author: Murdock: Teammell,

text:
    Federal Street and Pleasant Valley Passenger Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29758.
    Promulgated October 2, 1931.

      Frank C. Miller, C. P. A., for the petitioner.

      J. L. Bachstrom, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined deficiencies in the peti-. tioner’s income taxes for 1919, 1920, 1921, 1922 and 1923 in the respective amounts of $220.63, $1,232.42, $219.32, $405.54 and $511.57. The amended petition contains four assignments of error, but two of these have been abandoned. The two remaining assignments relate to invested capital; and, since an excess-profits tax has been determined for but one year, 1920, the adjudication of these questions will affect only the deficiency determination for that year.

The parties have entered into, and submitted in evidence, a written stipulation of facts. The stipulation is so lengthy that to include it verbatim would unnecessarily extend this report. Therefore, it is incorporated herein by reference.

The first question for our consideration is whether the Commissioner erred in excluding from the computation of invested capital for 1920 overassessments of $3,424.60 and $1,593.44, for 1917 and 1918, respectively, notice of which was given the petitioner in the deficiency notice which forms the basis for this proceeding. The petitioner made no offer of proof that the allowance of the over-assessments was not barred by the statutory period of limitations, but its position, as set forth in the brief, is that such overassessments were not barred by the statute of limitations at January 1, 1920, the basic date for the determination of invested capital for 1920, and invested capital should not be determined with reference to an event which occurred some four or five years later. The deficiency notice fixed April 1, 1926, as the date when the overassessments in question would become barred by operation of the provisions of section 284(g) and it may be assumed that these overassessments were not barred at any time during 1920. Nevertheless, following Murtha & Schmohl Co., 17 B. T. A. 442, we sustain the Commissioner on this point.

The other question for our consideration is whether the respondent erred in failing to include, in the computation of invested capital for 1920, the fair cash value of the obligation of the lessee of the petitioner’s railroad properties to discharge the petitioner’s funded debt when it matured. From the stipulated facts it appears that by a written agreement dated July 20, 1896, the petitioner leased all of its railroad properties to the North Side Traction Company (hereinafter referred to as the lessee) for a term of 950 years; under the covenants of the agreement, the lessee undertook to operate, work, use and run, and keep in public use the demised railways, to maintain said demised railways, property and premises, at its own expense, in good repair, working order and condition, and supplied with such rolling stock, equipment and other appliances as should be reasonably requiredNfor its operation; to indemnify, save and keep harmless the petitioner from all costs, charges and expenses arising from the management and operation of the railways; to pay the bridge tolls agreed to be paid by the petitioner; to perform all covenants and agreements made by the petitioner with other companies; to pay to the petitioner an annual rental of $70,000, payable in semiannual installments of $35,000 on the 15th days of January and July throughout the term of the lease; to pay a further sum of $500 per annum, payable in equal semiannual installments, for the purpose of defraying the expense of maintaining the petitioner’s corporate existence; to-assume all of the floating debts of the petitioner to an amount not exceeding $175,000, when and wherever the same might become due and payable; to pay all taxes and assessments and water rents which might be assessed upon the petitioner’s properties, franchises, capital stock, business, rental, income and indebtedness, or upon any of the lines of railway leased, operated or controlled by the petitioner; to fay at maturity the principal and interest of $1,250,000 par value of bonds theretofore issued by the petitioner and then outstanding; to assume the petitioner’s guarantee as to the payment of the principal and interest of certain other bonds; to insure the demised properties against loss from fire, paying the premiums therefor from its own funds; and, upon the expiration of the lease, to yield and deliver up to the petitioner the demised railways and properties, with their appurtenances, in the same good order and repair as they were in when received by the lessee, or might be put in during the term of the lease, reasonable wear and tear excepted.

By a written agreement dated January 27, 1897, the lessee, with the assent and concurrence of the petitioner, leased all of its properties, including all properties which it held under lease agreements, to the Second Avenue Traction Company for a term of 949 years, the latter assuming all of the lessee’s obligations to the petitioner under the agreement of July 20, 1896, except the lessee’s obligation to assume all of the floating debts of the petitioner to an amount not exceeding $175,000, which indebtedness was to be paid by the lessee out of the proceeds from the sale of its own securities; by a written agreement, dated June 29, 1897, the Second Avenue Traction Company sold, assigned, set over and conveyed to the United Traction Company of Pittsburgh all of its right, title and interest in and to the leasehold estate in the properties of the petitioner, the purchaser agreeing to perform all the conditions and covenants in all-leases theretofore entered into by the seller; by a written agreement, dated June 28, 1897, the lessee (North Side Traction Company) sold, assigned, set over and conveyed to the United Traction Company of Pittsburgh all of its rights, title and interest in and to tbe leasehold estate in the properties of the petitioner, as evidenced by the agreement of July 20, 1896, the purchaser agreeing to perform all of the covenants and obligations of the lessee contained in that agreement; on July 81, 189T, the United Traction Company of Pittsburgh had recorded- on its books, as a part of its funded debt, its liability to pay and discharge the funded debt of the petitioner, in the amount of $1,250,0.00, and such liability was carried on the books at December 31, 1920, and was shown in a balance sheet of the United Traction Company of Pittsburgh, as of the latter date, which has been filed with, and not modified by, the Public Service Commission of the Commonwealth of Pennsylvania; and the total amount of interest which has been paid on the petitioner’s funded debt, during the period July 1, 1896, to January 1, 1930, by the parties to the aforementioned agreements, other than the petitioner, is $2,089,955.83.

In the provision of the original lease wherein the lessee agreed to pay at maturity the prinicipal and interest of. all bonds theretofore issued by the petitioner and then outstanding, there was set forth in tabular form a description of the bonds to which the provision related. These bonds matured at various dates from July 1, 1903, to May 1, 1942. Under the table there was a statement as follows:

The aboye issues are covered by and are being exchanged into an issue of like amount, viz: — 1,250 Bonds of $1,000.00 each, $1,250,000.00 dated May 1, 1892 and maturing May 1, 1942.

