author: Siepkin :

text:
    Art Metal Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16226.
    Promulgated December 6, 1927.

      R. P. Smith,, Esq., for the petitioner.

      T). D. Shepard, Esq., for the respondent.
   OPINION.

Siepkin :

It is not necessary to decide in this case whether “ the return ” which starts the running of the statute of limitations, is the return filed June 16, 1919, or that filed November 7, 1919. The same questions arise regardless of the date, and both parties having considered a choice immaterial, we shall consider the June 16, 1919, return as the return.”

Petitioner contends that by section 250 (d) of the Eevenue Act of 1921, collection of this tax was barred on June 16, 1924, and that the passage of the Eevenue Act of 1924 before collection was barred did not make that Act operative in any way, since that Act, by its terms, expressly did not affect any assessment made before its passage.

Eespondent, however, insists that the provision of the Eevenue Act of 1924 which repealed the Eevenue Act of 1921 as of January 1, 1924, removes the 1921 Act from consideration, and, the five years for collection not having expired prior to the repeal of that Act, any limitation must be found in the 1924 Act substituted for it. Eespond-ent then insists that collection was not barred under the 1924 Act because, he says, this tax was assessed in time, and as to taxes assessed in time, the 1924 Act provided six years after assessment for collection.

The provisions of the Eevenue Aft of 1924 upon which respondent relies are as follows:

Sec. 277. (a) Except as provided in section 278 * * *
(2) The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.
Sec. 278. (d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.
Seo. 278. (e) This section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint, or proceeding was barred by tlie period of limitation then in existence, or (2) affect any assessment made, or distraint or proceeding in court begun, before the enactment of this Act.
Sec. 1100. (a) The following parts of the Revenue Act of 1921 are repealed * * * Title II (called “Income Tax”) as of January 1, 1924.

We have considered the question involved in Reliance Manufacturing Co., 7 B. T. A. 583, and there came to the conclusion that section 278 (e) above quoted did not authorize collection by distraint after the period provided by section 250 (d) of the Revenue Act of 1921 in a case where assessment was made prior to the passage of the Revenue Act of 1924 even though the five-year period provided for collection by section 250 (d) had not expired at the time of the passage of the 1924 Act. In reaching that conclusion we relied upon the case of United States v. Whyel, 19 Fed. (2d) 260; United States v. Cabot (Supreme Court, D. C., June 15, 1926, 5 Am. Fed. Tax Rep. 6172) to the same effect, and upon Wilhelm Co. v. Heiner, 21 Fed. (2d) 463. We said in that case:

The reasoning of the two learned judges in the last above cited cases is persuasive and leads us to the conclusion that we must find that in the case at bar the five-year period of limitation provided by section 250 (d) of the Revenue Act of 1921 had expired on June 15, 1924, and that at the time the deficiency letter dated July 30, 1925, was issued and mailed, the Commissioner had no authority to either assert, assess, or collect any tax or any deficiency in tax for the calendar year 1918 against or from this petitioner.

The opinion of the Board considers the sections of the Revenue Act of 1926 and determines that they do not have a retroactive effect , in providing an additional period of six years for collection “ where the assessment * * * (whether before or after the enactment of this Act) * * * ” has been made within the statutory period of limitations. We further relied upon the provisions of section 1106 of the Revenue Act of 1926 and upon our decision in Ocean Accident & Guarantee Co., Ltd., 6 B. T. A. 1045.

Before considering decisions of courts which have been made since our decision in the Reliance case, ,it may be pointed out that our decision in Ocean Accident & Guarantee Co., Ltd., supra, is not authority for the holding in the Reliance case, since in the earlier case the five-year period for collection had expired prior to the passage of the Revenue Act of 1924.

Since our decision in the Reliance case, the Circuit Court of Appeals for the Fifth Circuit in United States v. Russell, 22 Fed. (2d) 249, the District Court for the Northern District of Georgia in McClure Company, Bankrupt, 21 Fed. (2d) 538, and the case of United States v. Board, 14 Fed. (2d) 459, have held to the contrary and to the effect that if collection was not barred at the time of the passage of the Revenue Act of 1924, the Government is allowed six years after assessment within which to collect, even though assessment had been made prior to the Act of 1924. In addition to these cases, see also Erie Taxi v. Gnichtel, 17 Fed. (2d) 661, and United States v. Crook, 18 Fed. (2d) 449 (Fifth Circuit Court of Appeals), affirming the decision of the District Court and upholding the application of section 278 (d) of the Revenue Act of 1924 to a 1919 tax.

In the Russell case, supra, the Circuit Court of Appeals said:

It is apparent that this case does not come within the exceptions of Sec. 278 (e). The Revenue Act of 1924 was adopted June 2, of that year, at which time the assessment of the tax here in suit had been timely made and there wore still ten days in which to file suit to collect, so that neither was barred under the provisions of the Act of 1921. It follows that as the assessment was made within five years after the return, the Government had six years thereafter within which to bring suit, which it did within one year. The action was not barred by limitation.

Judge Sibley’s opinion in the M-oGlure case is extremely consistent and well reasoned. He says:

We are, therefore, required to ascertain whether the Act of June 2nd, 1924, saved this claim from becoming barred by the Act of 1921, five years after the return was filed, to-wit: on June 14th, 1925. The Act of 1924, Section 277a (2), which deals with tax claims arising prior to 1921, required that they “ except as provided in Section 278. * * * shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be taken after the expiration of such period.” Section 278d provides that “ where the assessment of the tax is made within the period prescribed in Section 277, or in this Section, such tax may be collected by distraint or a proceeding in court begun within six years after the assessment of the tax.” The combined effect of the two sections is to require an assessment to be made, or a suit without an assessment to be filed, within five years from the making of the return; but if an assessment is made within that time, a distraint or a suit to enforce it may be had within six years after the assessment. Thus, for the first time, in the Act of 1924, the assessment is made a point from which the limitation on proceedings to enforce collection is to run. The reason for the innovation is thus stated in the Gregg Report on the Mellon bill, as quoted by Holmes Federal Taxes, 6th Ed. p. 1347, note 85: “ If the taxpayer has had notice of an assessment within the statutory period therefor, little hardship to him results from authorizing proceedings thereafter for the collection of the tax. The purpose of the limitation upon assessments is to assure the taxpayer that after the period has run and no assessment has been made, no tax may be collected from him. If, however, the assessment is made within the prescribed period, the assessment is comparable to a judgment at law and should remain alive until the tax is paid.” This reason applied with equal force to every assessment, whether made before or after June 2nd, 1924. Section 278d does not speak of assessments hereafter made, but of assessments generally. In reenacting this provision in Section 27Sd of the Act of 1926, in order to set at rest any doubt about the intent of the words, Congress inserted a parenthesis: “(whether before or after the enactment of this Act).” The assessment in this case, made within five years after the filing of the return and within six years before the filing of the proof of claim, saves this tax from the bar.
But section 278e is said to compel the opposite conclusion It declares: “ This Section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint or proceeding was barred by the period of limitation then in existence; or (2) affect any assessment made or distraint or proceeding in court taken before tlie enaciment of this Act.” The plain meaning of the first clause is that if on June 2nd, 1924, it was, under the provisions of previous statutes, too late to assess a tax, the new statute should not authorize the assessment, and if too late under previous statutes to distrain or sue, no distraint or suit should be had under the new statute. The present assessment was not made under the new statute, and it was not, on June 2nd, 1924, too late to sue under previous statutes, so this clause has no present application. Tlie second clause seems equally plain and means that if an assessment had been made prior to June 2nd, 1924, it shall not be affected by the new statute, that is to say, it shall be no better and no worse as an assessment; and if a distress or suit had been begun before that date, it also shall be unaffected by the limitations of the new statute. It is not enacted that the provisions of the new statute shall not apply to a tax where a valid assessment was made before June 2nd, 1924. No reason can be thought of for imputing any such intent to Congress. While a shorter period of limitations was fixed for more recent taxes, it was known that behind 1921 was a great mass of unassessed and uncollected taxes. The period of five years was retained in which an assessment or a suit without assessment must be had on them. But where, within that time, the taxpayer had solemn notice of assessment of the claim, and thereby it was liquidated with prima facie correctness, more time was desired to be given for adjustment and payment before enforcement was to be compelled. An assessment on June 1st, 1924, differed in nothing from one on June 3rd, whether from the standpoint of the taxpayer or the" Government. Section 278e was not intended to make a distinction where there was no difference. It did not exclude from the new scheme of limitations tax claims that had been assessed prior to June 2nd, 1924, but only declared that such assessment stood unaffected as assessments. Such an assessment, if timely and valid when made, remained a good assessment and as capable of being a starting point for the new limitation as one made after June 2nd. The proceeding in court here dealt with was begun long after June 2nd, 1924, and the second clause of 278e does not apply to it at all. It rests upon an assessment to which that clause does apply, but only to declare it unaffected, as good an assessment as it ever was, and such an assessment as 278d makes the basis for the new six year limitation. 277a (3) and 278d of the Act of 1926, are but a clarifying reenactment of 277a (2) and 278d of the Act of 1924, and should set at rest any doubt as to the original Congressional intent. I think the proof of claim is not barred and ought to be allowed if otherwise correct.

