidenee held, insufficient to establish value of good will.
    Additional salaries disallowed.

      W. T. Frame, Esq., and P. L. Billings, E. G. Prouty, and I. B. McGladrey, O. P. A.’s, for the taxpayer.

      Ward Loveless, Esq., for the Commissioner.
    Before Geattpner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $13,021.06 for the calendar year 1918. It is alleged that the Commissioner erred: (1) In refusing to allow claimed additional salaries amounting to $12,000; (2) in adjusting taxpayer’s opening inventory for the year; and (3) in refusing to permit the inclusion in invested capital of an amount claimed to represent the purchase price of good will. In the petition the taxpayer also claimed the right to assessment under sections 327 and 328 of the Revenue Act of 1918, but it withdrew this claim.
    FINDINGS OF FACT.
    The taxpayer is an Iowa corporation, with its principal office at Cedar Rapids, and is engaged in the manufacture of proprietary medicines.

      Upon its organization in 1903, the taxpayer purchased the business -which W. F. Severa had operated as an individual since 1880, issuing in exchange therefor its capital stock in the amount of $50,000. The assets taken over by the corporation, exclusive of the good will here claimed, amounted to approximately $41,000. Good will was not shown on the books of Severa, nor has it ever been recorded on the taxpayer’s books. About 1908 earnings of the taxpayer were added to its original investment, as shown on its books, which were continued in the same manner as they had been kept by Severa, and by this means its capital was brought up to the amount of $50,000.
    The taxpayer has always been a close corporation, its stock being held by W. F. Severa and members of his family and by J. H. Vosmek. In 1918 the directors drew the following salaries:
    W. I\ Severa, president-$6,000
    Lumir Severa, vice president and treasurer_ 3,000
    J. H. Vosmek, secretary_ 3,000
    Lumir Severa was in the military service in 1918 and, with the exception of a part of the month of December, was absent from the taxpayer’s place of business during the entire year. He was advised by correspondence concerning the business of the taxpayer, and at times he gave his opinions and suggestions in regard to the taxpayer’s affairs.
    The president and secretary, at an informal meeting held in the summer of 1918, expressed the belief that the salaries then being paid by the taxpayer to its directors, who were also its managing officers, were not in keeping with the salaries paid by other firms, doing a similar kind and amount of business, to their officers. There was no record made of this meeting in the corporate minute book. No definite decision was reached at that time as to any changes to be made in salaries, but the secretary thereafter, in November or December, 1918, inquired of the president of the Proprietary Association as to the salaries paid, by other firms. This association is an organization of about 250 of the largest manufacturers of proprietary medicines in the United States. The president of the association informed Vosmek that they had no information on the subject which he was at liberty to reveal, but that the association was then preparing to secure such information in some form that could be made available to members, and that, upon being acquired, it would be furnished the taxpayer.
    The taxpayer closed its books on December 31, 1918, without making provision thereon for any additional salaries.
    Sometime after 1918, but prior to March 14, 1919, the taxpayer received from the Proprietary Association compilations showing average salaries paid by other manufacturers of proprietary medicines to their principal officers, arranged according to the volume of business transacted and the amount of stock owned by the officers. Upon receipt of this information by the taxpayer, a meeting of the board of directors was held, at which it was decided that, as fair salaries for the year' 1918, W. F. Severa was entitled to $12,000 and Lumir Severa and J. H. Yosmek to $6,000 each. On and under date of March 14, 1919, an entry was made in the taxpayer’s ledger charging surplus with $12,000, with the notation “ correction in salaries of officers compared with corporations in like business and same volume of business which pay to their officers.” The same amount, $12,000, was credited to back salaries in a column dated December 3.1, 1918.
    Prior to 1918 it had been the custom of the taxpayer to inventory its manufactured package goods by reducing the selling price by an arbitrary percentage. The opening and closing inventories of package goods for 1918 were taken by this method,' but a closing inventory was also taken on the basis of cost. In filing its income-tax return for 1918 the taxpayer reported as the opening inventory the arbitrary figure based.on selling price, and as the closing inventory reported the cost figure. - It later revised its opening inventory for that year to a cost basis, which was $9,727.60. The Commissioner, as a result of a revenue agent’s investigation, reduced the opening inventory to $9,145.25, by application of an arbitrary percentage.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, under Eule 50.
   OPINION.

GratjpneR

: The taxpayer contends that it should be permitted to include in invested capital as good will the amount of $9,088.90, representing the difference between the value of tangible assets taken over upon organization and the par value of the capital stock issued in exchange for the business. The only evidence directed toward establishing the value of good will was testimony that W. F. Severa had conducted the business since 1880; that the volume of business for 1901 was about $71,000, and for 1902, $78,000; and that the annual profits of the business ran between $12,000 and $15,000.' The •minutes of the meeting of stockholders of the taxpayer on July 1, 1903, state that the meeting was held to elect officers and “ to assume all stocks, moneys and credits, good will and liabilities ” of the business of W. F. Severa. The good will claimed to have been acquired at that time was not entered on the taxpayer’s books, nor has it ever been entered. So far as the record shows, no efEort was made by the incorporators to determine the value of the good will upon any sound basis; they merely assumed that the par value of stock in excess of the amount determined upon as the value of tangibles acquired must have been issued for good will. This is not sufficient to establish value for invested capital purposes. Appeal of W. E. Marshall & Co., 1 B. T. A. 175.

The principal question for determination on the claim for additional salaries of $12,000 is whether any liability for payment of this amount was incurred by the taxpayer in 1918. The substance of the testimony of the taxpayer’s witnesses was that a directors’ meeting was held some time in 1918, at which time the question arose whether the officers were drawing proper salaries, and it was agreed that the salaries were to be increased if information could be obtained showing that other firms doing a similar business, in kind and volume, were paying their officers higher salaries-than the taxpayer. Certainly such an agreement could not bind the corporation to pay additional salaries. The fallacy of the taxpayer’s argument on this question is shown by the testimony of the principal witness, which is to the effect that if it had been learned that other firms were paying no higher salaries than the taxpayer, then the salaries of the taxpayer’s officers would not have been increased. The books were closed for 1918 with no entry relating to additional salaries, and it was not until March 14, 1919, that the increase was finally agreed upon and entered and charged to surplus. On the evidence, we must approve the action of the Commissioner in disallowing for 1918 the additional salaries -claimed. Appeal of Ballou & Wright, 2 B. T. A. 493; Appeal of Matchless Metal Polish Co., 2 B. T. A. 79; Appeal of Van De Kamp's Holland Dutch Bakers, 2 B. T. A. 1247.

The method adopted by the taxpayer in valuing its inventories is set forth in the findings of fact. Upon making an investigation of the taxpayer’s records, the Commissioner attempted to bring the opening inventory for 1918 down to cost, which was the basis upon which the taxpayer reported its closing inventory for that year. He accordingly reduced the opening inventory to $9,145.25, which increased the income for that year by $3,048.42. The correct amount of the opening inventory on the basis of cost was $9,727.60. This results in a difference of $582.35, and the income of the taxpayer for 1918, as determined by the Commissioner, should be decreased by this amount.


text:
    Appeal of R. B. COOK.
    Docket No. 3643.
    Submitted September 20, 1925.
    Decided February 11, 1926.