From oral and documentary evidence presented at the hearing, it appears, further, that from the time of the petitioner’s organization, in 1871, to July 20, 1896, no item of income or expense was recorded on the petitioner’s books unless and until there was an actual receipt or disbursement of cash; on July 21,1897, entries were made in the journal and properly posted to the general ledger, recording, as of July 21, 1896, all of the petitioner’s liabilities and all amounts due to the petitioner which were outstanding on the latter date, and which affected the operating revenue and expense accounts; the petitioner ceased to be an operating company upon execution of the lease agreement of July 20, 1896, and thereafter maintained the status of a nonoperating company; after July 20, 1896, the petitioner’s business transactions amounted only to the receipt of rentals for its properties and the distribution of dividends; rentals and dividends were recorded on the books as they were received and disbursed, respectively; the time of the-receipt of all rentals and the disbursement of all dividends was such that the time for making-each entry on the books would have been the same regardless of whether the books were kept on a cash or an accrual basis; there was no change after 1896 in the method of accounting employed in keeping the petitioner’s books; the petitioner has not recorded on its books any income, as such, which may have been derived from its lessee’s assumed obligation to pay and discharge, at maturity, the principal of the petitioner’s funded debt amounting to $1,250,000; and the Commissioner has not included in his computation of invested capital for 1920, as earned surplus or otherwise, any amount representing the fair cash value of the lessee’s agreement to assume the petitioner’s obligation on its bonds at the date of the execution of the lease agreement.

Based upon the foregoing facts and circumstances, the petitioner contends that the lessee’s agreement to pay its (the petitioner’s) funded debt amounting to $1,250,000 at maturity represented a bonus payment, in addition to the reserved rentals, for the lease; the assumption of this obligation by the lessee was income to the petitioner when the lease w^s executed in 1896; and the fair cash value of that agreement, as of the date the lease was executed, should be included as an asset in computing earned surplus for invested capital purposes. The respondent contends that the petitioner’s books have been kept consistently upon the cash receipts and disbursements basis, and, upon that basis of accounting, the obligation of the lessee is not income to the petitioner until it is actually paid and discharged by the lessee; and regardless of the method of accounting employed in keeping the books, the obligation of the lessee could not be considered income to the petitioner prior to the time it is discharged, because “ the lease discloses that the lease must be performed before the petitioner is entitled to have its funded debt paid on its behalf.”

Subdivision (3) of section 326(a) of the Revenue Act of 1918 provides that invested capital includes “ paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.” The following cases adhere to the rule that the amount of earned surplus and undivided profits to be included in the invested capital of any taxable year must be determined in the light of the method of accounting properly employed in keeping the taxpayer’s books for that taxable year. Blum's, Inc., 7 B. T. A. 737; New England Furniture & Carpet Co., 9 B. T. A. 334; J. B. Bradford Piano Co., 15 B. T. A. 1045; Jacob Brothers Co., 19 B. T. A. 59, decision reversed but this principle upheld, 50 Fed. (2d) 395; S. Davidson & Brothers, Inc., 21 B. T. A. 638; Tull & Gibbs, Inc., 21 B. T. A. 1073; John M. Brant v. United States, 40 Fed. (2d) 126; and Txill & Gibbs, Inc., 48 Fed. (2d) 148, decided March 16, 1931, by Circuit Court of Appeals for the Ninth Circuit, affirming decision of the District Court for the Eastern District of Washington. Therefore, whatever the method of accounting employed in keeping the petitioner’s books in 1896 and 1897, its right to have the fair cash value of its lessee’s obligation, as of the date of execution of the lease, included in invested capital is dependent upon the method of keeping its books and computing net income for 1920.

From 1871 to 1896 the net income of this petitioner may have been computed on the books on the basis of cash receipts and disbursements, but thereafter, it has been computed upon an accrual basis. An examination of the profit and loss account and its supporting primar}7 accounts discloses that during the earlier period no item of income or expense was taken into the computation of net income unless actually received or disbursed. During that period there were numerous items, such as discount, interest, insurance, taxes, rent and pay roll which perhaps should have been recorded as belonging to different periods, had the books been kept upon an accrual basis. But whatever the method used prior to 1896, it is reasonably clear that in that year the books were placed upon an accrual basis and there has been no subsequent change in that basis. In 1896 and 1897 appropriate entries were made in the journal, and properly posted to the general ledger, for the purpose of recording all receivables and payables affecting the operating revenue and expense accounts, and the result thereof was to place the computation of net income upon an accrual basis. It is true, of course, that the total of such receivables and payables was a comparatively small amount, but that was not surprising, since the petitioner’s business was the operation of a street railway. After 1896 the petitioner’s business transactions were entirely of a cash nature. Rentals and dividends were recorded on the books as received and disbursed, but the time of their receipt and disbursement was such that they would have been recorded in the same way whether the books were kept on a cash or an accrual basis. The occasion for entering any accrual on the books after 1896 and 1897 did not arise, but that does not serve to change the character of the basis. Our conclusion is that the petitioner’s books were kept upon an accrual basis in 1920. Accordingly, as we have previously pointed out, the earned surplus and undivided profits to be included in invested capital for 1920, must be determined upon an accrual basis.

The petitioner claims that it should have accrued as income $1,250,-000 when the lease was entered into representing the lessee’s promise to pay the interest and principal of the bonds at maturity. It cites Boston & Providence Railroad Corporation v. United States, 31 Fed. (2d) 594; affd., 37 Fed. (2d) 670, as authority. This case is strikingly similar, but the present case can not go to that Circuit, and since we can not agree with the reasoning of the Boston Providence case, we must, with all due respect, decline to follow it. Perhaps the two cases are distinguishable, since here there is no provision for a sinking fund, while there there was.

A number of cases have been decided in which a lessee has made improvements to leased premises. In some of these cases the Board has held that the value of the improvement at the time made was income to be reported ratably over the remaining life of the lease. Shelby D. Scott, 9 B. T. A. 1219; Joseph L. B. Alexander et al., 13 B. T. A. 1169. In Gilbert Butler et al., 4 B. T. A. 756, the Board held that improvements to a leased mine were income to the lessor upon the termination of the lease, whereas, in Henry I. Brown, 4 B. T. A. 1129, comparable improvements were held to be income when made. Miller v. Gearin,, 258 Fed. 225 (certiorari denied, 250 U. S. 667), and Cryarn, v. Wardell, 263 Fed. 248, are authority for the proposition that improvements made to leased property by a lessee prior to March 1, 1913, are not thereafter income to the lessor. In some of these cases there were agreements in the leases requiring the lessee to make the improvements, but income was not considered to have accrued or been received prior to the time when the improvements were actually made.