It might be further pointed out that it is familiar law that statutes of limitation may be altered before the statutory bar has become complete. See Ogden v. Saunders, 12 Wheat. 349; Sturges v. Crowninshield, 4 Wheat. 122. See also Campbell v. Holt, 115 U. S. 620, as to the extent to which the law-making body may alter the statute of limitations. In this case at the time of the passage of the Revenue Act of 1924 the taxing officials still had a period within which col-, lection could be made. Under the Revenue Act of 1921 the bar of the statute was not complete and it is our opinion that under such circumstances Congress could and did intend to permit the Government to collect at any time within six years from the date of the assessment. That being our opinion, we must overrule our decision in the case of Reliance Manufacturing Co., 1 B. T. A. 583.

It may be well to point out that the situation in the present case and in the Reliance case are substantially different from the situation involved in the case of National Products Co., 7 B. T. A. 632, where we were considering a case in which the parties, by a consent in writing, had extended the time for collection to a date after the passage of the Bevenue Act of 1924. In such a case it may be that we should recognize the agreement in its terms, and no more, and refuse to attach to it any additional period for collection contained in a statute not in existence at the time of the agreement. That, however, is not the case that we are deciding here.

Keviewed by the Board.

Order will be entered restoring the yroceed-ing to the calendar for assignment for hea/ring in due course.

Tkussell and Phillips dissent.


source: Caselaw Access Project

author: Littleton :

license: Public Domain

text:
    Douglas Park Jockey Club, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5738.
    Promulgated December 9, 1927.

      Robert E. Moloney, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
   OPINION.

Littleton :

The testimony of a number of witnesses has been submitted relative to the character, cost, and March 1, 1913, value of petitioner’s property, conveyed March 5, 1919, for a total consideration of $300,000, the sum of $285,000 being the net consideration received after the allowance of $15,000 as a commission on the sale to the Kentucky Jockey Club.

The evidence is sufficient to convince the Board that the cost of petitioner’s property was as follows:

Cost of land_$130, 000.00
Construction prior to lease_ 150, 000. 00
Construction in 1912, after lease_ 30, 000. 00
Miscellaneous and pari-mutuels, 1912_ 8, 000. 00
Additions from 1913 to 1919_ 21, 366.64
Total_ 339, 366. 64

The evidence also convinces us that the fair market value of petitioner’s property on March 1, 1913, was $350,000 and that $7,500 per annum is a proper and reasonable allowance for exhaustion, wear, and tear of depreciable assets.

The March 1, 1913, value therefore depreciated to March, 1919, is $305,000. Petitioner realized from the sale $285,000, which is less than the fair market value of petitioner’s property on March 1, 1913, but more than the cost value depreciated at the same ratio from date of acquisition to date of sale, and therefore petitioner neither realized a taxable gain nor sustained a deductible loss on the sale in 1919.

The evidence does not establish that the petitioner was guilty of negligence such as would warrant the imposition of the penalty of 5 per cent affirmatively claimed by the Commissioner in his answer and at the hearing.

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

Considered by Smith, Tkussell, and Lov®.


author: Lansdon:

text:
    Estate of K. Threefoot, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 521.
    Promulgated December 9, 1927.

      O. R. McAtee, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
   OPINION.

Lansdon:

K. Threefoot was a business man interested in large operations. His membership in the partnership of Threefoot Brothers & Co. was only one of the many activities in which he was engaged. Outside of the partnership he had large property interests that required his attention. At the beginning of the taxable year he employed his two sons to assist him in his business. The sons relieved him from many of the burdensome details for which he was responsible • in the operation of Threefoot Brothers & Co. - They looked after his outside affairs. They were 29 and 24 years of age respectively, were well educated, and each had already had several years of business experience. There is nothing in the record that throws the slightest shadow of doubt on the ability or the efficiency of either. The salaries which 3L Threefoot paid his twfhsons in the taxable year were ordinary and necessary expenses incident to the conduct of his business, and are a proper deduction, for income-tax purposes, from his gross income for such year.

A matter of accounting is involved here. The salaries received by the sons were paid by the partnership and charged to the partnership account of K. Threefoot in the taxable year. On the books of the partnership this procedure appeared to reduce K. Threefoot’s share of the distributable net earnings for such year in the amount- of $12,000, and it was so reported in the personal income-tax return of said Threefoot. The respondent properly added said amount to the K. Threefoot share of the distributable net income of the petitioner. He was in error in. not permitting its deduction from the petitioner’s gross income as an ordinary and necessary expense. Goldsmith v. Commissioner, 7 B. T. A. 151; LeBlanc v. Commissioner, 7 B. T. A. 256.

As we have found that the amount of $12,000 is deductible from the petitioner’s gross income for the taxable year as business expense, the deficiency is probably entirely eliminated. We are convinced that there were reasonable causes for the delay in filing the complete return. ' The 25 per cent penalty for delinquency should not be imposed.

Judgment will he entered on 10 days' notice, under Rule SO.

Considered by GreeN and Artjndell.


author: Landsdon:

text:
    Earl King, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9942.
    Promulgated December 9, 1927.

      Earl King pro se.

      Brice Toole, Esq., for the respondent.
   OPINION.

Landsdon:

The following described amounts are found by the Board to be professional expenses, trade losses evidenced by closed and completed transactions, bad debts ascertained to be worthless, and expenses in connection with business of clients definitely shown to be uncollectible within the taxable years, as designated:

1920
Traveling expenses_$102.39
Expenditures at Memphis Country Club for entertainment of clients— 96.80
1921
Bad debts-$435. 00
Loss in automobile trading- 270. 00
Professional expenses not collected- 342. 95
Earm losses- 110. 00

The contributions to the Phi Delta Theta fraternity, and the depreciation of the petitioner’s dwelling, were personal expenses. The cost of books, the brokerage paid for securing a loan to be used in the construction of the petitioner’s dwelling were either personal expenses or capital investments and are, therefore, not legal deductions from gross income. The proof in support of the claim for deduction of other items disallowed is not sufficient to enable us to make the findings of fact upon which to base a decision for the petitioner.

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

Considered by Green and Artindell.


author: Thammell :

text:
    John C. Shaffer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1072.
    Promulgated December 9, 1927.

      Chas. B. Hamel, Esq., Benjamin Saunders, Esq., and George K. Bowden, Esq., for the petitioner.

      E. O. Lake, Esq., for the respondent.
   OPINION.

Thammell :

Petitioner filed his original petition herein on December 13, 1924, asserting as error the refusal of respondent to allow a deduction for certain alleged bad debts. By leave of the Board, petitioner filed an amended petition on December 5, 1925, wherein no. reference was made to, nor claim asserted in respect of, any deduction for bad debts, but in which it was alleged as error that respondent had failed and refused to determine the proper March 1, ■ 1913, value of a certain leasehold of elevator properties and had failed and refused to allow petitioner a proper deduction for exhaustion of its leasehold for each of the years involved. On motion ■granted by the Board on January 15, 1927, petitioner amended paragraph 5 of his amended petition, but did not materially change the allegations contained therein. At the hearing, counsel for petitioner stated in substanco that the issues tendered in the original petition .were abandoned, and that proof would be offered only on the issue contained‘in the amended petition. No evidence was offered touching the question of bad debts. The determination of the respondent in that respect is therefore approved.

In his amended petition, petitioner alleges that the value of his leasehold on March 1, 1913, was not less than $500,000, and that he is entitled to an annual deduction for exhaustion in the amount of $15,555.55. Respondent avers that said leasehold had no value at March 1, 1913, and that therefore petitioner is not entitled to any deduction for exhaustion. A- single, clear-cut issue of fact is thus presented.

If petitioner’s leasehold had any value at March 1, 1913, having been acquired prior to that date; he is entitled to a deduction for exhaustion in an amount equal to an aliquot portion of such value for each of the years 1918 and 1919. Appeal of Grosvenor Atterbury, 1 B. T. A. 169. The respondent raises no issue on this point, but contends that petitioner is not entitled to any deduction on account of exhaustion solely for the reason that his leasehold had no value as of March 1, 1913. With this contention, we are unable to agree. The evidence of record clearly and conclusively establishes that the leasehold in question had a very substantial value on that date. , However, the problem of determining with reasonable accuracy the definite amount of such value is not so easily solved.

This lease enabled the petitioner to operate his grain business at an average annual profit of more than $125,000, upon a capital investment of approximately half a million dollars, and without the leasehold such business could not have been operated profitably.

In the process of determining the value of the leasehold in question, an element of vital importance is the life expectancy of the lease contract or the remaining length of time it had to run from March 1,1913. The value of the leasehold depends largely on the term over which it was to run.