      R. B. Ooolc, Esq., pro se.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before Grattpner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax in the amount of $734.73 for the calendar year 1920. The issue raised is the value of certain real estate as of 1918, when it was acquired by the taxpayer by inheritance, for the purpose of determining the taxable gain on the sale thereof in 1920. This value was found by the Commissioner to be $30,000, but is claimed by the taxpayer to be $40,000.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Davenport, Iowa.
    The property here involved, known as No. 218 Main Street, Davenport, was inherited by the taxpayer from his mother at the time of her death on October 5, 1918. The taxpayer, acting as administrator of his mother’s estate, listed the property in the estate-tax return filed at a value of $25,000. This was the value placed upon the property by the appraisers of the estate, who were appointed by the State District Court of Scott County.
    As the result of an investigation later made by a deputy collector, the property was included in the gross estate at a value of $30,000 and the Federal estate tax was paid upon that basis.
    The property was sold by the taxpayer in 1920 for $48,500 net, and the market value thereof on October 5, 1918, was $35,000.
   DECISION.

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


text:
    Appeal of KIRTLAND BROS. & CO., INC.
    Docket No. 4482.
    Submitted September 21, 1925.
    Decided February 11, 1926.

      W. Wallace Gibson, O. P. A., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before GratipneR, Teammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax of $123.35 for the calendar year 1921. The taxpayer seeks affiliation with the F. B. Warner Co. and the Davis Warner Arms Corporation, under section 240 of the Revenue Act of 1921, on the theory that substantially all the stock of the corporations involved was owned or controlled by the same interests.
    FINDINGS OP PACT.
    The taxpayer is a New York corporation, organized in 1909, with its principal office in New York City.
    The F. B. Warner Co. and the Davis Warner Arms Corporation were organized in 1909 and 1917, respectively, under the laws of the State of New York.
    In 1921 the stock of these three corporations was owned in the amounts and percentages as follows:

    Franklin B. Warner was the president of each of these companies and Marvin J. Warner was vice president of each of them. Marvin J. Warner is a brother of Franklin B. Warner, and in 1921 was a salaried clerk in the store of the taxpayer. C. C. Warner, who was a son of Franklin B. Warner, and resided at home with his father, was secretary of the F. B. Warner Co. and the Davis Warner Arms Corporation.
    At stockholders’meetings of the Davis Warner Arms Corporation the stock of that company which was owned by the taxpayer and by the F. B. Warner Co. was voted by Franklin B. Warner. The management of the three companies was personally directed by Franklin B. Warner.
    Franklin B. Warner owned the building in which the Arms Corporation operated and charged no rent for its use. He also managed the company without salary. The Arms Corporation paid the cost of operating the power plant connected with the building and used by it in manufacturing, and also paid the taxes.

      All of the guns, rifles, and pistols manufactured by the Davis Warner Arms Corporation were sold to the taxpayer at the cost of production. The Arms Corporation made no profit on its sales to the taxpayer.
    The taxpayer sold the Arms Corporation products at a profit.
    All three companies occupied the same executive offices, the rent of which was paid by-the taxpayer and the F. B. Warner Co. The salaries of the president, and of the bookkeeper and stenographer, who performed services for all three companies in the executive office, were paid by the taxpayer and the F. B. Warner Co.
    By letter dated January 20, 1925, the Commissioner held the F. B. Warner Co. and the Davis Warner Arms Corporation to be affiliated.
   DECISION.

The taxpayer was affiliated with the F. B. Warner Co. and the Davis Warner Arms Corporation during the year 1921. The deficiency, if any, should be computed accordingly. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.


author: Marquette

text:
    Appeal of SIAN OIL AND GAS CO.
    Docket No. 2549.
    Submitted August 14, 1925.
    Decided February 11, 1926.
    Tbe value of certain oil leases, for purposes of invested capital and depletion, determined.

      Edward Thompson, G. P. A., for the taxpayer.

      Benjamin H. Saunders, Esq., for the Commissioner.
    Before Marquette and Moeeis.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1918 in the amount of $45,465.38 and overassessments for 1917 and 1919 in the amount of $48,562.44. The questions presented are: (1) The value of certain oil leases, when paid in for the taxpayer’s capital stock on November 14, 1912, for invested capital purposes; and (2) the March 1, 1913, value for purposes of depletion.
    FINDINGS OP PACT.
    The taxpayer is a Delaware corporation, with its principal offices in Pittsburgh, Pa.
    Between May 12, 1912, and June 12, 1912, certain persons named Andrews and Smith acquired 14 leases of the oil rights in certain lands in Wabash County, Ill., with one-sixth royalty to the lessors. The leases comprised a total area of 1,074 acres. The first oil well was drilled approximately at the geographical center of the leased property and at the southeast corner of the Adam Biehl land. When a depth of 1,489 feet was reached, oil was struck bringing in an initial daily production of 750 barrels. That discovery occurred on July 80,1912, and constituted the first discovery of oil in Wabash County. In August, 1912, oil was brought in on the Caroline Smith property, owned by other persons and located about one mile to the south of the Biehl well, with an initial daily production of 750 barrels. On September 1, 1912, a second well sunk by Andrews and Smith on the C. E. Jordan property, lying a short distance southeast of the Adam Biehl well, brought in an initial production of 50 barrels. On September 7, 1912, a third well sunk by Andrews and Smith on the Edward Smith property, lying at the southerly part of the entire leased land, and as close to the Caroline Smith well as Andrews and Smith could drill an offsetting well, brought in an initial daily production of 500 barrels. In October, 1912, a well sunk by others than Andrews and Smith on the John Prout property, lying to the southwest of the Adam Biehl well and close to the Wolf property (leased to Andrews and Smith), brought in an initial daily production of 125 barrels. On November 11,1912, a well sunk by Andrews and Smith on the Wolf property as an offset well to the one just referred to brought in an initial daily production of 225 barrels.
    Andrews and Smith had drilled a well just to the south of the Adam Biehl tract, on the J. T. Smith land, and, on September 1, 1912, had reached a depth of 1,481 feet without striking oilT The operation was suspended solely by reason of litigation which had been started by other persons, who claimed a right in that land superior to that of Andrews and Smith. In the desire of settling the dispute before oil was disclosed as present in that land, Andrews and Smith, by the suspension of operations, gave the appearance that the drilling produced a dry well. After the dispute was settled another well was driven on that land, at the southerly border, and on November 24, 1912, brought in an initial production of 350 barrels.
    At some date in 1912, prior to November 14, Andrews and Smith acquired a fifteenth lease of 58 acres, making the total area of their leased property 1,132 acres.
    In September, 1912, steps had been taken to organize the taxpayer corporation and, with the organization duly effected, the 15 leases were transferred to the taxpayer on November 14, 1912. for its entire capital stock of $200,000 par value.