Such improvements were held no part of invested capital in Julia Building Association, 3 B. T. A. 333. Furthermore, in the case of a sale of property subject to a mortgage, the profit can not be computed until the benefit from the purchaser’s agreement to pay the mortgage is recognized. A number of specific provisions of the revenue acts govern the computation and reporting of the gain from sales. These provisions usually require that the gain be accrued and reported for the year of the sale. But here we have a lease, and leases are not sales. The consideration for a lease is called rent. Cf. Nelson Land & Oil Co., 3 B. T. A. 315. Bent is all profit and is all reported as gross income without being first offset by the cost of the property. It is only accrued and reported as income as it is earned or becomes due. In the year 1920 the date had not yet arrived upon which the lessee was to fulfill its promise and agreement to pay the principal of the petitioner’s bonded indebtedness. The promise of the lessee was not negotiable and, unlike promissory notes, was not to be accrued in its entirety, at least, when given. Cf. Commissioner v. Garber, 50 Fed. (2d) 588; James M. Butler, 19 B. T. A. 718. This rent payment was not yet due and had not been paid in advance. Not being due, it should not be accrued on the promise alone. Cf. Bedell v. Commissioner, 30 Fed. (2d) 622. When was it earned? The petitioner has not accounted for the item as either accrued or earned and we can not say precisely to what extent it was earned on January 1, 1920. Where income is earned ratably over a term, but payments become due at times unrelated to the period when earned, good accounting may require that the payments be accrued as earned. Cf. Madison & Kedzie State Bank, 1 B. T. A. 922. A similar principle has been applied occasionally in reporting income and in deducting expenses on the ground that it enables income to be more clearly reflected on an annual basis. Shelby D. Scott, supra; Joseph L. B. Alexander, supra; Fall River Electric Light Co., 23 B. T. A. 168; S. & L. Building Corporation, 19 B. T. A. 788; United States Playing Card Co., 15 B. T. A. 975; Chicago Acceptance Co., 12 B. T. A. 150; Western Exchange Bank, 12 B. T. A. 66; Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988, affirmed on several points and reversed on one, 47 Fed. (2d) 990. But here accrual should not be delayed after the date of actual receipt. Automobile Underwriters, Inc., 19 B. T. A. 1160. Following these decisions, we hold that the petitioner should have accrued as income in each year a proportionate part of the $1,250,000 over the expected life of the bonds, 46 years, beginning July, 20, 1896, thus increasing earned surplus as of January 1,1920.

Reviewed by the Board.

Judgment will be entered; under Rule SO.

Smith, Sternhagen, and McMahon dissent.

Teammell,

dissenting: In my opinion, the Circuit Court of Appeals for the First Circuit, in the case of Boston & Providence Railroad Co. v. United States, supra, has correctly answered the question as to the assumption of the bonded indebtedness. Aside from that decision, I think the entire amount should be included in invested capital. The corporation was enriched by the amount of assumed obligations prior to any taxable period.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Marshal Stearns, Ancillary Administrator of the Estate of Carl Richard Hieronymus, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48930.
    Promulgated October 6, 1931.

      L. L. Hamby, Esq., for the petitioner.

      Eugene Harpole, Esq., and Edwin M. Niess, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner is a fiduciary. The beneficiaries had him appointed for the purpose of recovering property from the Alien Property Custodian and of distributing the net proceeds to them. There was no trust or other instrument directing him to retain or withhold any part of what he received beyond that necessary to defray expenses and charges on the estate. In computing and reporting the net income of the estate for income-tax purposes, the petitioner was entitled to deduct the amount of the income for the taxable year which was to be distributed currently by the fiduciary to the beneficiaries and/or the amount of the income for the taxable year which he properly paid or credited during the year to any beneficiary. Section 162(b) and (c) of the Eevenue Act of 1928. Here the petitioner properly paid or credited during, the year, to those entitled, all of the funds which reached his hands except 100 shares of Studebaker stock and $37,525 in cash. There was sufficient corpus in the estate to pay all disbursements save the distributions to which the beneficiaries were entitled and practically all such disbursements were properly payable out of the corpus of the estate. The Studebaker stock was corpus and not income. Unless we hold that some part of the $37,525 cash in excess of the net loss was income, there is obviously no tax due from the estate for 1928 for, except for any income in the $37,525, the petitioner properly paid or credited during the year to the beneficiaries, all income for the year and any income which he received was to be distributed currently to the beneficiaries. If some allocation of the $37,525 between corpus and income should be, made, the part representing undistributed income would be offset by the net loss of $11,388.31 and by some considerable part of the $45,744.07 paid to the attorneys. Under all of the circumstances we are satisfied, without deciding various other questions raised, that there is no tax due from the estate. The petitioner may or may not be liable as a withholding agent, but this question is not before us.

Judgment will be entered for the 'petitioner.


text:
    Houma Cypress Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8627.
    Promulgated October 6, 1931.

      George Seth Guión, Esq., for the petitioner.

      James L. Bachstrom, Esq., for the respondent.
   opinion.

Murdock:

The Commissioner notified the petitioner that he,had denied claims in abatement for 1919, 1920 and 1922 in the respective amounts of $1,231.62, $3,254.65 and $583.48. The latter determination is not contested. The only error assigned is:

In reconstructing invested capital as at December 31st., 1918, the Department shows an adjusted invested capital of $204,673.66 and as at December 31st., 1919 an adjusted invested capital of $133,967.67 whereas in original returns filed the invested capital was $229,110.53 as at December 31st., 1918 and $198,544.15 as at December 31st., 1919.

The petitioner was a corporation organized under the laws of Louisiana. This proceeding is by its liquidator. The answer admits that the Commissioner did the things complained of, but denies any error was committed.