The evidence discloses that it was intended by the parties that the term- of the lease should be coextensive with the term of the contract under which petitioner sold the property to the-railway company, and that the lease should cease and terminate at the same time that-said contract by its terms should cease and terminate. ■ To ascertain the life of the lease, we must, therefore, look to the terms of the sale contract. -Under that contract, the railway company agreed to pay the purchase price of $1,000,000 in monthly installments equal to , 2 cents per 100 pounds on the grain delivered by it to- the- elevators, together with the interest, but further agreed to pay during each year an amount equal to all interest and in- addition at least $50,000 on the principal sum.

The bonds in the principal sum of $1,000,000,- representing the purchase price to be paid by the railway company, were payable at-and matured on October 1, 1924, but contained the provision that they should be redeemable on any interest-paying date at par and accrued interest. In other words, the term of the lease was 20 years unless the happening of a contingency shortened it. The lease provided that the term should be the time provided in the contract of-purchase of the leased premises. The railway company was to pay ithe purchase price from freight receipts. In each year, beginning October 1, 1904, the railway company was to pay 2 cents on each 100 pounds of grain shipped into the elevators over its railway from points west of Joliet, Ill., or carried by it 40 miles or more, except that at least $50,000 and interest should'be paid each year. During the period from 1904 up to 1913, under the terms of this contract, judging by conditions then existing and the amount of freight so handled, it would have .required more than 20 years to complete, the payments out of the freight receipts alone. The railway, company was primarily interested in profits to be derived from the transportation of grain. The operation of the elevators was only incidental to and as an aid in securing freight business for the railway company: - In 1913, the date as of which the value of the-leasehold-is to be determined, more than eight years had run, during which time the railway company had carried out the provisions of the lease contract by making the minimum annual payments set out therein. During that period, no question or controversy had arisen with respect to the redemption of the, bonds prior to their maturity at the end of the 20-year period. The railway company, during that period, had. not redeemed the bonds, and the lease actually ran -for 20 years. • Upon consideration of all the evidence in-the case, we believe it-was-the intention of the parties in 1913, as in 1904, that the-lease should run until 1924.

In determining the value of this leasehold,, another element for consideration is the restrictions imposed by the contract on the lessee. These related mainly to the giving of preference to the Rock Island Railway in the shipment of grain into and out of the elevators, and the requirement that at least 5,000,000 bushels per year should be delivered by the railway company to the elevators. However, the lessee was not required to ship its grain over the lines of this railway unless its rates were as favorable and its service as efficient as those of other r'ailroads. Bearing in mind the fact that these elevators were located directly on the Rock Island Lines in Chicago, which enabled that company to render an expedited service, particularly important in the grain business, and which also eliminated an onerous switching charge imposed by other lines, the preference restrictions do not appear to have been unfavorable to the lessee, nor to have materially detracted from the value of the leasehold. Also, considering the capacity of the elevators, the quantity of grain handled by them annually, and the other pertinent facts, the stipulation that 5,000,000 bushels of grain should be delivered by the Rock Island Railway each year does not appear to have been burdensome. From 1904 to the beginning of 1913, an average amount in excess of the minimum had in fact been so delivered, and no forfeiture had been exacted of the lessee. From the facts and conditions known or reasonably based on experience, it was not contemplated that any forfeiture would likely be exacted in the future.

Coming now to the matter of determining the value of the leasehold at March 1, 1913, we find that the evidence offered by the petitioner to establish such value varies widely.

For the years 1909 and 1910, the corporation operating the elevators paid to petitioner an annual rental of $20,000 and for the years 1911 to 1920 the corporation paid an annual rental of $36,000 and permitted the petitioner a certain limited use of the elevators. All the stock of this corporation was owned by petitioner. We do not regard these facts, standing alone, as a satisfactory basis for determining the value, but is the rental of $36,000 which was actually paid during the year 1913 and subsequent years by the corporation for the use of the elevators, under all the facts and circumstances, a fair and reasonable rental?

Witnesses for the petitioner testified that in their opinion the annual rental value at March 1, 1913, was $50,000, while petitioner testified that in his opinion the leasehold on that date had a value of $75,000 per year for the remaining life of the contract. The terms and conditions of this lease enter so largely into the question of determining its value, that we do not give great weight to opinions of rental value under conditions which are not shown to be similar.

It also appears from the evidence that in 1913 the Rosenbaum Grain Co. paid $30,000 per year for an elevator of 1,000,000 bushels capacity, and that in 1916 the Northwestern Railroad Co. leased its elevators of 10,000,000 bushels capacity to the Armour Grain Co. at a rental of $300,000 per year. Comparing the capacity of the South Chicago Elevators with the capacity of the elevators leased to the Rosenbaum and Armour companies, the value of petitioner’s leasehold in 1913 was $135,000 per year. However, this evidence is not impressive as a criterion by which to measure the value' of petitioner’s lease in 1913, in the absence of information with respect to the comparative conditions and terms of the various leases involved.

The evidence further shows that upon expiration of petitioner’s lease contract in 1924, the railroad company leased the elevators to petitioner’s corporation for a period of five years at an annual rental of $34,488, which amount was reduced from March 12, 1925, to $33,300 in consideration of the lessee assuming and relieving the lessor of certain liabilities. Here the parties were again dealing at arm’s length, in respect of the very property the rental value of which we are seeking to ascertain, although the transaction occurred more than eleven years subsequent to March 1, 1913. This new lease contract was made on the Missouri River basis, which fixed the annual rental at $34,488. This, in our opinion, establishes a minimum rental value as of 1913, but in 1924 depreciation had been sustained over a period of 11-& years. We have no evidence upon which to determine the extent or rate of depreciation. The lease in 1913 had more than 11 years to run, while the 1924 lease had a term of only 5 years. We think that the rental value on March 1, 1913, for the lease in question, considering the fact that the property had depreciated from that date to 1924, was in excess of the rental value in 1924. On the Missouri River basis the rental was based on the value of the elevator properties not including the land. Considering all the evidence, we think that the rental of $36,000 which was actually paid to the petitioner in 1913, was a fair and reasonable rental value. The evidence as a whole tends to corroborate this valuation. The lease contract at that time had an unexpired life or term of llf^ years, and the aggregate rental value on this basis, reduced to present worth as of March 1, 1913, gives substantially the amount which we have found was the fair market value of petitioner’s leasehold at that date. This amount should be the basis for deductions on account of exhaustion, as indicated in our opinion hereinabove.

Reviewed by the Board.

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


author: Muedook:

text:
    United States Trust Company of New York, Jemima E. Fletcher, and Orlando E. Shipman, as Executors, Estate of Charles H. Fletcher, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7856.
    Promulgated December 9, 1927.

      Lee MeGanliss, Esq., for the petitioners.

      J. F. Greaney, Esq., for the respondent.
   OPINION.

Muedook:

At the hearing and in his brief counsel" for the petitioner mentioned some contention in regard to the executor’s demand for determination of the amount of tax and discharge from personal liability therefor in accordance with section 407 of the Revenue Act of 1921, but since no such issue was raised by the pleadings, we will dismiss the matter without further discussion.

The respondent in his answer denied that his letter of August 8, 1925, was a deficiency letter and alleged that since the enactment of the Revenue Act of 1924, there has been no determination of a deficiency within the meaning of that Act, and that consequently this Board had no jurisdiction in the case. The respondent did not refer to this contention in his oral argument or in his brief. We can see no merit in his position and we are satisfied that we have jurisdiction.

There is one issue to be decided on its merits. The respondent contends that the estate of the decedent had a right to the $254,510.17 which it eventually received, which right -it could have enforced, and that- consequently the amount was properly included in the gross estate by authority of section 402 (a) of the Revenue Act of 1921. If this contention should prove unsound he then contends that the amount was properly included in the gross estate in accordance with section 402 (c), inasmuch as the decedent made a transfer of the amount to the Centaur Company without a fair consideration in contemplation of or intended to take effect in possession or enjoyment at or after his death.

We shall discuss the alternative contention first. It seems wholly without merit. The contract which alone could have made the transfer was entered into on November 24, 1917. It supplanted another similar contract dated 1912, and the letter was not the first of the kind between the parties. A witness who had been with the company for many years and who knew the deceased stated that he had always understood that the peculiar terms were inserted in these contracts following the death of a profit-sharing officer in 1904, at which time the heirs or representatives of that deceased officer had given the company considerable annoyance by insisting upon their right to examine into the profits of the company, as disclosed in its books. Under the circumstances it does not appear that Fletcher did what he did prompted by the apprehension of death within the reasonably near future, arising from some existing bodily condition. Appeal of Hannah M. Spofford, Administratrix, 3 B. T. A. 1016.