      All of the leases were such as are customarily made in acquiring the oil rights in land. Each provided for royalties of one-sixth to the lessor, and was to continue in effect for stated periods or during the actual production of oil from the respective properties. None of the leases required the payment of either a bonus or rental in addition to the royalties.
    The following leases were later abandoned or surrendered:

    All of the surrendered leases applied to property lying to the north of the Adam Biehl property. The Price lease was later reacquired by the taxpayer in 1915 for the cost of a well which had been sunk by the ad interim owner of the property. The production after 1915 was very small. The Courter lease was later sold in 1916 to others than the taxpayer for $700,000, but the sale included 135 acres of land in other leaseholds.
    By March 1, 1913, the taxpayer had seven wells in operation on the leased property:
    Property. Property. Wells.
    Adam *BieM_ Edward Smith_ 2
    William Wolf. J. T. Smith_ 1
    H. Mullimax O. E. Jordan_ 1
    Prior to March 1, 1913, dry wells were driven by the taxpayer on:
    William D. Ramsay property.
    John Beasley property.
    H. Mullimax property.
    Edward Smith property (two dry holes).
    Dry holes were drilled on adjoining land of other parties than the taxpayer prior to March 1,1913:
    Payne property.
    Margaret Price property.
    The following wells were sunk on the various properties of the taxpayer:

      Adam Bichl (100 acres).

    Well No. Date completed. July 30,1912 Aug. 13,1916 Sept. 15,1916 Initial production. Barrels. 750 375 50 Well No. Date completed. Oct. 5,1916 Nov. 20,1916 Dec. 23,1916 Initial production. Barrels. 150 175 45
    Total gross production according to pipe line run, in barrels:
    1912_ 24, 661. 36 1916_ 32, 992. 98
    1913_ 13,769.09 1917_54,113. 82
    1914_•_ 7, 506. 00 1918_ 27,228.29
    1915_ 6, 792. 54 1919_16, 519. 51

      H. E. Jones (15 aeres).

    Total gross production:
    Barrels. Barrels.
    13,674 94 1917_ 5,285.39 0⅞
    12, 551.56 1918__ 4,132. 57 oí rl
    10,458.12 1919_ 2, 471. 43 os ri
    6,467. 23 a ri

      O. B. Jordan (80 acres).

    Total gross production:
    Barrels. Barrels.
    873. 62 1916_60,411.64 ÍO
    2, 615. 01 1917_'33, 603. 69 CD
    969.82 1918_ 24,681.64 O
    3,879.87 1919_ 17,745.39 0

      J. E. Jordan (80 acres).

    1 No. 4 was abandoned Nov. 4,1918.
    Total gross production:
    Barrels. Barrels.
    1914_ 9,172. 86 1917- 23,334. 44
    1915_ 11,423.15 1918- 12, 699.29
    1916_29,191. 03 1919- 5, 883.12

      R. Lithen'land (97 acres).

    1 No. 3 was abandoned in May, 1914.
    Total gross production:
    Barrels. Barrels.
    1913_ 27, 971.00 1917_ 2, 356.40
    1914_ 24, 202. 56 1918_1_ 1, 783. 60
    1915_ 6, 846.48 1919_ 1, 532.15
    1916_ 3,170. 52

      B. MulUmaa) (J¡0 acres).

    Total gross production:
    Barrels. Barrels.
    1913- 6,203.34 1917_ 635. 29
    1914- 1, 905. 54 1918_ 284.20
    1915- 1, 968. 90 1919_ None.
    1910- 744. 84 Production ceased entirely in 1921.

      Edivard Smith (120 acres).

    1 Abandoned.
    Total gross production:
    Barrels. Barrels.
    1912_ 14,925. 54 1916_ 34,203. 60
    1913_ 30,183.61 1917_ 14, 766.07
    1914_ 37,038. 90 1918_ 5, 555. 40
    1915_ 34, 727. 46 1919_^_ 3, 486.19

      Jacob Smith (1⅛0 acres).

    1 Abandoned.
    Total gross production:
    Barrels. Barrels.
    1912_ 1, 866. 67 1916__ 28, 561.92
    1913_26,710. 87 1917_ 53,303.20
    1914_ 56,450. 52 1918_ 54, 996.22
    1915_ 44, 500.36 1919_ 30,485.28

      Wm. Wolfe (10 aeres).

    Total gross production:
    Barrels. Barrels.
    1912_2,517.91 1916_ 1,967.46
    1913_5,813.14 1917_ 1,643.76
    1914_ 4,975.56 1918_1,415.45
    1915_2,911.28 1919_ 1,326.19

    Total gross production:
    1918-120.62 barrels.
    1919- 57.87 barrels.
    The fair market value of the leaseholds on November 14, 1912r was $600,000 and the fair market value on March 1, 1913, was $616,404.83.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Marquette

: The difficulty in valuing oil leases is well illustrated by the facts in this appeal. On the Courter lease of 99 acres, the taxpayer drove a well in November, 1913, to a depth of almost 1,600-feet and, finding practically no oil, immediately abandoned the well. The lease was surrendered on July 1, 1914. Wells were later drilled on this land by others, and the land proved to be very productive— so much so that the lease was sold in 1916 for $700,000, and one month later for $1,000,000. That property lay to the northeast of the Adam Biehl discovery well.

On the other hand, leases for property surrounding that held by Andrews and Smith were sold after the original discovery of July 30,1912, and prior to the transfer to the taxpayer, at prices ranging from $57.14 an acre to $300 an acre. Of 10 or more such transactions, oil was brought in on only one of the properties, that one being directly to the south of the taxpayer’s land, and, although the 1912 sales price was $100 an acre, the land later proved to be very productive.

Subsequent events demonstrated that about half of the original acreage acquired by Andrews and Smith was productive, and even the Adam Biehl land, where the oil was first discovered, proved to be only on the border of the subterranean oil pool. Even to the south the land was not entirely productive. A dry area, constituting about two-thirds of the acreage within the Edward Smith lease, became apparent after several successive wells had been driven.

A situation of wide variation in the evidence has been presented for our consideration. Even as recently as September, 1918, the tax-payér, in a letter to the Commissioner, stated, “We estimate the fair market value of this property on March 1, 1913, to be $200,000.” In 1912, after the original discovery, Andrews and Smith declined an offer of $600,000 for the property. Under date of February 5, 1923, petroleum engineers employed by the taxpayer, in rendering a most exhaustive report on all of the taxpayer’s properties, gave a total value at acquisition on November 14, 1912, of $721,271.15, and a March 1, 1913, value for the oil reserves of $797,115.31, and claimed a paid-in surplus on November 14, 1912, of $291,838.22. The divergence of opinion by expert witnesses is shown in the following table:

It will be observed that the opinions of the taxpayer’s witnesses show a margin of value between $1,000,000 and $2,268,000, and the full divergence of value runs between $2,268,000 and the $200,000 claimed by the taxpayer itself in 1918. Between these two extremes lies the Commissioner’s determination of $600,000.

All of the witnesses seemed to have sufficient qualifications, from their long experience in the oil business and their knowledge of the particular locality, to express opinions as to value, but it is perfectly apparent that their opinions were based primarily upon the record of production of oil in the immediate vicinity over the series of years subsequent to 1912. At the time of the discovery of oil in 1912, it is obvious that any value of a leasehold was purely speculative and incapable of a reduction to any assured amount. That is sufficiently clear from our reference to the Courter lease, and to the many adjoining properties where leaseholds sold, after the discovery, at prices ranging from $300 an acre to less than $60 an acre, and the fact that none of those leases proved productive of oil except the single one which sold on a basis of $100 an acre. The abandomnent by the taxpayer of over 400 acres, within two years after discovery, shows conclusively that a value of $1,500 an acre could not be credited to every acre of land included within the fifteen leases. Yet, the value admitted by the Commissioner of $600,000 means an average value per acre of about $530 for all of the 1,134 acres. In view of the sales, which in no instance exceeded $300 an acre, and the abandonment by the taxpayer of over one-third of its leaseholds, and the fact that much of the retained acreage showed no oil production, we are not convinced that the fair market value of the property exceeded the value determined by the Commissioner.