The petitioner had contracted to pay one-half of its net profits to the Dulac Cypress and Shingle Company. In June, 1919, the latter company was suing the petitioner in regard to its one-half of the petitioner’s net income. The petitioner desired to pay dividends to its stockholders through the issuance of interest-bearing notes. The two companies on June 18, 1919, entered into an agreement providing that some of the issues in the suit should be settled by the petitioner giving its notes to the Dulac Company, one issue should be left for decision by the court, and providing further as follows:

The Houma Company shall he permitted to declare, a dividend from the operation of 1917 and 1918 not exceeding the amount of $103,617.72 instead of borrowing the money with which to pay this dividend in cash, it is understood that the Houma Company may issue to its stockholders, notes representing such dividends, which notes shall he dated January 1st., 1918 to represent the dividends for the year 1917 and January 1st., 1919 to represent the dividends for the year 1918. All notes shall be due on August 1st., 1920 and shall bear interest at 6% from their date until paid. It is distinctly understood and agreed, however, that these notes shall be subordinate to the notes issued to the Dulac Company as above provided and shall be also subordinated to the rights of the Dulac Company under its contract of date, September 13th., 1913. That is to say that the notes delivered to the Dulac Company shall be paid by preference and priority from the assets of the Houma Company before any amount is paid upon the notes to be delivered by the Houma Company to its stockholders, and furthermore that the Dulac Company shall always be paid any amount that might be due it under its contract of September 13th, 1913 by the Houma Company before any amounts are paid by the Houma Company upon the notes delivered to its stockholders and that there shall be written into the face of the notes to be delivered to the stockholders of the Houma Company, a stipulation that said notes are issued in accordance with the terms of the resolution of the Houma Company approving this contract. The intent being that any third person who might acquire said note shall be bound by the provisions of this contract.

Thereafter, the petitioner issued to its stockholders certain of its notes as shown below:

The Series C notes were paid in the latter part of 1919 and the first part of 1920. The Series D notes were all paid between July-16, 1920, and October 25, 1920. The Series E notes were paid between December 28, 1922, and May 21, 1923. Each contained a statement that it was “ issued in accordance with and subject to the conditions of contract entered into with Dulac Cypress Company of date June 18,1919, and ratified at stockholders’ meeting held October 14, 1919.”

The notes bore interest at 6 per cent from their respective dates. Series C and D were issued some time after June 18, 1919.

These notes were issued after a resolution was adopted authorizing their issuance.

In adjusting invested capital for 1919 the Commissioner deducted $11,717.94, which he explained as follows:

Dividends paid October 23, 1919-$103,617. 74
Deduct current earnings, less accrued Federal income tax_ 42, 517. 06
Amount paid out of surplus to be prorated- 61,100. 68
Prorated for 70 days_ 11,717. 94

For 1920 he made a similar adjustment of $48,430.81, based on a dividend of $80,087.77 on March 18, 1920.

Dividends reduce invested capital from the date declared rather than from the date paid. The stockholders of the petitioner became creditors of the corporation at the time the dividends were declared. They were certainly creditors from the time they received the notes regardless of when or under what circumstances the notes were to be paid. They were paid, thus showing there was no impossible condition attached. The Commissioner committed no error. W. E. Caldwell Co., 6 B. T. A. 47.

Judgment will be entered for the respondent.


author: MuRdock :

text:
    J. J. White Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43720.
    Promulgated October 6, 1931.

      John J. Finnorn, Esq., for the petitioner.

      O. J. Tall, Esq., and J. Mills Newton, Esq., for the respondent.
   OPINION.

MuRdock :

This proceeding deals with the petitioner’s tax liability of 1924, for which year the Commissioner determined a deficiency of $8,033 94. The petitioner contends that the Commissioner has allowed inadequate deductions for depletion and depreciation due to his understatement of the March 1, 1913, value of certain timber and his overstatement of the salvage value of certain physical assets.

Counsel for the parties have filed a stipulation and they agree that with the figures thus agreed upon, a proper allowance for the deductions in question can be computed if the Board determines two facts, one, the fair market value on March 1, 1913, of the timber then owned by the petitioner, and, two, the value which will remain in the petitioner’s physical assets on hand in 1924 after the timber then owned has been exhausted. The stipulation is incorporated herein by reference. The Commissioner has determined that the value on March 1, 1913, of the petitioner’s timber was $1,374,686.25, and the salvage value of the petitioner’s physical assets on hand in 1924 would be $68,961.49. He used these figures in computing the deductions by a method which both parties agree was otherwise correct.

In August, 1911, the petitioner bought a tract of long leaf yellow pine timber for $1,029,798. The tract consisted of about 17,000 acres. At the time of purchase the officers of the petitioner had had two cruises made by one cruiser. This man estimated on one cruise that the tract contained 205,946,000 feet and on the other that it contained 239,530,000 feet. The officers considered that the petitioner had purchased 205,946,000 feet at $5 per thousand feet and the property was put on the books in that way. In the latter part of 1912 the petitioner leased the right to take turpentine from this tract in consideration of the payment of $248,000. The lessee had had the timber cruised and considered that it had paid $1 per thousand feet of timber for the lease. From this tract, 261,845,000 feet were actually cut. Lumbermen usually expect the actual cut to exceed the cruiser’s estimate by from 10 to 20 per cent.

The fair market value on March 1, 1913, of the timber owned by the petitioner was $1,400,000.

The probable salvage value of the petitioner’s physical assets (exclusive of timber) owned in 1924 was $7,000.

Eight witnesses testified as to the value on March 1, 1913, of this timber per thousand feet. Not all gave an opinion of this value subject to the turpentine contract, but the contract reduced the value per thousand by about $1. None gave an opinion as to the value of the tract as a whole. The petitioner argues that we should determine the value per thousand feet and multiply by 261,845, the number of thousand feet actually cut. This reasoning is unsound. Depletion in this case is to be allowed on the basis of the fair market value of the property on March 1, 1913. Section 204(c) of the Revenue Act of 1924. Fair market value has been frequently defined as the price at which a willing seller, not forced to sell, would sell the property in question to a willing purchaser, not forced to buy. This value on a given date, as March 1, 1913, must be determined in the light of facts then known or then reasonably to be anticipated. The actual number of feet cut from the tract of timber in question was not such a fact.

• What, then, was the probable content of this timber which the assumed buyers and sellers would have had reason on March 1, 1913, to expect? The testimony on this question came only indirectly. We have summarized it above. But it is to the probable content as shown by the cruises made before March 1, 1913, that the value per thousand testified to by the witnesses must be applied. A buyer or seller would have fixed his price by multiplying his estimate of the value per thousand by the number of thousands he thought the tract contained. We have determined the fair market value of the tract in this same way.