Furthermore, in our opinion, the deceased never transferred anything to the Centaur Company by the contract. The money which was undrawn'never became his and certainly in 1917, when he signed the contract, he transferred no right or property which he then had or owned. The contract has been the subject of a suit in the State of New York, and the learned court which decided the case, in reaching the same conclusion as we have reached, discussed this point at length. See In re Fletcher’s Estate, 219 N. Y. S. 239; and see also the decision of the New York Court of Appeals In re Fieux’s Estate, 241 N. Y. 277; 149 N. E. 857.

We fail to see, in the evidence before us, any reason for holding that all or a part of the undrawn salary was transferred as a part of the decedent’s estate at his death, or that it was subject to the payment of charges against his estate or to distribution as a part of his estate. The weight of the evidence is the other way.

The petitioner introduced a contract and some evidence that there was no other. Thus he made a prima facie case, at least. Another contract between Fletcher and the stockholders of the Centaur Company was mentioned by a witness and some such contract is also referred to in the letter written by the company to the executors dated July 27, 1922, and in the final release. But so far as we know such contract or contracts does or do not affect the question before us. If Fletcher agreed that money could be set aside for the payment of income taxes, how could he or his estate be heard to complain if money was so set aside? Was such a plan not within his contemplation when he signed the employment contract? Also did he not know when he signed this latter contract that it would take some months after the close of a year to determine and to draw his share of the profits ? The mere fact that he was not derelict in drawing his share would not move a court to enforce the payment to his estate of the portion which he had not drawn. It does not appear that the com-panjr ever did anything against Fletcher’s wishes or without his consent.

The respondent relies upon the fact that a release was demanded and given, and upon the admission of counsel for the petitioner that the executors made some sort of a demand upon the company, to show that the estate really had a right to receive all or a part of this money from the company either as undrawn salary, or for the use of Fletcher’s name. This does not seem logical. The assertion of an alleged right does not establish any right. The fact that a release was demanded, given, and received does not seem unusual or inconsistent with the petitioner’s contention, and certainly it is inconclusive. Suppose the act of the corporation giving the undrawn salary to the Fletchers was ultra vires, does that fact subject the money to an estate tax?

The evidence does not justify us in going beyond the plain terms of the contract, and our judgment must be for the petitioner, because by the terms of the contract this estate got nothing. The amount in question was not a part of the estate transferred on the death of the owner. Y. M. C. A. v. Davis, 264 U. S. 47.

Reviewed by the Board.

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


author: Smith :

text:
    Jacob F. Brown, Trustee, and Ray Slater Murphy, Beneficiary, under the Will of H. N. Slater, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8191.
    Promulgated December 9, 1927.

      M. B. Angelí, Esq., and Blount Ralls, Esq., for the petitioners.

      R. E. Dopes, Esq., for the respondent.
   OPINION.

Smith :

The question presented is whether the trustee is liable to income tax upon the income of the trust from January 1, 1920, to the date of distribution to the beneficiaries in 1920, or whether the petitioners are liable to income tax in respect of such income. The petitioners contend that the trustee is not liable to income tax upon the income. The trustee filed an information return on Form 1041 for 1920, which return showed no tax due from the trustee. The respondent contends that under section 219 of the Revenue Act of 1918 the rents, profits, and income of the trust from January 1, 1920, were properly taxable to the trustee and not to the beneficiaries.

Section 219 of the Revenue Act of 1918 provides as follows:

(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any hind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for mating the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that there shall also be allowed as a deduction (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the not income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.

In Mary L. Barton, Trustee, 5 B. T. A. 1008, we said at page 1014:

It is also quite clear that the imposing clause contained in subdivision (a) provides that the tax shall be paid by the fiduciary unless otherwise provided. From the general imposing clause the statute turns to the specific classifications that are to be included within subdivision (a).

and at page 1015 we said:

The intention of the statute is to let the tax be imposed in accordance with what actually transpired * * * Paragraph (3) treats of “income held for future distribution under the terms of the will or trust.” It could hardly be contended under this paragraph that income actually distributed by a trustee, who had the discretion to distribute or hold for future distribution, was taxable to the trustee as income being “ held for future distribution.” Also, it is to be noted, in such a case, the terms of the will or trust would have been complied with, as the trustee had the discretionary power to áo distribute. Thus, the intention again seems to be to let the tax be imposed in accordance with what actually occurred.

If this be true of the income of a discretionary trust paid over to beneficiaries, a fortiori, it is true of the income distributed to the beneficiaries in the instant case, which income was distributed in accordance with the express provisions of the instrument creating the trust. We regard it as immaterial that the income of the trust fund was to be accumulated for a period of years, which period came to an end during the taxable year. The income received by the trustee in 1920 was not held for future distribution under the terms of the will or trust for the entire year. It was paid over to the beneficiaries during the year. The trustee was merely the conduit through which they received their income. The conduit should not be charged with income tax in respect of the income paid over to the beneficiaries during the taxable year.

Reviewed by the Board.

Judgment will be entered for the petitioners.


author: MuRCock :

text:
    Walter R. McCarthy, Executor, Estate of John Francis McCarthy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17334.
    Promulgated December 9, 1927.

      Hugh Satterlee, Esq., and A. E. Graupner, Esq., for the petitioner. L. O. Mitchell, Esq., for the respondent.
   OPINION.

MuRCock :

In the decision of this case we are not disturbed by the fact that an estate tax and an income tax may impinge upon each other’in their ultimate incidence. George D. Widener et al. v. Commissioner, 8 B. T. A. 651. Our problem is the same as it would be had the estate tax been omitted from the statutes. The question is, does or does not the statute require an estate to include in its gross iiicome for income-tax purposes the amount which it finally received in cash, which amount just equals the value at the decedent’s death of an asset belonging to the corpus of the estate, which, if received by the decedent-during his lifetime, would have been income to him?

Facts have been stipulated which are at least prima facie evidence that the value at the death of the decedent of the asset represented by the right to receive $25,000 was $25,000, thus overcoming any presumption to the contrary in favor of the Commissioner. Appeal of Elizabeth J. Bray, Administratrix, 4 B. T. A. 42; William G. Frank v. Commissioner, 6 B. T. A. 1071. When later the estate received $25,000 in cash the capital asset which already formed a part of the corpus of the taxpayer’s estate was merely converted into cash and the estate did not as a result of the receipt of that cash have any taxable income. Appeal of Elizabeth J. Bray, Administratrix, supra; William G. Frank v. Commissioner, supra; and Appeal of Dorothy Payne Whitney Straight, Executrix, 7 B. T. A. 177.

Reviewed by the Board.

Judgment will be entered for the petitioner on notice of 15 days, under Bule 50.


author: Sieekin:

text:
    Perkins Land & Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11363, 17041.
    Promulgated December 9, 1927.

      Frank E. Seidman, O. P. A., and Jacob S. Seidman, Esq., for the petitioner.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Sieekin:

In his deficiency notice for the year 1919, respondent allowed $5,000 salary to each O. F. Perkins and G. W. Perkins. Jr., although $1,500 was duly authorized and paid to each. By amendment of his answer at the hearing, respondent alleged no amount should be allowed as salary to either. In his deficiency letter for the years 1920 and 1921, respondent allowed only $1,000 of a $10,000 salary authorized and paid G. W. Perkins, Sr., but allowed $1,500 each authorized and paid to C. F. Perkins and G. W. Perkins, Jr. By amendment of his answer at the hearing, respondent alleged that the allowance of $1,500 each to C. F. Perkins and G. W. Perkins, Jr., was erroneous.

As to the salaries of C. F. Perkins and G. W. Perkins, Jr., it is the contention of the respondent that, under the above resolution, notwithstanding the action authorizing the salaries and the resulting credits on the books of petitioner, a liability for salary did not exist and that any such liability was contingent upon future events, since the resolution stated that—

said salaries to be payable only at sucb time as the company shall have on hand cash sufficient to retire all its current liabilities.

As to the salary of G. W. Perkins, Sr., respondent contends that $1,000 a year is a reasonable allowance for the years 1920 and 1921, basing such contention upon his age, his failure to spend more than a part of his time at petitioner’s place of business and the competence of his two sons to properly handle the business. No such issue is raised by the respondent for the year 1919.

It is in evidence and uncontroverted that the three officers were men of long experience and of demonstrated abilities. The services were actually rendered, the salaries were duly authorized by appropriate action of the board of directors, and the salaries incurred were accrued upon the books of account of petitioner. After a careful consideration of all the evidence we are of opinion that the salaries were reasonable and they were ordinary and necessary expenses of the business. We are unable to agree with the contention of respondent that the provision for deferment of the payment in cash of the liabilities of petitioner for these salaries until such time as the petitioner was possessed of sufficient cash to retire all its current liabilities operated to relieve petitioner of the liabilities. Petitioner was on the accrual basis and in our opinion, whether it quickly discharged in cash its liabilities for salaries is immaterial. We therefore conclude that the salaries of the three officers accrued upon the books and claimed as deductions from income should be allowed.