It should be observed further that the opinions of the several witnesses, and the engineer’s report as well, had in view the value of the oil within the property, or the value of the land by reason of its natural resources, and did not contemplate a valuation for the leasehold interests, with proper apportionment between the lessors and the taxpayer-lessee. Discounting some degree of exaggeration in a retrospective opinion of value, influenced as the same appears to be by the record of production from the entire oil pool, and crediting the value partially to both lessors and lessees, we find considerable corroboration for the Commissioner’s determination of value in the opinions of the taxpayer’s own witnesses.

We were not advised of the method used by the Commissioner in his determination of value. The taxpayer relied entirely upon opinion evidence,: and the report by the engineer to the taxpayer was submitted by the Commissioner in contradiction of the taxpayer’s contention as to value. Except for the facts set forth in that report, we have had no opportunity for making a careful appraisal of the leaseholds in question. This must have been done by the Commissioner in reaching his conclusion, and the data in the report of the taxpayer’s engineer confirms that decision. For example, the engineer arrived at a total value for the property on November 14, 1912, with the following apportionment:

Apportioning five-sixths of that amount to the lessee, would give a value of $591,554.30, or approximately the total value allowed by the Commissioner, and we believe a value of $600,000 represents the fair market value of the properties at November 14, 1912, when they were acquired by the taxpayer, and that this amount should be used in computing invested capital.

The Commissioner determined the value as of March 1, 1913, to ■ be $616,404.93, or an increase of $16,404.83 over the values of November 14, 1912. The evidence does not show to what this increase in value was attributed, nor has the taxpayer shown any error therein. In the circumstances, the Commissioner’s determination of March 1, 1913, value must be approved.


author: Tritssbll,

text:
    Appeal of GEORGE P. FISHER, Executor of the Estate of ANNA F. HAY.
    Docket No. 1775.
    Submitted July 18, 1925.
    Decided February 11, 1926.
    1. Land held by tbe estate of a decedent may, for tbe purpose of valuing tbe gross estate, bave a substantial value, altbougb tbe land produced no income and no market for its sale bad developed.
    2. Tbe average price of sales of stocks during tbe year of decedent’s death held, to be tbe measure of values of sucb stocks for estate-tax purposes.

      Dana Latham, and B. 8. Doyle, Esqs., for the taxpayer.

      L. O. Mitchell, Esq., for the Commissioner.
    Before Green, Moeeis, and Teussell.
    This is an appeal arising from a determination of a deficiency in estate tax in the amount of $3,291.94. It involves the valuation of an undivided one-fifth interest in certain real estate and certain shares of stock.
    FINDINGS OF FACT.
    The taxpayer is the estate of Anna F. Hay, of which George P. Fisher, of Chicago, Ill., is the duly appointed and qualified executor.
    At the time of her death on September 25, 1922, the decedent owned 1,565 shares of the capital stock of the Oconto Co., a Wisconsin corporation, and a like number of shares of the Bay de Noquet Co., a Michigan corporation; also an undivided one-fifth interest, as a beneficiary of a trust, in 1,280 acres of land in and near Oconto, Wis. On the estate-tax return the undivided one-fifth interest in the real estate was valued at $3,000, and the stock in the corporations mentioned was valued at $195,625, or $125' for each two shares of stock, one share of the stock of each corporation being taken together and treated as a unit. In determining the tax due from the estate, the Commissioner has increased the value of the undivided one-fifth interest in the real estate to $5,228, and has increased the valuation of the shares of stock to $289,525, or $185 per unit.
    The real estate in which the decedent owned an undivided one-fifth interest was composed of two tracts. One tract, containing 1,100 acres, was principally marsh land from which marsh hay was cut at a small profit. The other tract was composed of 180 acres of agricultural land, located in the town of Oconto, Wis. It was not suitable for subdivision into lots. This tract of land was usually rented from year to year, but during part of the time a tenant was not procured and during some years the rental was not sufficient to pay taxes on the property. The operation of these tracts resulted in a net operating loss of $8,978.04 for the years 1913 to 1922, inclusive. This loss was a charge upon the land at the time of the decedent’s death. These two tracts were offered for sale through agents, but no offers were received. The assessed valuation of an undivided one-fifth interest in the land for the year 1922 was $5,308. This valuation was protested by the trustees but no adjustment was made.
    The Oconto Co. and the Bay de Noquet Co. are engaged in the lumber business. Their assets consist chiefly of timber holdings and cut-over land in Michigan and Wisconsin. The stock of both corporations is held by eight individuals and is not listed on any exchange or traded in actively. The authorized capital stock of the Oconto Co. is $1,000,000, consisting of 10,000 shares of $100 par value, while the authorized capital stock of the Bay de ISToquet Co. is $100,000, consisting of 10,000 shares of $10 par value. Neither of these corporations maintained a reserve for exhaustion or depletion of the properties. At the date of the death of the decedent', it was estimated that there was sufficient timber on the Wisconsin properties to justify the operation of a mill thereon for 8 or 9 years, and on the Michigan property for about 10 or 11 years.
    The consolidated net earnings of the two corporations for the five-year period 1918 to 1922, were as follows:
    LOSSES. EARNINGS. .
    _$324,364.29 1918_^_$88,998.94 rH <N S
    _ 243, 811. 87 1919_ 260,380.24 <M r-i

    1920_ 346,184. 60
    The average net income for those years was $25,477.51, which is a return of approximately 2 per cent on the stock valued at $125 per unit and little more than 1 per cent valued at $185 per unit.

      During the year 1922 there were three sales of the stock of these corporations. The number of units of stock, date of transaction, and price were as follows:

    In the case of the first transaction mentioned above, the purchaser first agreed to buy 20 units for $175 per unit, but before the transaction was closed it was agreed that there should be added 20 additional units at $150 per unit. The sales of February 20 and April 27 were made to one of the officers of the corporation by heirs of a former officer. The sale of November 1 was by the same individuals to a company physician.
    In the year 1923 a resolution was passed by the board of directors, whereby offers of the stock of the corporation were to be made to employees for $200 per unit. Of this amount, 20 per cent was to be paid in cash, the remainder to be spread over a period of five years. For this remainder the employees were required to give notes bearing 5 per cent interest. Under this arrangement 102 shares of stock were sold. The resolution recited that these sales were to be made to employees for the purpose of increasing their loyalty, and, although the agreements of sale contained no provision with reference to the redemption of the stock, it was generally understood that the company would see that employees purchasing stock would lose no money in connection with the transaction, and in one or two instances the stock was repurchased by the companies at the request of employees.
    DECISION.
    The value of the decedent’s interest in the lands in controversy at the date of her death was $5,228. The value of the corporation stocks at the date of decedent’s death was $162.98 per unit of shares of the two affiliated corporations. Final determination of deficiency will be settled on 15 days’ notice, pursuant to Fule 50.
   OPINION.