Judgment will be entered under Rule 50.


author: Murdock :

text:
    Charles J. Derbes, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Inez M. Roy, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. K. Roy and C. J. Derbes, Executors of the Estate of Andrew Stafford, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Carmen Derbes, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alphonse K. Roy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stafford, Derbes & Roy, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Upstream Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37362-37366, 41104, 42642, 42643, 43271, 43272, 47085.
    Promulgated October 6, 1931.

      John J. Finnom, Esq., for the petitioners.

      Otis J. Tall, Esq., and R. R. Bain, Esq., for the respondent.
   OPINION.

Murdock :

The petitioners’ principal contention is that most of the so-called sales made by the partnership and the corporation were not in fact sales but were merely contracts for sales so that the payments received prior to the delivery of a deed did not belong to the seller and were not income until a deed was delivered. Tax returns for the years in controversy were filed on the basis of installment sales; the Commissioner has approved and used this method in determining the deficiencies; the deficiencies apparently resulted from adjustments of other kinds not contested; in the original petitions for 1928 and 1924 the petitioners insisted that the installment method be used; and not until the hearing was there any change in those pleadings.

Counsel for the petitioners now urges that this method be abandoned and less tax computed on some other basis never before applied by either party. Unless the installment method is faulty, we do not think its use should be abandoned under the circumstances of these cases. Cf. J. B. Bradford Piano Co., 15 B. T. A. 1045; Calvin T. Graves, 17 B. T. A. 1318; Gilbert W. Lee, 6 B. T. A. 135, affd., 41 Fed. (2d) 1004; James C. Ellis et al., 16 B. T. A. 1225; Morrow, Becker & Ewing Co., 21 B. T. A. 1013. Having heard nothing to the contrary, we must assume that the installment method is in accordance with the method used in keeping the books and clearly reflects income and, in all cases where the initial pajunents did not exceed one-fourth of the purchase price, the Commissioner has allowed the income to be reported on the installment basis. If there were any transactions on the “ bond for deed ” contract where the installment sales method of reporting would not apply because more than one-fourth of the purchase price was paid as an initial payment, the petitioners’ contention might have some merit. But we do not know that there were any such transactions or, if there were, how the Commissioner has treated them and, in any event, the petitioners make no complaint about the treatment of transactions of that kind and offer no alternative method of treating them in case we hold that the installment basis was a proper way of reporting income from the transactions in which the initial payments did not exceed one-fourth of the purchase price. In other words, if, as to transactions of the latter class, there is any income which can be reported on the installment basis, then the petitioners’ first contention fails and they agree to abide by the determination of the Commissioner.

We do not agree with the petitioners in their contention that title must pass by the delivery of a deed before any income can arise for tax purposes and, therefore, any method of reporting as income any part of the payments before title passes is unsound and improper. If correct, it would almost completely emasculate the retroactive provisions of section 212(d) of the Revenue Act of 1926 relating to a sale or other disposition of real property. Those provisions do not require that title pass when the initial payments are made. In most installment sales, title does not pass with the initial payments. Cf. Calvin T. Graves, supra; J. T. Pittard, 5 B. T. A. 929; Pacific Coast Redwood Co., 5 B. T. A. 423. Of course, title must pass eventually in order to have a sale or other disposition, but there is nothing to indicate that title did not pass eventually in the transactions on which the taxes in these cases were computed. If a sale falls through after some income has been reported, some adjustment becomes necessary and would no doubt be permitted by the Commissioner. Cf. Blum’s, Inc., 7 B. T. A. 737. But that question is not before us. The installment basis of reporting the income from such transactions permits that income to be reported as it is received, regardless of whether title has or has not passed at that particular time. Under that method notes of the purchaser are not included in income. The first two contentions of the petitioners suggest no reason for disturbing the determinations of the Commissioner. Cf. Pacheco Creek Orchard Co., 12 B. T. A. 1358; Morrow, Becker & Ewing Co., supra.

In prior decisions we have indicated that we are slow in substituting our judgment for that of a board of directors on the question of the reasonableness of officers’ salaries. But, here, the officers and the board were in effect one; the salaries were more than double the amount these men ever received for their services before or since, so far as the record shows; the Commissioner determined that the amounts deducted were unreasonable; and the evidence does not require its review here or indicate that the Commissioner erred.

If the expenditures of the trip to Europe had been proven, it is possible that some part, at least, would appear to be a deductible expense. We do not know how much was spent by the corporation or for what particular purpose any amount was spent. Certainly, if all of the expenses of the entire party were paid by the corporation, the larger portion was not an ordinary and necessary expense of carrying on the business of the corporation. The connection of the cost of operating the yacht Lurline with the European trip does not appear. The corporation had a yacht, but this trip was made on the Be,rengaría. We are not in position to order any modification of the Commissioner’s determination in this connection.

Judgment will be entered for the respondent.


author: Aeundell:

text:
    The Thomas J. Corcoran Lamp Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27689.
    Promulgated October 6, 1931.

      J. Marvin Haynes, Esq., for the petitioner.

      John E. Marshall, Esq., and G. B. Marshall, Esq., for the respondent.
   OPINION.

Aeundell:

It is stipulated by the parties that on March 1, 1923, the Corcoran Lamp Company and the Corcoran Victor Company became affiliated within the meaning of the revenue statute. This affiliation was the outgrowth of an agreement entered into whereby the Lamp Company agreed to issue certain shares of its own stock to the stockholders of the Corcoran Victor Company for stock in the latter company. It was the intention of the Corcoran Lamp Company, after acquiring all the stock of the Corcoran Victor Company, to liquidate the latter company and consolidate the two businesses. Due to the failure of some of the stockholders of the Victor Company to deliver their stock to petitioner and certain outstanding contracts of the former, the Victor Company continued to operate as a separate legal entity until February, 1925, when it was liquidated and dissolved.