On the question of the statute of limitations petitioner makes two contentions. So far as the year 1919 is concerned petitioner abandons the issue of the statute of limitations, except so far as the deficiency asserted by the respondent may be increased because of the amendment of respondent’s answer. In view of our decision above, therefore, we need not pass upon 1919. As to the years 1920 and 1921, the petitioner contends that the “ income and profits tax waivers ” set out in our findings of fact, not being signed personally by the Commissioner and it not appearing by whom and when they were signed on behalf of the Commissioner, were inadmissible in evidence and ineffective to extend the statutory period of limitations. A witness on behalf of respondent, however, identified the instruments as part of the official files in the Bureau of Internal Revenue. Both contain a signature purporting to be that of “D. H. Blair, Commissioner,” and the witness testified to a practice in the Bureau to sign such “ waivers ” as soon as received. In view of all the facts, and also taking into consideration our belief that it is not necessary that the Commissioner personally sign all “ waivers ” in order to have a valid consent in writing, it is our opinion that the time was extended and that assessment and collection are not barred. See Joy Floral Co. v. Commissioner, 7 B. T. A. 800.

Reviewed by the Board.

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


author: Siefkin:

text:
    Prey Brothers Live Stock Commission, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6464, 8385.
    Promulgated December 9, 1927.

      J. S. Boyd, Esq., Leslie E. Greene, Esq., and Ralph B. Mayo, G. P. A., for the petitioner.

      P. J. Rose, Esq., for the respondent.
   OPINION.

Siefkin:

Petitioner asserts it is a personal service corporation, defined in section 200 of the Revenue Act of 1918 to mean:

* * * A corporation whose income is to be ascribed primarily to the activities of the principal Owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * * *.

In the view we take of the case it is unnecessary to examine the facts in the light of the tests prescribed by the quoted excerpt from the statute other than the prerequisite that “ capital invested or borrowed, is not a material income-producing factor.” As to this aspect of the question petitioner urges that “ income ” as used in the statute means net income and, therefore, losses being sustained on the loans arranged for patrons and on the Sand Hill Ranch project, that no “ income ” was derived from those sources. We think capital was a material income-producing factor even though the capital invested in and the income from those items be excluded from consideration. We refer to the use of capital to carry patrons in connection with the strictly commission business. It appears that petitioner’s capital stock and surplus account (though credits to stockholders be ex-eluded) was in excess of $40,000 from July 1, 1918, until some time between June 80, 1919, and December 31 of that year, when the capital made up of these combined items totaled more than $32,000. Petitioner at times found it essential to borrow money in undisclosed amounts to supplement available invested capital to enable it to make remittances to shippers in advance of collections and to pay for stock purchased before it received payment from the purchasers. Aside from unknown quantities of borrowed capital admittedly employed, it seems apparent that the invested capital item of $40,000 was a substantial factor in earning income. Petitioner rendered a dual service — the service of buying and selling stock, which was personal in its nature, and the service of providing funds to carry the customers, which was a service capitalistic in nature. It is true that each customer was carried for only a few days, but capital sufficient for that purpose was deemed essential to petitioner’s business and was substantial in amount, and not incidental, when compared with the size of petitioner’s business as indicated by commissions received. It is also true that the remuneration for this dual service took the form of commissions. Yet where both services were rendered and each was necessary to petitioner’s successful operations, it can scarcely be said that the comparatively substantial capital used was not an income-producing factor or that such income could be primarily ascribed to the buying and selling activities of the stockholders. In this respect, the case is to be distinguished from Lee Live Stock Commission Co., 7 B. T. A. 532, and is similar to Denver Live Stock Commission Co., 7 B. T. A. 985.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    Appeal of Ira L. Henry Co.
    Docket No. 4041.
    Promulgated December 9, 1927.

      Harold O. Anderson, G. P. A., and Paul E. Shorb, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner,
   OPINION.

Littleton :

The issue in this proceeding is whether the petitioner is entitled to deduct from gross income for the calendar year 1919, as an expense of that year, the Wisconsin normal income tax levied upon the income for 1919, which was assessed in 1920 and became due and payable on December 1, 1920, considering the circumstance that under the provisions of the statute levying that tax the petitioner was entitled to have its liability therefor discharged, in whole or in part, by, and to the extent of, the payment of any personal-property tax assessed against it in 1920, in respect of such tangible personal property as might be owned on May 1, 1920.

Petitioner contends that the tax amounting to $2/130.80 was an ordinary and necessary expense of its business for 1919; that the income and the rates of tax applicable thereto being known, the amount of the tax could be definitely determined at the close of the year; that liability for the tax accrued on December 31, 1919, concurrently with the close of the taxable year; and that under the method of accounting regularly employed in keeping its books, it correctly deducted the tax, in the full amount thereof, from gross income in its Federal income-tax return for 1919. The Commissioner traverses on the ground that since the tax in question could be discharged, in whole or in part, by the payment of any personal-property tax made in 1920, the liability at December 31, 1919, was purely a contingent one, and it, therefore, did not accrue and was not a proper deduction for 1919.

It is necessary that there be a clear conception of the Commissioner’s position on the issue. He does not contest the proposition that ordinarily a tax of this character accrues under the method of accounting employed by the petitioner concurrently with the close of the taxable year; that it constitutes an expense and a proper deduction for the year in which the income upon which it is levied is earned. At the hearing, he conceded that the Wisconsin Soldiers Educational Surtax for 1919 of $433.56, levied upon the income for that year, accrued at December 31, 1919, and was properly deducted by the petitioner in its Federal income-tax return for 1919, since there is no provision in the state statute under which that tax was levied, whereby it could be discharged or satisfied by the payment of any personal-property tax in the following year, or the liability for payment of the full amount of the tax aifected by any other subsequent event. On the other hand, he takes the position that the statutory provision under which the petitioner was entitled to present a receipt for the payment of its personal-property tax for 1920, and to have such a receipt accepted in payment in whole or in part of its income tax for 1919, made it impracticable for the petitioner to definitely determine, at December 31, 1919, the exact amount, if any, which it would be required to pay to the State of Wisconsin, as income taxes for 1919.

There is also involved as a feature of the issue in this proceeding the action of the Commissioner in respect of the deduction claimed by petitioner on account of the personal-property taxes of $1,369.59 assessed and paid during 1919, the receipt for which was tendered by the petitioner and accepted by the tax collector in payment of petitioner’s 1919 income tax amounting to $223.94. The petitioner in this instance claimed a deduction of only $1,145.65 from its gross income for the purpose of the Federal tax for the reason that the income tax of $223.94 on its income for 1918 accrued at December 31, 1918, and the personal-property tax of $1,369.59 accrued in 1919. Petitioner further claims that to the extent of $223.94 the assessment and payment of the personal-property tax for 1919 represented a settlement and discharge of the 1918 accrued liability for the income tax. The position of the Commissioner is that since the amount of 1918 state income tax was less than the 1919 personal-property tax subsequently determined and assessed along with the income tax, there never was any accrual of the income tax and, accordingly, there should be no deduction on account thereof at any time.

We think the position taken by the petitioner is correct and that the decision of the Commissioner that there can be no accrual in respect of any jiortion of the income tax until the personal-property tax for the succeeding year is determined, and then only to the extent that the income tax exceeds the amount of the personal-property tax, is erroneous.

A study of the Wisconsin statute applicable to the situation here presented convinces the Board that the Commissioner’s position is based upon a misconception of the intent and purpose of its provisions. So far as pertinent here, the statute provides as follows:

Section 1087 M-26. Any person wlio shall have paid a tax assessed upon his personal property during any year shall be permitted to present the receipt therefor to the Collector, together with any similar receipts for personal property taxes paid by members of his family whose incomes have been assessed to him, and have the same accepted by the tax collector to their full amount in the payment of income taxes assessed against such person during said year.

The Commissioner construes the foregoing provisions of the statute to mean that the payment of the personal-property tax and the presentation of the receipt therefor, in payment of the preceding year’s income tax, effects a reduction in the amount of the income tax and determines for the first time the liability of the taxpayer to pay it. Thus construing the statute, he concludes that all of the events that fixed the amount of the tax and the liabiliy of the petitioner to pay it, had not occurred at the close of 1919, and, therefore, liability for the income tax could not have accrued within that taxable year. We do not so construe the statute.'