Tritssbll,

: The testimony offered by the taxpayer shows that the interest of the deceased in the lands in question had been held since prior to 1913; that during the period from 1913 to 1922 the income from these lands had been insufficient to pay taxes and other carrying charges; and that the lands had been placed on the market for sale, but no prospective buyers had appeared. The value of lands for purposes of the estate tax can not be measured wholly by the amount of income produced or by the fact that during any given period no one has cared to buy such lands. Lands may have a substantial value even though they .produce no income and the market for their sale has not yet developed. These lands were in and adjacent to a settled community, and it is well known that owners frequently hold such lands in anticipation of realizing their true value from future sales. The record of this appeal does not contain any evidence as to such true value, except the local assessor’s valuation and the Commissioner’s valuation. We are, therefore, of the opinion that the valuation placed upon these lands by the Commissioner can not be modified.

The securities held by the estate are stocks in two affiliated corporations, Avhich appear to have been engaged for many years in the lumbering business in the States of Wisconsin and Michigan. The record shows that during a period of five years prior to the decedent’s death the average net earnings of the corporation had been $25,477.51 upon an outstanding capital of $1,100,000; that no sales of stock had been made, except transfers between former stockholders and a few sales to employees. The testimony indicates that the lumbering business could not continue for more than 10 or 12 years, and that, from the average profits during the five years from 1918 to 1922, inclusive, no stockholder could anticipate a sufficient return in dividends to establish a value of the stocks even equal to the amount returned by the taxpayer.

A summary of the record shows that three officers and directors of the corporations issuing the stocks under consideration testified that in their judgment the stocks were not, during 1922, worth in excess of $125 per unit, although during the same year one of these directors purchased a number of shares at different times and at varying prices, which averaged $162.50 per unit; and in the following year these same directors authorized sales of these stock units to employees, on the basis of installment payments, at $200 per unit, and allowed the books of account of the companies to stand showing a valuation of $400 per unit, with no book provision for the depletion of timber resources. From this record we are able to find one outstanding fact upon which to base a conclusion as to values. The heirs of one deceased former stockholder, desiring to convert their securities into money, were able, during the year 1922, to sell 77 shares at an average of $162.98. We are thus led to the conclusion that the heirs of the estate here under consideration, had they offered their stock for sale, could not have obtained a higher price per unit of tRe two stocks. We, therefore, hold that the unit values of the stocks of these two affiliated corporations were, at the date of decedent’s death, $162.98 per unit.


text:
    Appeal of B. O. LAUERMAN.
    Docket No. 3739.
    Submitted September 20, 1925.
    Decided February 11, 1926.

      William M. Haag, Esq., for the taxpayer.

      B. H. Saunders, Esq., for the Commissioner.
    Before Love.
    This appeal is from the determination of a deficiency in income tax for the year 1921 in the amount of $181.09.
    The deficiency arises by reason of the fact that the Commissioner included in the taxpayer’s income, for the taxable year, $1,000, being a part of his salary for said year which was not actually paid to him until January 10, 1922. The taxpayer alleged that his accounts ivere kept on the basis of cash receipts and disbursements. This allegation was denied by the Commissioner, and no competent evidence was offered by the taxpayer to sustain this allegation of his petition.
    FINDINGS OF FACT.
    The taxpayer, in 1921, was the principal stockholder and president •of the Washington Institute, located in Chicago. His salary was fixed at $12,000 per year, payable in monthly installments of $1,000 ■each.
    It was the corporation’s custom to credit the taxpayer on the last ■day of each month with his salary for that month. Occasionally this credit was made prior to the last day of the month. The taxpayer had authority to draw, and sometimes did draw, against this monthly salary during the pending month, though most frequently it was not drawn against until on or after the last day of the month.
    On December 31, 1921, he was credited, as usual, with his $1,000 as salary for that month. By reason of the fact that the corporation had heavy expense accounts for December, it was short of money at the bank, which fact was known to the taxpayer, and, by reason of that fact, he refrained from drawing on his said December salary. ■On December 31, 1921, the company had in cash in the bank and in its treasury, $600.59.

      The $1,000 was received by the taxpayer on January 10, 1922, and was included in his return for 1922. The Commissioner included said amount as income to the taxpayer for the year 1921.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of BOERICKE & RUNYON.
    Docket No. 2981.
    Submitted May 19, 1925.
    Decided February 11, 1926.

      F. J. Batchelder, G. P. A., for the taxpayer.

      J. A. Adams, Esq., for the Commissioner.
    Before James, Smith, Littleton, and Trussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the years 1919, 1920, and 1921, in the amounts, respectively, of $396.11, $188.08, and $28.23, a total of $609:02. Not all of the above deficiencies are in controversy.
    findings of fact.
    The taxpayer is a New York corporation, engaged in the business of manufacturing and selling pharmaceutical preparations, with its principal place of business in New York City.
    During the taxable years in question the taxpayer took depreciation upon its books and claimed a depreciation deduction in its income-tax return in the amount set down in the first column of the table below. In determining the deficiency here in question, the Commissioner made adjustments, as shown by the second and third columns below. The Commissioner computed depreciation upon the average of the assets.during the year; the taxpayer, upon the total of the asset value appearing upon the books at the end of the year.

    In the New York office the taxpayer computed and claimed depreciation at the rate of 5 per cent upon furniture and fixtures. These consisted to a large extent of partitions, shelving, floor covering, and light fixtures built into the premises occupied by the taxpayer under a lease for 10 years.
    At about Christmas during each of the years here in question the taxpayer paid a bonus of $5 to each of its employees. This bonus amounted, for 1919, to $155, and for 1920 and 1921, to $185 for each year. In determining the deficiency here in issue the Commissioner disallowed these deductions claimed by the taxpayer.
    In making information returns to the Commissioner in connection with its annual return the taxpayer did not advise the Commissioner as to these payments or include them in the amount reported paid to the employees to whom payment in excess of $1,000 had been made during the year.
   DECISION.

The net income of the taxpayer during these several years should be computed by allowing 10 per cent depreciation upon furniture and fixtures of the Hew York office, upon the basis of the average investment therein during each of the several years, and by the further allowance of the bonuses paid to employees in the taxable years in question. Final determination will be settled on 10 days’ notice, in accordance with Rule 50.


text:
    Appeal of E. J. BARKLOW.
    Docket No. 4021.
    Submitted August 20, 1925.
    Decided February 11, 1926.

      E. J. Barhlow pro se.

      B. H. Saunders, Esq., for the Commissioner.
    Before Love.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $169.19.
    FINDINGS OE FACT.
    In March, 1919, the taxpayer purchased bonds of the University Heights Farms Co., of Darby, Mont., in the amount of $5,000. A year later he purchased additional bonds from this company in the amount of $1,000. The venture was unsuccessful and the bondholders took over the property. They were also unsuccessful and, during 1923, the bonds were surrendered to the trustee, the Merchants Trust & Savings Bank, of St. Paul, Minn., the property being taken over by the creditors of the bondholders.

      The creditors then organized, under the laws of Delaware, the Maclntosh-Morello Orchards, Incorporated, main office at Darby, Mont.
    In the reorganization the bondholders of the University Heights Farms Co. received second preferred stock of the new company in the ratio of one share of stock of the par value of $100 to each $200 face value of the bonds.
    ’ This gave the taxpayer, for his $6,000 in bonds of the University Heights Farms Co., $3,000 par value of the second preferred stock of the Maclntosh-Morello Orchards, Incorporated.
    The taxpayer claimed, and the Commissioner denied, a loss of $3,000, being the difference between the par value of the bonds and the par value of the stock received by the taxpayer in exchange for the bonds. There was no evidence of the market value of the stock.
   DECISION.