The transaction for the sale of Plant A was closed March 31, 1923, a date within the affiliation period, resulting in a loss of $142,336.42. This loss the petitioner seeks to take as its own on the theory that, by reason of its ownership of stock of the Victor Company and intention to eventually liquidate its affairs, it was the equitable owner of the assets of the Victor Company. This argument is clearly without merit. Under the facts here the petitioner was no more the equitable owner of the assets of the Victor Company than any stockholder may be said to be the equitable owner of corporate property. Eisner v. Macomber, 252 U. S. 189; John K. Greenwood, 1 B. T. A. 291. The title to Plant A remained in the Victor Company and the deed to the property was executed by it. At no time did petitioner have title to the asset. The petitioner does not claim that by the exchange of stock it became the owner of all the assets and business of the Victor Company. On the contrary, it appears that the Victor Company continued throughout the taxable year as an operating concern with its own assets and business and separate income. In view of this situation it is difficult to understand on what theory petitioner singles out the one asset, Plant A, and claims that as its own. The respondent’s action in holding the loss to have- been one sustained by the Victor Company is sustained.

It is argued that the net loss of $143,592.76 sustained by the Victor Company in 1922 should be brought forward into the j^ear 1923 and applied against the net income of petitioner. The two corporations filed a consolidated return for the entire r^ear 1923, although affiliated only for the last ten months thereof. The respondent found that the net income of the Victor Company for the full year as a separate company was $137,870.67, without applying the loss of $142,336.42 sustained from the sale of Plant A. Giving effect to the loss on the sale of Plant A, respondent found that the Victor Companjr had a net loss of $4,465.75 for the year 1923. This net loss the respondent prorated over the year, one-sixth to the period prior to affiliation and five-sixths to the ten months after March 1, 1923. The latter figure, amounting to $3,731.46, was \Tsed in determining consolidated net income. There being no net income of the Victor Company in 1923 from which to deduct the net loss for 1922 no part of the 1922 net loss may be used in determining consolidated net income for 1923. See Hutt Contracting Co., 17 B. T. A. 818; Alabama By-Products Co., 18 B. T. A. 919; Warren-Nash Motor Corporation, 21 B. T. A. 897; General Box Corporation, 22 B. T. A. 725.

The petitioner contends, however, that, inasmuch as the Victor Company had net income of $137,870.67 in 1923 without considering the loss sustained from the sale of Plant A and such loss occurred after March 1, 1923, we should attribute one-sixth of the net income as having been earned in January and February, 1923, and the remaining five-sixths to the last ten months of the year. Clearly, the proposal of petitioner is wrong. The figure of $137,870.67 was reached by the subtraction of various deductions from gross income and there appears to be no more reason to disregard the loss sustained on the sale of Plant A in determining the net income of the Victor Company for the whole year than any other allowable deduction. The record does not indicate the periods in 1923 during which the income was earned and the fact may be that there were no profits made in the first two months of the taxable year. Following the decision in General Box Corporation, supra, the entire calendar year 1923 is still the Victor Company’s taxable year despite its affiliation beginning March 1,1923, and income is to be determined on the basis of the full year. The respondent’s method of proration takes into consideration the result of operations for the full year, and under the circumstances is the only practicable one. The respondent’s action in refusing to allow the net loss sustained by the Victor Coznpany in 1922 as a deduction in 1923 is sustained.

Decision will be entered for the respondent.


author: GoodRioh :

text:
    Robert Lyons Hague, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39195, 50110.
    Promulgated October 6, 1931.

      Walter E. Godfrey, Esq., for the petitioner..

      T. M. Mather, Esq., for the respondent.
   OPINION.

GoodRioh :

We sustain respondent in denying to petitioner the deduction claimed in the amount of $12,000. Petitioner claims this amount was lost in a joint venture entered into for profit, but we are unable to find from the record before us the terms and conditions of the agreement, if any, under which petitioner advanced this money. There ivas no written agreement and the testimony as to any oral agreement is indefinite and contradictory. Petitioner could not say whether he made an agreement with the corporation or with Godfrey, nor to which of the two he advanced the money. He testified that he advanced money to improve and furnish the house and went “in your joint venture on a fifty-fifty basis,” yet Godfrey testified, in explaining why none of the proceeds of the sale of the premises were turned over to petitioner in repayment of the money advanced by him, that when “ Miss Bobe decided to put more money into the proposition, to redecorate and rebuild the house and refurnish it, it ivas then decided to take that money out first before any money was taken out for the purchase of the premises and the outlay of the alterations and so forth, that money was paid out first.” The record shows that petitioner put no money into this proposition until after his marriage to Miss Bobe. Whether the money later advanced by him was a gift to his wife, or a loan to her or the corporation we can not say, but certainly, in view of the vagueness and uncertainty of the testimony, we can not find the existence of any agreement of joint venture under which these advances were made. If the advances be regarded as loans, there is no showing that the debt was ascertained to be worthless and charged off within the taxable year, as required by section 214 (a) (1) of the Revenue Act of 1926.

While petitioner admits that the legal fees of $1,000 and $5,000 claimed as deductions were not paid as expenses in carrying on his trade or business, he claims them to be deductible under paragraph 5 of section 214 (a) of the Revenue Act of 1926 as “losses sustained during the taxable year * * * incurred in any transaction entered into for profit.” The simple answer to this contention is that petitioner did not enter into these transactions but, on the contrary, stayed out of them. For the assistance rendered him in deciding whether or not to enter into these transactions he paid his attorney the fees here involved. There is no provision of section 214 permitting expenditures made under such circumstances to be deducted from income and therefore we sustain respondent’s action with respect to these items.

In considering petitioner’s third allegation of error we are met with a failure of proof so complete that we can not make even a finding of fact. In his petition—

petitioner assents to the change in income caused by the Commissioner’s handling of the Standard Oil Co. of New Jersey stock bonus under the stock bonus acquisition plan of that company.

At the hearing, by motion, the petition was amended to—

include the contention by the petitioner that the issue or charge made by the Government which includes the sum oí §22,741.85 as income under a stock acquisition plan be disallowed to the Government and that petitioner be given credit on his return for the sum of this $22,741.85 as not income for that year.