The language of the statute seems to us so clear as to leave no doubt as to its meaning, or the intent and purpose of the legislature in its enactment. Its purpose is clearly to provide a method of payment by which the liability for the income tax, fixed and determined by other sections of the statute, may be discharged or satisfied, in whole or in part. There is nothing in the statute which can be construed as changing the amount of the tax or affecting the status of the taxpayer’s liability therefor to the State. The amount of the income tax is not reduced by the amount of the personal-property taxes paid, nor is the taxpayer relieved from the liability to pay the whole amount by virtue of having paid a personal-property tax. The income tax is paid, and the liability therefor discharged, by presentation of receipts for personal-property taxes subsequently determined, assessed and paid, to the full amount of the income tax if less than the personal-property tax and to the full amount of such receipts if the income tax is greater than the personal-property tax. Until thus paid, or otherwise satisfied, the liability for the income tax continues just as it was fixed at December 31 of the preceding year. That is the sole effect of this section of the statute. Its provisions do not affect the amount of the tax which is determined by applying the prescribed rates to the net income in excess of the credits and exemptions, and do not alter the liability of the taxpayer to pay that tax. The decision of the Supreme Court of Wisconsin in the case of State ex rel. Bolens v. Frear, 134 N. W. 673, 688, lends support to this construction of this section of the Wisconsin statute. In that case, many provisions of the Wisconsin income-tax law of 1911 were attached as offending against the Federal or the State constitutions. During the course of its opinion, the court stated:

By the present law it is quite clear that personal property taxation for all practical purposes becomes a thing of the past. The specific exemptions of all money and credits and the great bulk of stocks and bonds, as well as of all farm machinery, tools, wearing apparel, and household furniture in actual use, regardless of value, goes far to eliminate taxation of personal property; while the provision that he who pays personal property taxes may have the amount so paid credited on his income tax for the year seems to put an end to any effective taxation of personal property.

In Van Dyke v. City of Milwaukee, 150 N. W. 509, the same court stated:

But when a statute, giving its language its ordinary and natural meaning, expresses a result neither absurd nor harsh, but on the contrary one in harmony with the general scheme of the law, namely, that an income tax shall, substantially, become a substitute for a personal property tax, then such natural and ordinary meaning should be given to the language used, and there is no room for construction. A tax was levied upon incomes for 1911. A tax upon personal property was levied for said year. The statute says that a person who has paid a tax upon his personal property during any year may have the same offset for the taxes due upon the income of such person during said year. Plaintiff paid a tax upon his personal property for 1911. He paid a tax upon his income during said year. The statute says the first may be applied in payment of the latter.

These decisions of the highest court of Wisconsin seem to indicate very clearly that the primary liability is for the income tax; that such tax may be paid, in whole or in part, by payment of the personal-property tax; but that there is no exemption from, or reduction of, the income tax by virtue of the payment of the personal-property tax. In view of what has been said we see no reason why the accrual of the income tax for the taxable year should await a determination in a subsequent year of whether the taxpayer has any personal property upon which a property tax may be levied. If, in the following year, the taxpayer owns no tangible personal property upon which a property tax may be asssessed, he is compelled to pay the amount of his income tax assessed. If he has taxable personal property, both his income tax for the preceding year and his personal-property tax for the current year are assessed. He in fact pays the larger of the two, but his liability for the income tax for the preceding year is not reduced by reason of any personal-property tax. It is merely satisfied by payment. If the personal-property tax for the taxable year should be greater than the income tax for the preceding year, as was the case with respect to the 1919 personal-property tax, the taxpayer is entitled to a deduction in that year on the accrual basis of only the excess of the personal-property-tax assessment over the income tax for the preceding year for the reason that the personal-property tax, to the extent of the income tax which accrued at the end of the preceding year, is merely a payment of such income tax. If the amount of the personal-property tax levied and assessed within the taxable year is less than the amount of the income tax for the preceding year, there is no deduction on account of the personal-property tax for the reason that the payment thereof is a partial discharge of prior accrued liability.

We believe there can be no question but that, in view of the law and facts involved in this proceeding, the petitioner was, at the close of 1919, legally bound and obligated to pay the State of Wisconsin a normal income tax of $2,780.80. All of the events had occurred which fixed the amount of the tax and the liability of the petitioner to pay it. The income having been realized, within the purview of the Wisconsin statute, there was no contingency that could have happened after the close of that year that would have released the petitioner from its liability to pay the tax, other than the payment of the tax which might be accomplished by the presentation of a receipt for personal-property taxes paid. Such being our conclusions we hold, in accordance with the decisions of the United States Supreme Court in United States v. Yale & Towne Manufacturing Co., 269 U. S. 422, and in United States v. Anderson, 269 Ú. S. 422, that the liability for the normal income tax for the year 1919 accrued at December 31 of that year, and that under the method of accounting regularly employed by the petitioner in keeping its books, there being no evidence that such method does not clearly reflect income, the petitioner is entitled to deduct the income tax amounting to $2,730.80, from gross income of 1919 in computing net taxable income for that year. We also hold that the deduction to which petitioner is entitled for 1919 in connection with personal-property taxes for this year is $1,145.65 as claimed by it, instead of $1,369.59 allowed by the Commissioner. The Soldiers Educational Surtax of $433.66 should also be allowed as a deduction for 1919.

Reviewed by the Board.

Judgment mil Toe entered on 15 days' notice, under Rule 50.


text:
    L. S. Cobb, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7136.
    Promulgated December 9, 1927.

      Theodore B. Benson, Esq., for the petitioner.

      Joseph K. Moyer, Esq., for the respondent.
   OPINION.

Littleton :

Petitioner contends that his wife was a member of the valid partnership and owned a one-sixth share of the capital and profits of the business. The Commissioner seizes upon certain provisions of the partnership agreement and insists that the petitioner’s wife “ had no interest in or control over the assets of L. S. Cobb & Co. whatsoever, either as to her share of the taxpayer’s capital investment in the firm or the distributable net profits thereof; she in fact was not a partner in the firm.” We find no support of this claim in the partnership agreement. The parties to the agreement were competent to enter into a valid partnership. The tona ftd&s of the transaction is not questioned. The Civil Code of California provides—

Section 158. Husband, and wife may malee contracts. Either husband or wife may enter into any engagement or transaction with the other, or with any other person, respecting property, which either might if unmarried; subject, in transactions between themselves, to the general rules which control the actions of persons occupying confidential relations with each other, as defined by the title on trusts.
Section 2895. Pas'tnership, what. Partnership is the association of two or more persons, for the purpose of carrying on business together, and dividing its profits between them.
Section 2404. When division of losses implied. An agreement to divide the profits of a business implies an agreement for a corresponding division of its losses, unless it is otherwise expressly stipulated.
Section 2J/28. Poioer of majority of partners. Unless otherwise expressly stipulated, the decision of the majority of the members of a general partnership binds it in the conduct of its business.
Section 24H. Liability of one held out as partner. Any one permitting himself to be represented as a partner, general or special, is liable, as such, to third persons to whom such representation is communicated, and who, on the faith thereof, give credit to the partnership.
Section 2450. Total dissolution of partnership. A general partnership is dissolved as to all the partners:
* * * * * * *
By the transfer to a person, not a partner, of the interest of any partner in the partnership property.

Outside the provisions in the partnership agreement attempting to limit the rights of the wife in the event of separation or death and in respect of her right to alienate her interests, the wife had equal rights and authority with her husband. The provisions relating to the power of alienation by the wife were conditions subsequent, were repugnant to the interest created, and were ineffective to prevent the vesting of the one-half interest in the wife. Jones v. Clipton, 101 U. S. 225; Murray v. Green, 64 Cal. 363; 28 Pac. 118; Maynard v. Tolhemus, 74 Cal. 141; 15 Pac. 451; Kaltschmidt v. Weber, 135 Cal. 590; 79 Pac. 272. The conditions in the partnership agreement restraining alienation by the wife were void under the provisions of section 711 of the California code. This section has general application and provides that “ Conditions restraining alienation, when repugnant to the interest created, are void.”

It was not necessary that the partners make a distribution of profits in order for them to be taxable to the members of the partnership under the revenue statute. The Commissioner is reversed.

Eeviewed by the Board.

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


author: ApojNdell :

text:
    D. M. Stevenson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14698.
    Promulgated December 9, 1927.

      Gliarles E. McCulloch, Esq., and Iva/n F. Phipps, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   ORINION.

ApojNdell :

If petitioner’s one-fourth interest in the deferred payments under the contract may be said to be the equivalent of cash, it would seem that the deficiency determined by the Commissioner must be approved, even though petitioner reports his income on a cash receipts and disbursements basis. What the Commissioner has sought to tax as cash income is a contract right to receive one-fourth of certain deferred payments payable over several years in the future. The fact that petitioner had but a one-fourth interest in the deferred payments and the known financial weakness of the purchaser and the speculative character of his undertaking would in and of themselves give one pause in saying that the deferred payments were the equivalent of cash. But we have here in addition the actual inability of petitioner to Realize on his contract right by sale, nor was he successful in pledging his interest in the contract as collateral for a loan.

Income under the statute to one reporting on a cash basis is a much more real thing. We believe under the circumstances here present petitioner was entitled to recover his capital before being charged with the receipt of a profit and we so hold. Anton M. Meyer, 3 B. T. A. 1329; cf. Leroy G. Evans v. Commissioner, 5 B. T. A. 806.

Reviewed by the Board.

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

SterNhageN dissents.


author: Teussell :

text:
    Motor Car Supply Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2088.
    Promulgated December 12, 1927.