The determination of the Commissioner is approved.


author: Marquette:

text:
    Appeal of THOMAS PUBLISHING CO.
    Docket No. 3215.
    Submitted October 5, 1925.
    Decided February 11, 1926.
    1. Iu tbe absence of competent evidence of tbe value of assets transferred to a corporation in exchange for its stock, tbe Commissioner’s determination of value will not be disturbed.
    2. Deduction of an alleged worthless debt disallowed.

      Daniel F. Kelly, G. P. A., for the taxpayer.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Maequette, Geeen, and Love.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1919 and 1920 in the amount of $3,273.39. The deficiency arises from.the reduction of invested capital and the refusal to allow as a deduction an alleged bad debt.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation and was organized in 1898 to publish trade-reference books. The entire capital stock of $25,000 was issued in exchange for five trade directories, in the form of set-up type ready for printing. The directories had been prepared by H. Ward Thomas and his assistants over a period of approximately 'five years prior thereto.

      In computing its invested capital for the year 1919, the taxpayer included therein the entire amount of the $25,000, as representing the fair market value of the assets received in exchange for the stock. This amount was reduced by the Commissioner to $4,200.
    The Thomas Directory Co. was organized in 1910 to publish certain trade directories. Three directories were transferred to it by the taxpayer in exchange for $10,000 in stock and $15,000 in notes. Since December 31, 1917, the taxpayer and the Directory Co. have been affiliated and have filed consolidated returns.
    The Directory Co. continued in business until 1917, when its liquidation was commenced, and it was finally liquidated in 1920, at which time it was indebted to the taxpayer in the amount of $5,544.96. This amount was deducted by the taxpayer «as a worthless debt in its return for 1920.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Marquette:

The facts present two questions 'for decision: (1) The value of the assets transferred to the taxpayer at its incorporation in exchange for stock; and (2) the deductibility of a debt alleged to have been ascertained to be worthless in 1920.

With respect to the first question, we are of opinion that the evidence of value is insufficient to warrant us in disturbing the Commissioner’s valuation. ' The only witness for the taxpayer testified that he had devoted about five years to the preparation of the data contained in the directories, and that he valued his time at from $2,500 to $3,000 a year; that he considered the assets transferred had a cash value of $25,000. The amount of time and labor expended in the production of an article has little, if aiiy, evidentiary value in determining the value of the article produced, in the absence of other evidence showing it had a value.

The taxpayer’s second contention, is that it should be permitted to deduct the amount of $5,544.96 as a debt ascertained to be worthless in 1920. It appears that the taxpayer and the Directory Co. were affiliated and filed consolidated returns. The deduction was disallowed because it was an intercompany transaction. The taxpayer contends that the debt was created in part prior to the time consolidated returns were required from affiliated corporations, and that such part at least should be allowed. Assuming that its premise is correct, there is nothing in the record to show what part of the debt, if any, was so created, and we must therefore disallow the deduction on the Commissioner’s determination that the transaction was an intercompany transaction.


text:
    Appeal of DIAMOND RED PAINT CO.
    Docket No. 3099.
    Submitted June 29, 1925.
    Decided February 11, 1926.

      Fred G. Mem, Esq., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, Green, and Love.
    This is an appeal from the determination of a deficiency of $1,669.33 income and profits tax for 1920, resulting from the alleged erroneous computation of invested capital.
    FINDINGS OF FACT.
    On December 31, 1918, the taxpayer, an Illinois corporation, had ■ outstanding capital stock of $10,000 par value. Each share had a par value of $10. During 1919, it issued $202,250 par value. On January 2, 1920, it issued $87,750 par value, for which it received cash of $11,899.44 on that date and charged stockholders’ notes receivable and accounts receivable with the balance of $75,850.56.
    During the year 1920, stock was paid for, as shown on the books of account, as follows:
    July 1, 1920, bonus stock issued as additional compensation (treated by the Commissioner as cask)_$4,300.00
    July 1, 1920, cask_ 29,200.00
    Aug. 31, 1920, cash_ 8,850.56
    Sept. 4, 1920, cash_._•_ 500.00
    Sept. 7, 1920, cash_ 1,000.00 '
    Sept. 9, 1920, cash_ 550.00
    Oct. 1, 1920, cash_ 500.00
    Oct. 11, 1920, cash_ 450.00
    Oct. 15, 1920, eash_ 500.00
    45, 850. 56
    In 1920, dividends of $30,000 on the stock issued in 1920 were credited to the personal accounts of stockholders and applied against the notes receivable and accounts receivable. The stockholders’ accounts not only were stock p'urchase accounts but were general open accounts. Some of the stockholders withdrew money during 1920.

      The taxpayer also issued the' following stock:
    Par value.
    July 1, 1920_$103, 500
    Aug. 31, 1920_ 5,050
    Sept. 7, 1920 _ 2, 050
    Oct. 10, 1920_ 1,450
    112, 050
    for which it charged on its books:
    Notes receivable_$88,267. 63
    Accounts receivable_ 23,782.37
    112, 050.00
    In December, 1921, the stock of $112,050 par value was canceled. The capital stock was increased in 1920 to enable the taxpayer to obtain cash and credit to carry it over the winter period when, by reason of the seasonal nature of its business, it receives no payments on purchases. It was canceled because business and profits had accumulated sufficiently so that the additional capital amount was not needed to carry the taxpayer through this period.
    The taxpayer included the amo'unt of $87,750 in its invested capital from January 2, 1920, when it was issued. The Commissioner “adjusted this amount by prorating the payments for the stock to the dates.when the cash was received by the taxpayer.”' The taxpayer included the $112,050 in invested capital “ as of the dates of issuance and prorated the same accordingly.” The Commissioner excluded the amount entirely.
   DECISION.

The determination of the Commissioner is approved.


author: Gkeen

text:
    Appeal of J. H. McDERMOTT OIL CO.
    Docket No. 3579.
    Submitted July 1, 1925.
    Decided February 11, 1926.
    Commissioner’s determination of taxable gain from sale of oil wells and equipment approved.

      J. V. Blair, Jr., Esq., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Geeen, Lansdon, and Love.
    This is an appeal from the determination of a deficiency in income1 and profits taxes for the year 1919 in the amount of $4,513.71. The-sole issue involved in this appeal relates to the amount of profit' realized by the taxpayer upon the sale in 1919 of certain oil leases-

      FINDINGS OF FACT.
    Taxpayer is a West Virginia corporation, with its principal office at Morgantown. It is engaged in the business of leasing oil lands and in the production of oil from ¿uch lands.
    On November 1,1916, the taxpayer acquired from J. H. McDermott certain oil leases, known as the Jakes Run Leases and the Bell Leases, together with all the physical properties comprising the producing and well equipment, for a consideration of $250,000 par value of its capital stock.
    On January 1, 1919, taxpayer sold the Jakes Run Leases and the Bell Leases, including all the physical properties, for considerations of $150,000 and $1,080, respectively, and in its return for the year 1919 reported a profit from the sale of these leases in the amount of $23,510.82.
    Upon audit of the return of this taxpayer, the Commissioner increased the net income by the amount of $21,850.69, additional profit realized from the sale of these leases. The result of the Commissioner’s computation is as follows:
    Selling price of Jakes Run Leases-$150, 000.00
    Selling price of Bell Leases- 7,080.00
    Total-_ 157, 080. 00
    Oost of Jakes Run Leases. $118, 644.40
    Cost of Bell Leases_ 2, 653.69
    Cost of additions_ 7,098. 89
    Total_ 128, 396.98
    Less depreciation sustained to date of sale-'- 16,678. 49
    - 111,718.49
    Total profit from sale of leases- 45, 361. 51
    Less profit reported in return--- 23,510. 82
    Additional profit_ 21, 850.69
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Gkeen