To this amendment respondent entered a general denial. In his opening statement petitioner’s counsel outlined the facts which ho proposed to prove with respect to this issue, but the record contains not one word of testimony concerning it. In his brief, counsel makes a statement of facts concerning a stock acquisition plan of the Standard Oil Company of New Jersey, but even there does not tell us whether this petitioner was a participant under that plan and, if so, the amount and value of the stock, if any, received by him thereunder. He assumes that all facts relative to this issue are conceded. In this he is in error for, as stated, respondent has denied generally the amendment by which this issue is raised. We are referred to the cases of Schaefer v. Bowers, 41 Fed. (2d) 803, and Durkee v. Welsh, 49 Fed. (2d) 339. Having no facts as to any acquisition by petitioner of corporate stock under any stock bonus plan, we can not say whether this issue in the case at bar is controlled by these decisions. For lack of proof, we must deny petitioner’s contention.

Judgment will he entered for the resfondent.


author: Steenhagen:

text:
    Robert Van Iderstine, Trustee for Alf L. Whist, a Nonresident Alien, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert Van Iderstine, Agent for Alf L. Whist, a Nonresident Alien, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert Van Iderstine, Alleged Trustee for Andreas Rendtorff, and Andreas Rendtorff, a Nonresident Alien, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 27202, 28766, 28775.
    Promulgated October 7, 1931.

      LeRoy B. Iserman, Esq., for the petitioners.

      J. 0. Rhyne, Esq., for the respondent.
   OPINION.

Steenhagen:

The petitioner assails the respondent’s determination on numerous grounds, none of which is, in our opinion, sufficiently strong to establish error. Whist and Rendtorff were nonresident aliens with substantial interests in the several insurance businesses conducted in the United States. Yan Iderstine was the resident managér of these enterprises and, as postulated by the Commissioner, apparently acted also as their individual representative, receiving and distributing to them their distributive shares of the income. He was required by the Revenue Act of 1926, section 221, to withhold and pay tax and to make a withholding return. He neither made the return nor iraid the tax. The respondent therefore determined the deficiencies to be due from him and added penalties. We are of opinion he acted correctly. The failure to file returns also prevents the application of any limitation period. Revenue Act of 1926, sec. 277. The filing by Van Iderstine of returns for the International Corporation and, as fiduciary, for the special accounts of the business done in respect of the other foreign companies, did not discharge his duty to file withholding returns for Whist and Rendtorif and does not control the limitation period or the penalties. Cantrell & Cochrane, Ltd., 19 B. T. A. 16.

It is argued that the amounts received by Whist and Rendtorff from all of the several sources were salaries or compensation for services and reimbursement of expenses, and that since the services were performed abroad, the income is not derived from sources within the United States and hence, to a nonresident alien, is not taxable. We are of opinion, however, from the evidence, that the amounts were neither salary or compensation nor reimbursement of expenses. The evidence indicates that they were distributions to nonresident aliens of their distributive shares of the income from the several businesses carried on in the United States by the International and the Norwegian agencies, and, as such, taxable to the dis-tributees and to their resident withholding agent. The performance by them of services abroad in behalf of these enterprises does not establish that they were to receive salaries therefor or to be compensated otherwise than by their shares in the profits resulting from the success of the business.

It is argued that, since International was classified under section 200 as a personal service corporation, its income is taxable as partnership income and that these nonresident aliens are therefore not taxable on their distributive shares. Assuming that the corporation is a personal service corporation, the income, however, is still the income of the domestic corporation, although taxable not directly to the corporation but to the shareholders or their withholding agent.'

Judgment will he entered for the respondent.


author: Sternecaoisn:

text:
    Central Union Trust Company of New York, Therese Davis and Samuel Norris, as Executors of the Last Will and Testament of John H. Davis, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36636.
    Promulgated October 7, 1931.

      John M. Perry, Esq., for the petitioners.

      G. A. Bay, Esq., for the respondent.
   OPINION.

Sternecaoisn:

The Commissioner determined a deficiency of $10,-793.82 in the estate tax of the estate of John H. Davis, deceased. By the petition, the deficiency was assailed as to three items. The first issue, as to the value of certain stock, has been withdrawn by petitioners, and the last issue, as to the correct amount of credit for state inheritance taxes, will be adjusted by the parties as the corollary to the decision on the second issue. The second issue remains in controversy and arises from the respondent’s determination that $146,-089.84 (taken apparently as the equivalent of £30,000 sterling) is not deductible under section 303(a) (1), Bevenue Act of 1926, as contended by petitioners. The facts are embodied in a stipulation and so far as they affect this issue are as follows:

(a) On the 13th day of October, 1893, an indenture was entered into between the Honorable Terence John Temple Hamilton Temple Blackwood (hereinafter called “Lord Terence”) a son of the Marquis of Dufferin and Ava, of the first part; Florence Chapman Davis (hereinafter called “Miss Davis”) a daughter of John Hagy Davis (the decedent in this proceeding), of the second part; the said John Hagy Davis, of the third part, and Arnold Heseltine and Russell Stephenson (hereinafter called “Trustees”) of the fourth part, wherein it was recited that a marriage was contemplated between Lord Terence and Miss Davis, and that as a settlement therefor, Lord Terence should pay the Trustees £10,000 and John Hagy Davis (the decedent) should pay to the Trustees £10,000 to be held by the Trustees upon the trusts in said indenture set forth. The said John Hagy Davis further agreed in said indenture, clause 9(e) that his representatives would pay to the Trustees under said indenture within six months after his death, the sum of £30,000 (subject to reduction to the sum of £20,000 upon the happening of events, which did not occur) with interest at the rate of four per cent, per annum from the date of his death until the date of payment. A copy of said indenture is annexed hereto as “ Exhibit A” and made a part hereof.
(b) Lord Terence and Miss Davis were married within six months from the date of the indenture. The parties thereto made the original payments to the Trustees in accordance with the terms of the indenture.
(e) The said John Hagy Davis died on the 7th day of May, 1926, a resident of the County of New York. Lord Terence and Miss Davis predeceased him. Three daughters of the marriage, all over the age of twenty-one years, survived the said John Hagy Davis. The substituted Trustees under the said indenture were required by such children to enforce the terms of the said indenture obligating the representatives of said John Hagy Davis to make the payment to the Trustees of said £30,000 with interest and sworn proof of claim is annexed hereto as “ Exhibit B ” and made a part hereof.
(d) The petitioners paid said claim on the 10th day o'f May, 1927, in the amount of £31,289-8-6, and received a general release and receipt therefor, a copy of which is annexed hereto as “ Exhibit C ” and made a part hereof.