      S. F. Beach, for the petitioner.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Teussell :

The allowable depreciation for the taxable year in question was depreciation sustained in that year alone. The method of computation used resulted in the inclusion of depreciation accumulated in prior years and not deducted in prior income-tax returns. Appeal of Fort Orange Paper Co., 1 B. T. A. 1230. The action of the Commissioner must, therefore, be affirmed.

Judgment will be entered for the respondent.

Considered by Littleton, Smith, and Love.


author: Trussell:

text:
    William H. Wanamaker, Jr., and Bessie D. Bremer, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11136, 12689.
    Promulgated December 12, 1927.

      Joseph H. VanDorn, O. P. A., and Randolph W. Child, Esq., for the petitioners.

      Frank W. Gibbs, Esq., for the respondent.
   OPINION.

Trussell:

These cases have been presented and argued on the theory that the building maintained by the petitioners on land located at 1217-1219 Chestnut Street, Philadelphia, was a temporary building maintained only for the purpose of producing such an amount as would meet the fixed carrying charges upon the land and building, and that as such a building its useful economic life should be estimated as not more than 11 years from the time the petitioners acquired it in 1920. It has been argued on behalf of the petitioner that the practice of maintaining temporary buildings on land in the larger cities only for purposes of producing a sufficient amount to pay taxes and fixed carrying charges on the land is a well established practice and must be given consideration in the adjustment of exhaustion allowance under the income-tax acts. In this case the Commissioner has allowed an exhaustion deduction based on a life of 40 years. Petitioners appear to concede that that allowance is fair and reasonable if ordinary wear and tear alone is considered but that it is not reasonable when considered in connection with obsolescence.

Much stress has been laid upon the admitted facts that the income produced by this property is a wholly inadequate return upon the investment. This may be readily conceded. We believe, however, that owners of land located as is the land here under consideration, are not looking to the net rents from property for their return upon their investment but are looking to the increased value of the land, when the same may be sold at a satisfactory profit or its uses changed, and there is nothing in this record and we know of no basis upon which to estimate when a satisfactory profitable sale of this property may become probable or when business and financial conditions may appear to warrant the present owners in so improving their property as to produce adequate money return upon their investment.

The record shows the total of expenses which the owners have charged against the rents of this property but it does not show what items are included in that total and whether there are other items than local taxation and ordinary building repairs. The record also shows that during the years 1920 to 1923, inclusive, the assessed valuation of this property was $480,000, and for the years 1924 and 1925 it was $500,000, but petitioners have failed to furnish any other evidence respecting any gradual increase of assessed valuations or whether the tax rate upon assessed valuations is stationary, increasing, or diminishing. And, if it may be argued that this building were to become obsolete at the time when its gross rentals will cease to meet the necessary carrying charges, we are furnished with no basis upon which we can make a finding as to whether that time will arrive at the end of 11 years as estimated by the petitioners or at some other undetermined date. We are, therefore, of the opinion that upon the present record the exhaustion allowance of 2% per cent allowed by the Commissioner can not be determined to be inadequate. The deficiencies should be recomputed in accordance with the foregoing findings of fact and this opinion.

Judgment will he entered upon 15 days’ notice, pursuant to Bule 50.

Considered by Littleton, Smith, and Love.


text:
    Albrecht & Weaver, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10129.
    Promulgated December 12, 1927.

      Frank J. Maguire, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
   OPINION.

Smith :

The only issue is whether the petitioner is entitled to classification as a personal service corporation. It contends that during both the years 1920 and 1921 it complied with all of the three conditions named in section 200 of the Revenue Acts of 1918 and 1921 as essential to such classification, namely, (1) that the income must be ascribed primarily to the activities of the principal owners or stockholders; (2) that the principal stockholders must themselves be regularly engaged in the active conduct of the corporation’s affairs; and (3) that capital must not be a material income-producing factor.

The respondent contends, first, that the income can not be ascribed primarily to the activities of the principal owners or stockholders. Before deciding that question there is a preliminary one that must be settled. The list of stockholdings for the years 1920 and 1921 appearing in the foregoing findings of fact shows that no stock was issued to Maguire or Allen prior to or during the taxable years. It is the petitioner’s contention, however, that, while no stock was actually held by Maguire and Allen during the years, they owned 100 shares each of the unissued stock. We think that the evidence does not support the petitioner’s contention. The follows ing testimony appears in the cross-examination of Albrecht, the only witness to testify in the proceeding:

Q. Now, when the corporation was organized did you and Mr. Weaver continue to be the only men actually doing the office work and actively conducting the business of the corporation?
A. No, no; Mr. Maguire and Mr. Allen were the other two in executive positions, and the only two who had clients of their own. In other words, they were the only two to whom we turned over any clients for such work as these clients wanted done.
Q. And did they put in their full time in the office?
A. Yes.
Q. And were they attorneys or accountants?
A. Mr. Maguire is an attorney and accountant. Mr. Allen is a certified public accountant and not an attorney.
Q. No stock was issued to either one of thorn?
A. Not until later.
Q. During 1919 and 1920 no stock was issued to them?
A. No; we simply had a contract with them that they would receive 100 shares of stock.
Q. But they didn’t receive it during those years?
A. They didn’t receive it during those years.
Q. Now, you four men, you, Mr. Weaver, Mr. Maguire and Mr. Allen, were the only four, as you call them, principals, of the business. You were the only ones who devoted all of your time to the business. I am not talking about the employees now but about the managers.
A. Yes, that is right.

The contract referred to for the issuance of the stock to Maguire and Allen was not produced nor was any further explanation of its terms and conditions given. It is not shown that Maguire and Allen paid any consideration upon such a contract or that they had any enforceable right with respect thereto. They did not receive any dividends or other monetary benefits from the stock which they are said to have owned. They had no voting power and it is not shown that they exercised any of the privileges commonly associated with stock ownership. They both received substantial salaries during the years 1920 and 1921. None of the others who owned and held stock received any salary or other compensation from the business. This would indicate that Maguire and Allen stood in an entirely different relationship to the petitioner from the stockholders. Albrecht further testified that upon organization of the petitioner the partnership turned over to it the accounting business for a consideration of 501 shares of stock and that this stock was considered as belonging to the partnership firm rather than to himself and Weaver individually; that he and Weaver, who controlled the petitioner at all times, were only waiting a favorable opportunity to issue the remaining stock.

Upon the record before us and for the purpose of application of section 200 of the statute, we are of the opinion that those to whom the stock had been issued and was outstanding during the years 1920 and 1921 must be accepted as the owners and stockholders.

Moreover, it appears from the testimony above given and from facts elsewhere stated that much of the managerial duties of the petitioner’s business devolved upon Maguire and Allen. They received clients on the same footing with Albrecht and Weaver and offered them their personal services. They directed the work of the employees as did Albrecht and Weaver. These four persons are referred to as “principals” in the business. We think that they must all be considered among those to whom the petitioner’s income is primarily to be ascribed.

It further appears that the petitioner employed during the taxable years from 8 to 17 employees who held no stock and to whom it paid salaries; that they were for the most part accountants and auditors; that the petitioner derived its income solely from fees for the work of auditing and accounting; that the total salaries of these employees was $28,975.77 for 1920 and $39,180.26 for 1921, whereas, the petitioner’s total income was $44,696.45 for 1920 and $60,282.25 for 1921. See Appeal of Patterson-Andress Co., 6 B. T. A. 392.

We can not agree, therefore, that the petitioner’s income must be ascribed primarily to the activities of the principal owners or stockholders.

The respondent contends also that the second condition has not been met that the principal stockholders were regularly engaged in the activities of the petitioner’s affairs. This raises two questions, (1) whether Albrecht and Weaver can be said to have been regularly engaged in the active conduct of the petitioner’s affairs during the same years that they were engaged in the active conduct of the affairs of the partnership, and (2) whether Lytle, Bedfield, Butler, and Mitchell, who held 10, 20, 60, and 60 shares of stock, respectively, and who took no part in the active conduct of the petitioner’s affairs, were principal stockholders.