: The taxpayer comes before us appealing from the action of the Commissioner outlined in our findings of fact, but admitting in its petition an additional profit from the sale of these leases of $12,024.26 over and above the amount of profit reported in its return. It thus admits a total profit from the sale of these leases of $35,535.08, while the Commissioner contends the profit realized was $45,361.51, a difference of $9,826.43. This difference is attributable to two factors: (1) Taxpayer alleges the cost of the leases and improvements was $128,702.50, while the Commissioner’s computation is based upon a cost of $128,396.98, a difference of $305.52; and (2) taxpayer alleges the depreciation sustained to date of sale was $7,157.58, while the Commissioner computes the depreciation sustained to date of sale to be $16,678.49, a difference of $9,520.91.

As pointed out in our findings of fact, these leases and physical properties were paid in to the taxpayer for capital stock. No evidence has been adduced by the taxpayer to show the actual value of the capital stock which it issued in exchange for these properties. From the testimony of the secretary-treasurer of the company, the only witness placed on the stand, we find that the costs upon which the taxpayer bases its computation of profit were obtained from an inventory alleged to have been made at the time the properties were paid in, the inventory values having been supplied by a previous superintendent of the properties. The inventory was offered in evidence but, upon objection by counsel for the Commissioner, it was excluded. It was apparent that the witness had no personal knowledge of the facts.

We have no evidence before us to show the actual costs of the properties involved in this sale. Such being the case, we must hold that the taxpayer has failed to show error in the Commissioner’s determination of costs.

With respect to the question of the amount of depreciation sustained on these properties to the date of sale, we have no evidence before us which would warrant us in overturning the Commissioner’s determination. The leases were not introduced in evidence. We have no knowledge of the length of the term or their remaining life from the date of acquisition. As to the. physical property, no evidence was adduced to show the remaining useful life from the date of acquisition. The witness testified that in his opinion 10 per cent depreciation on the producing equipment would be sufficient to take care of ordinary wear and tear. But his qualifications, as he related them on the stand, are such as entitle his opinion to little weight in a matter of this nature. An attempt was made to divide the de-preciable property into two classes — “ well equipment ” and “ producing equipment.” The nature of the property falling within each classification was not disclosed to us, and the record does not show the values and life of the assets claimed to be within each classification.


author: Smith:

text:
    Appeal of CONRAD & CO., INC.
    Docket No. 3941.
    Submitted October 27, 1925.
    Decided February 13, 1926.
    In the reorganization of a business, a partnership paid in to a corporation on November 1, 1917, all of its tangible assets for all the capital stock of the corporation, and all of its intangible assets upon an agreement by the corporation to assume its liabilities and to pay its debts. For the net assets of the partnership the partners received all the shares of capital stock of the corporation. Held, that section 331 of the Revenue Act of 1918 prevents the corporation from valuing the net assets at a greater amount in computing invested capital than the partnership could have valued them in computing invested capital if they had not been so transferred.

      Hugh Satterlee, Esq., for the taxpayer.

      Ward Loveless, Esq., for the Commissioner.
    Before James, Smith, and TRussell.
    This is an appeal from the determination of a deficiency in income and profits tax for a four-month fiscal period ended February 28, 1918, of $3,794.91. The question in issue is whether section 331 of the Revenue Act of 1918 is applicable to the facts as disclosed by the record in this appeal.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation, with its principal office in Boston. It was incorporated on or about November 1, 1917, with an authorized capital stock of $500,000 par value. It established a fiscal year ending February 28, and has made its Federal income-tax returns on the accrual basis for such accounting period.
    On or about November 1,1917, the taxpayer entered into a contract with Sidney S. Conrad and Bertram B. Conrad, partners, doing business under the firm name of Conrad & Co., a copy of which is as follows:
    Memorándum of agreement entered into this first day of November, 1917, by and between Sidney S. Conrad, of Boston, in the County of Suffolk, and Bertram B. Conrad, of Brookline, in the County of Norfolk, both in the Commonwealth of Massachusetts, co-partners under the firm name of Conrad & Company, parties of the first part, and Conrad & Co., Inc., a corporation organized under the laws of the said Commonwealth of Massachusetts, party of the second part, WITNESSETH that
    Whereas the said partnership has heretofore carried on the business at 25 Winter Street in the City of Boston, and is the owner of the assets connected therewith, and the said corporation desires to purchase the said business and to issue its capital stock in payment therefor:
    Now, therefore, it is hereby agreed by and between the parties hereto as follows:

      First: TRe said Sidney S. Conrad and Bertram B. Conrad, eo-partners* as aforesaid, hereby assign, transfer and set over unto the said Conrad & Co., Inc., its successors and assigns, the cash accounts and notes receivable', stock of merchandise, furniture, fixtures, equipment, and all other tangible assets of whatever kind and description belonging to the said business, to have and to hold the same unto the said corporation, its successors and assigns, to their own use forever; and further covenant with the said corporation that the said property as aforesaid is of the fair value of the amount of not less than Four hundred ninety-nine thousand seven hundred ($499,700) dollars, and is free from all encumbrances, and that the said co-partners have full right to convey the same, and will each of them make, execute and deliver any further writings or instruments which may be necessary or convenient to vest a perfect title to the said property in the said corporation and to secure to the said corporation full benefit and enjoyment of the said property.
    And the' said corporation hereby agrees to issue shares of its capital stock of the par value of one hundred dollars each at par to the said co-partners or to such persons as they may designate as payment for the foregoing property, said shares to be issued to an amount equal at their aggregate par value to the value of said property transferred as aforesaid, as of November 1, 1917, as the same may appear according to an inventory of said property to be taken forthwith.
    Second: The said Sidney S. Conrad and Bertram B. Conrad, eo-partners as aforesaid, further agree with the said corporation to sublet to the said corporation the premises 25 Winter Street in the City of Boston, Massachusetts, at which the business of the said Conrad & Company has heretofore been carried on, for the term of the two leases thereof from Charles E. Cotting et al, one dated November'5, 1908, for a term ending October 31, 1920, and the other dated March 19, 1917, for the term beginning November 1, 1920, and ending October 31, 1935, for the rent in the amount reserved in the said leases, the said sub-leases to contain the same terms and provisions set forth in the copies thereof hereto annexed.
    Third: The said Sidney S. Conrad and Bertram B. Conrad, co-partners as aforesaid, further convey, assign, transfer and set over unto the said corporation the' good will of the said partnership, the trade mark “ Bady Dainty ” and other trade marks owned by said partnership, and all intangible property belonging to the said partnership not included in the paragraph designated First: and the' right to use the name Conrad & Company as a part of the corporate name, and in payment therefor the said corporation agrees to and with said Sidney S. Conrad and Bertram B. Conrad and each of them to assume and pay all the bills payable and other outstanding liabilities of said partnership, including the liability of the said partnership for taxes due now or hereafter to the United States, Commonwealth of Massachusetts, and the City of Boston, and to save the said Sidney S. Conrad and Bertram B. Conrad and each of them jjprever harmless therefrom.
    In pursuance of the terms of the above contract, the partnership of Conrad & Co. transferred and conveyed to the taxpayer corporation on or about November 1, 1917, (1) its cash, cash items, merchandise, supplies, and other tangible property, which cost and had a current cash value of $562,265.20, in exchange for the taxpayer’s entire capital stock of $500,000 par value; and (2) certain trademarks and other intangible property, in consideration of the tax-paper’s agreement to assume the liabilities and pay the debts of said partnership, which amounted to $147,446.87.
    In its income and profits-tax return for the four-month period ended February 28, 1918, the taxpayer claimed the amount of $562,265.20 as its invested capital. The Commissioner allowed this amount as the taxpayer’s invested capital for the purpose of determining its tax liability under the provisions of the Eevenue Act of 1917, but excluded from the claimed invested capital $147,446.87 in determining its tax liability under the provisions of the Eevenue Act of 1918.
    DECISION.
    The deficiency determined by the Commissioner is approved.
   OPINION.