We believe that both of these questions must be answered as the respondent contends. The evidence shows that the partnership which Albrecht and Weaver conducted was a very active business. It was by its very nature a business exacting in its requirements for regular and consistent services on the part of its proprietors. That it was likewise remunerative is shown by the fact that Albrecht received as his share of earnings approximately $10,000 in 1920 and $13,000 in 1921. His share of the petitioner’s earnings for the same periods was approximately $1,900 and $3,400, respectively. The facts here are similar to those in Matteson v. Willcuts, 12 Fed. (2d) 447, where the court expressed itself as follows:

Throughout the year 1918, Mr. O. D. Matteson was Vice-President of the Capítol Trust & Sayings Bank of St. Paul, an important financial institution of that city, and received a large salary for his services with that corporation. Without question, he was regularly and no doubt constantly engaged in the active conduct of the affairs thereof. Can it be possible that he was also at the same time regularly engaged in the active conduct of the affairs of the plaintiff corporation within the meaning of the law in question? If that could be true as to two corporations, the number might be increased. The law no doubt contemplates such regularity and such continuity of service as would not permit a stockholder, seeking to qualify under this requirement, to apportion his time and energies between or among different corporations. If one of the principal stockholders might be permitted to give a trifling part of his time and energies to the affairs of such a corporation, then all might be so privileged and before long the requirements of the law would be substantially ignored. The intent of the law is that each such stockholder must be devoting his time and his energies in substantial measure to the corporation in question. In contemplation of law, he must be regularly engaged in a substantial way in earning the income in which he claims a share. If to bring the corporation within the personal service class, his service is required, that service must be such that he cannot at the same time render an equal service to one or more other corporations. There is constant temptation to urge that particular corporations, with no right to such favor, be accorded classification as personal service corporations, and the requirements necessary thereto must be substantially observed. Even if it were held possible under the law here in question, for a person to be regularly engaged in the active conduct of the affairs of two or more corporations at the same time, in such manner and to such extent as to qualify each of such corporations as personal service corporations, still Mr. O. D. Matteson is not within such class here. The extent of his duties at the bank precluded his being regularly engaged with the affairs of plaintiff in such sense as is contemplated by the law. Such attention as he gave was intermittent and irregular. He was at plaintiff's place of business from time to time as was convenient, and he turned over to plaintiff certain insurance on a brokerage basis. To hold that he was regularly engaged in the active conduct of the affairs of the corporation, would be to invite corporations of every variety wrongfully to apply for the classification which is sought here.

We agree with these views and we do not*believe that any distinction should be made here because there is involved a partnership rather than another corporation, or because oí the close relationship of the partnership and the petitioner. We do not believe that Albrecht and Weaver could have apportioned their time and energies between the partnership here and the petitioner with any less violence to the rule of the statute than they could have between two corporations.

As to the second question, we find that Lytle, Kedfield, Butler and Mitchell held during both the years 1920 and 1921 a total of 150 of the 301 shares outstanding. The principal stockholders of a corporation can not be ascertained by any mathematical formula based upon a strict percentage of holdings, but it appears certain that where such a relatively small amount of stock is held by only 6 persons, none of whom holds more than 75% shares, the two persons holding 60 shares each are among the principal stockholders. We must conclude, therefore, that the principal stockholders here were not regularly engaged in the active conduct of the petitioner’s affairs.

It is unnecessary for the purpose of our decision to consider the question whether capital was a material income-producing factor.

Judgment will be entered for the respondent.

Considered by LittletoN, Teussell, and Love.


author: Trtjssell:

text:
    O’Neill Machine Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7922.
    Promulgated December 12, 1927.

      Herbert W, Nauts, Esq., for the petitioner.

      Henry Rwoenel, Esq., for the respondent.
   OPINION.

Trtjssell:

The petitioner paid $20,000 on February 27, 1917, for the patent on the “ press machine ” pursuant to an agreement dated January 2, 1917. During 1917 this patent became obsolete due to a new invention whereby wide-mouth glassware could be manufactured on the same machine which made narrow-neck glassware. An examination of the specifications for patents for wide-mouth ware and for narrow-neck ware indicates that the processes and devices were similar in many respects up to the point where the molten glass was introduced into moulds, or blanks.

This similarity is particularly noted in the glass cut-off mechanism and the mold tab},e advancing mechanism. From these specifications it would appear that the ownership of the patent for the “press machine ” would be necessary to the petitioner to protect its patent on the “blow-machine.” However, it is clear that a large part of the mechanism employed in the press machines became valueless and obsolete in 1917, specifically that portion made up of moulds, plungers and devices whereby the glass vessels were shaped by pressure.

In our opinion at least $10,000 of the $20,000 paid for the press machine patent was a loss in the year 1917 due to the obsolescence of the portion of the press machine devices which was not included in the blow-machine specifications.

The petitioner’s return for income and profits taxes for the calendar year 1917 was filed with the collector of its district on March 26, 1918, and the statute of limitations defining the period within which tax liability upon said return might be assessed and collected would have expired on March 26, 1923. On February 5, 1923, the petitioner and Commissioner entered into an agreement extending the time within which taxes on said return might be assessed and collected for an indefinite period. Thereafter, and on April 11,1923, the Commissioner issued a public order as follows:

Unlimited Waivers for 1917 Held to Expire April 1,1924. •
To Collectors of Internal Revenue, Internal Revenue Agents m Charge, and
Others Concerned:
The form of waiver now in use extends the time in which the assessment of 1917 income and excess profits tax may be made to one year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by taxpayers containing no limitation as to the time which assessments for 1917 may be made, all such unlimited waivers will be held to expire April 1, 1924.

Under this order the time within which a tax against this petitioner for the calendar year 1917 might have been assessed and collected was extended to and limited by the day April 1, 1924. The Commissioner’s final action determining the petitioner’s tax liability for the calendar year 1917 was conveyed to the petitioner by a letter dated September 1, 1925, advising it of the rejection of its claim for abatement of additional taxes for the year 1917. At this time, September 1, 1925, the extended period within which any tax for the year 1917 could have been assessed and collected had already passed.

The Board has had occasion to review situations entirely similar to the one here existing in the cases of Cunningham Sheep & Land Co., 7 B. T. A. 652; Wirt Franklin, 7 B. T. A. 636; and Henry M. Leland, 8 B. T. A. 974. The reasoning and the decisions in those cases are controlling here.

Judgment of no deficiency will he entered.

Considered by Littleton, Smith, and Love.


author: Teussell:

text:
    American 3 Way Luxfer Prism Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5935.
    Promulgated December 12, 1927.

      Frank Carlton, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
   OPINION.

Teussell:

We are presented with two questions of fact, one as to the deduction for the loss of assets during the year as shown by petitioner’s closing inventory and termed in the petition as depreciation, and the other as to the amount of depreciation.

The facts established that petitioner sustained a loss during 1919 through reduction of its inventory, caused by breakage and/or loss of physical assets, and that loss amounted to $7,260.90, of which amount the respondent has disallowed a deduction of $4,686.06. The amount of $4,686.06 should be' allowed as a deduction in computing petitioner’s net income for the year 1919 as provided for in section 234 (a) of the Revenue Act of 1918.

As to the question of whether the respondent erred in disallowing $207.37 of the $807.51 claimed by petitioner for depreciation, we have before us no facts upon which to base any conclusion.

With reference to the recomputation of petitioner’s tax liability on the reduced net income, in accordance with this decision and the provisions of sections 327 and 328 of the Revenue Act of 1918, the respondent should use the same comparatives and rates as were used when the deficiency here involved was computed. Counsel for the petitioner stated in his closing statement at the hearing on this proceeding, that such comparatives and rates would be perfectly satisfactory. j

Judgment will be entered ufon 15 days’ notice, pursuant to Rule 50.

Considered by Littleton, Smith, and Love.


author: Love:

text:
    Fibre Container Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7475.
    Promulgated December 12, 1927.

      William G. Alexander, Jr., Esq., and Walter Lee Sheppard, Esq., for the petitioner.

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

Love:

The primary question is whether or not the assessment of the proposed deficiency is barred by section 277 (a) (3), Revenue Act of 1926. The pertinent part of this section is the following:

Tlie amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1918, * * * shall be assessed within five years after the return was filed, and no proceeding in court without assessment shall be begun after the expiration of such period.

As appears in the findings of fact, a consolidated return was filed in June, 1919. Later the Commissioner ruled petitioner was not affiliated with the Philadelphia Company, one of the corporations included in the return, and directed petitioner to file another return from which would be excluded income and invested capital of the Philadelphia Company. Petitioner filed a new return, accordingly, in September, 1923. On July 31, 1925, notice of the deficiency here in question was mailed to petitioner.

The Commissioner’s position is, that since he had determined that petitioner was not affiliated with the Philadelphia Company, the return filed in June, 1919, was not a compliance with section 239, Revenue Act of 1918. This section provides, “ That every corporation subject to taxation under this title * * * shall make a return * * Section 240 (a) required corporations which are affiliated to make a consolidated return.

There is no question of petitioner’s good faith in filing the consolidated return, and it also is not questioned that such return complied in all respects with section 240 (a) if the corporations were affiliated.

We think that a return so made also complies with section 239. Therefore, the limitation of time within which an assessment may be made should be computed from the date of filing such return. The facts in the present case bring it within the decision of the Board in National Tank & Export Co., 3 B. T. A. 1217. The present case also comes squarely within the Board’s decision in Appeal of F. A. Hall Co., 3 B. T. A. 1172, in that here as there the consolidated return contained all of the information necessary to a computation of the tax of each constituent corporation separately. See also Appeal of National Refining Compamy of Ohio, 1 B. T. A. 236. The deficiency letter having been mailed more than five years after the filing of the consolidated return, the assessment of the proposed deficiency is barred by section 277 (a) (3), Revenue Act of 1926.

It is, therefore, unnecessary to consider the question of affiliation.

Judgment of no deficiency for the year 1918 will he entered.

Considered by Thus sell, Smith, and Littleton.