Smith:

The taxpayer was incorporated on or about November 1, 1917, with an authorized capital stock of $500,000, all of which was issued to the members of a predecessor partnership in exchange for assets. The partnership had tangible assets of a current cash value of $562,265.20 and liabilities of $147,446.87, or net book assets of $414,815.33. It also had certain intangible assets the cash value of which has not been alleged or proven. The tangible assets were paid in to the taxpayer corporation in exchange for its $500,000 capital stock; the intangible assets were paid in at the same time and under the same contract of sale, and, in payment therefor, the taxpayer agreed to assume all the outstanding liabilities of the partnership, of an admitted amount of $147,446.87. In its income-tax return for the four-month fiscal period ended February 28, 1918, the' taxpayer claimed invested capital of $562,262.20 for the purpose of computing its tax liability under both the Eevenue Acts of 1917 and 1918. The Commissioner has excluded from this amount $147,446.87 in determining the excess-profits tax liability under the Eevenue Act of 1918, such action being predicated upon the Commissioner’s interpretation of section 331 of such Act. The taxpayer alleges error upon this point.

Section 331 of the Eevenue Act of 1918 reads as follows:

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation.

The contention of the taxpayer is that the contract of November 1,1917, under which the assets of the partnership were paid in to the taxpayer corporation, is a severable or divisible contract; that the tangible assets of a current cash value of $562,262.20 were paid in to the corporation in exchange for its $500,000 capital stock; that the intangible assets of the partnership were purchased for cash and that the paid-in capital of the corporation (tangibles in the amount of $562,262.20), was not affected by the transaction resulting in the acquisition of the intangibles; that section 331 of the Revenue Act of 1918 applies to and limits the determination of invested capital where assets are paid in for shares of stock, and that, in the instant case, since the good will was not paid in for shares of stock, section 331 has no application. ' .

We think it is not material to determine whether the contract of November 1, 1917, is an entire contract or a severable contract. The ruling of the Board would have to be the same in either case. The facts are that the partnership had assets of a net value of $414,815.33. It could not value those assets at any greater amount if it were computing its own invested capital. We think that section 331 is a complete bar to any greater value in the computation of the corporate invested capital. In Appeal of Baker, Hamilton & Pacific Co., 2 B. T. A. 1, we stated with respect to the interpretation of this provision of the 1918 law:

It is clear from the sections of the statute quoted above that two purposes are designed to be accomplished, among others, namely, that the taxpayer shall not include in invested capital any borrowed capital, and that, for the purpose of determining invested capital, a taxpayer which is the result of a reorganization after March 3, 1917, shall not by virtue of such reorganization obtain any advantage by comparison with the invested capital which would be allowed to a predecessor had no such reorganization taken place.

The situation is the same when a business carried on by a partnership is incorporated after March 3, 1917, and an interest or control in the property of 50 per cent or more remains in the same individuals. In the instant appeal a 100 per cent interest in the property transferred to the corporation remained in the same individuals.


text:
    Appeal of MAX BLITZER.
    Docket No. 5443.
    Submitted December 7, 1925.
    Decided February 13, 1926.

      ■John Gr. Jaeger, Esq., for the taxpayer.

      F. 0. Graves, Esq., for the Commissioner.
    Before Smith, Littleton, and Teussell.
    This appeal is from the determination of deficiencies in income tax for the years 1920 and 1921, aggregating $1,058.81, the deficiencies arising from the disallowance of deductions from gross income for the years 1920 and 1921 of $3,800 and $4,400, claimed by the taxpayer as traveling expenses.
    FINDINGS OF FACT.
    The taxpayer is a resident of New York City. During the years 1920 and 1921 he represented two -corporations, The Lightolier Co. and The Corona Corporation, both of New York City, as a traveling salesman, selling lighting fixtures to concerns throughout the United States and portions of Canada and Cuba. He was employed by the two corporations upon a weekly salary, under employment agreements which required that he pay his traveling expenses without reimbursement. The total compensation paid to him for the year 1920 was $14,394, and for the year: 1921, $15,523.
    During the years 1920 and 1921 the taxpayer kept no accurate record of amounts expended by him while traveling. During each year he made numerous trips which took him to the principal cities of the United. States and to some of the Canadian cities. One of his trips in 1920 took him to Havana, Cuba. On all of his trips he spent considerable amounts in the entertainment of buyers, and it was his practice to entertain at luncheon the salesmen of the buyers in some of the cities and, while entertaining them, to coach them in the best methods of selling. Also, while in New York City, he spent considerable amounts in the entertainment of buyers who came to New York. For the years 1920 and 1921, the taxpayer spent at least $3,500 and $4,000, respectively, on business trips and in the entertainment of buyers, and these amounts constitute ordinary and necessary business expenses.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. The determination of the amount will be made on 7 days’ notice, in accordance with Rule 50.


text:
    Appeal of Estate of ABBY ANN PHILIPP, MORITZ B. PHILIPP, Executor.
    Docket No. 5029.
    Submitted November 25, 1925.
    Decided February 13, 1926.

      James D. Ouchterloney, Esq., for the taxpayer.

      J. Sterling Halstead, Esq., for the Commissioner.
    Before GRaupneR, Teammell, and Phillips.
    This is an appeal from the determination of a deficiency in estate tax for the year 1922 in the amount of $6,645.75, of which $3,000 is in controversy. The disputed portion of the deficiency arises from the action of the Commissioner in increasing the value of certain property included in the estate of the decedent.
    FINDINGS OE FACT.
    Abby Ann Philipp died a resident of New York County, N. Y., on February 28, 1922, leaving a will and codicil naming as executor Moritz B. Philipp, to whom letters testamentary were issued on March 29, 1922.
    Thereafter, on or about May 5, 1922, the executor filed an estate-tax return wherein he reported, among other items, the premises known as 11 East Fifty-seventh Street, New York City, as a part of the estate of the decedent, at a value of $167,000. The premises consisted of a lot, with a frontage of 22 feet on Fifty-seventh Street and a depth of 100 feet 5 inches, upon which was located a four-story and basement stone-front dwelling.
    The Commissioner, in auditing the return filed, placed a value of $220,000 on the property.
    The value of the property was $205,000 on February 28, 1922.
   DECISION.

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