It is not necessary to set forth the exhibits in extenso. The settlement agreement (Exhibit A) contains as its last recital, “And Whereas upon the treaty for the intended marriage it was agreed that such settlement should be executed as hereinafter contained and these presents are executed in consideration of the intended marriage.”

The provision as to the £30,000 is as follows:

9. John Hagy Davis for himself his heirs executors and administrators Covenants with the Trustees and also as a separate Covenant with each of Lord Terence and Miss Davis That if the intended marriage shall be solemnized within 6 calendar months from the date hereof he John Hagy Davis will make or cause to be made the following payments
* ⅝ * * * ⅛ sfc
(e) Within 6 months after his death John Hagy Davis’ representatives shall pay to the Trustees the sum of £30,000 together with interest at the rate of 4 per cent per annum from the date of his death until payment. * * ⅜

For the petitioner it is argued (1) that the £30,000 was deductible under section 303(a)(1), and (2) that it was no part of the estate and to include it is unconstitutional under cited decisions.

1. We are of opinion that the amount is not deductible. The consideration for the claim (if it be a claim within the contemplation of the statute) is not “ in money or money’s worth.” This was a marriage settlement, and, for the purpose of this proceeding it may be assumed that it was bona fide and valid and that the consideration was fair. . Even if it could be assumed that the consideration was also adequate and full, still this would not be enough to establish deductibility. Lillian T. Latty, Executrix, 23 B. T. A. 1249. Marriage as a consideration, however good, is not “ money or money’s worth,” Prewit v. Wilson, 103 U. S. 22, and this is equally true as to the marriage of one’s child as of one’s self.

The decisions in Jeptha E. Wade, 21 B. T. A. 339, and John D. McIlhenny Estate, 22 B. T. A. 1093, must be confined within their narrow limits in respect of claims of charitable institutions which are within the beneficent intendment of the statute. They have no bearing on the question of deductibility of private obligations such as that now before us.

2. The amount was in our opinion clearly part of tbe decedent’s estate at the time of his death. It was not transferred at the time of the agreement. At that time there was only a promise that it would be transferred. This did not remove it from the estate nor restrict the decedent’s ownership before his death. Therefore to include it within his gross estate is not to impose a tax retroactively upon a completed transfer, and raises none of the constitutional questions involved in Nichols v. Coolidge, 274 U. S. 531; Shwab v. Doyle, 258 U. S. 529; Lewellyn v. Frick, 268 U. S. 238; Frew v. Bowers, 12 Fed. (2d) 625. Nor does the tax upon the net estate impair any obligation of the contract. The contract has, so far as appears, been fully performed and the statute may not be set aside by invoking imaginary cases of possible hardship in its application. But it may be added that we know of no theory to support such an attack of unconstitutionality as to a Federal statute and no authority is cited. Cf. Cohan v. Commissioner, 39 Fed. (2d) 540.

Judgment will be entered under Rule 50.


author: McMahon:

text:
    Otto H. Falk, Joseph E. Uihlein, Charles P. Vogel, and Louis Quarles, Executors of the Last Will and Testament of Charles F. Pfister, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Ida Lane Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent. John W. Mariner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elmwood Company of Delaware, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28070, 34678, 34758, 34759, 35815, 40426, 41089.
    Promulgated October 7, 1931.

      Charles F. Fawsett, Esq., and Richard S. Doyle, Esq., for the petitioners.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

McMahon:

The sole issue presented by these proceedings is whether the beneficiaries of a trust are entitled to deductions for depletion because of iron ore removed from properties forming a part of the trust corpus.

The principle is well established by decisions of this Board and the Circuit Courts that beneficiaries of a trust are not entitled to reduce their distributive share of trust income because of depletion or depreciation of the trust corpus. Detroit Trust Co. et al., Executors, 16 B. T. A. 207; George Snyder Crilly et al., 15 B. T. A. 642; Gilbert B. Goff, 18 B. T. A. 283; Rita M. Kohler White et al., 23 B. T. A. 391; Baltzell v. Mitchell, 3 Fed. (2d) 428; certiorari denied, 268 U. S. 690; Whitcomb v. Blair, 25 Fed. (2d) 528; affirming Louis P. V. Whitcomb et al., 4 B. T. A. 80; Abell v. Tail, 30 Fed. (2d) 54; Hubbell v. Burnet, 46 Fed. (2d) 446; affirming F. C. Hubbell et al., 14 B. T. A. 1040; Roxburghe v. United States, 64 Ct. Cls. 223; sections 214 (a) (10) and 234 (a) (9) of the Revenue Act of 1921; sections 214 (a) (9) and 234 (a) (8) of the Revenue Acts of 1924 and 1926; and section 215 (b) of the Revenue Acts of 1921, 1924, and 1926.

The petitioners base their claims for depletion deductions upon the decision of the Circuit Court for the Second Circuit in Merle-Smith v. Commissioner, 42 Fed. (2d) 837, overruling our decisions in Kate Fowler Merle-Smith, 11 B. T. A. 254, and Margaret B. Fowler, 11 B. T. A. 265. This Circuit Court decision was considered by the Board in the Rita M. Kohler White case, supra, in determining that the petitioners therein, who were beneficiaries of a testamentary trust, were not entitled to depreciation deductions because there was no provision in the will authorizing the trustees to retain a portion of the income to replace wasting assets. The distinction between this Circuit Court case and the Board case is that in the former the beneficiaries had an interest in the trust corpus as remaindermen, whereas in the latter, the beneficiaries had an interest only ,in the income.

In the instant case, as in the White case, the beneficiaries had no remainder interest in the trust corpus, because under the terms of the trust deed the trustees, upon the termination of the trust, were to convey back to the grantor corporation any remaining assets in the corpus.

The petitioners also contend that the trustees were merely agents of the beneficiaries in administering the trust and paying over the proceeds. This argument is rebutted by the trust instrument, which in clear and unambiguous terms creates the trust, names the trustees, specifies in detail their duties, powers, and authority, and provides for the distribution of the proceeds to the beneficiaries in accordance with their respective interests.

In view of the foregoing discussion and the authorities cited we approve the action of the respondent.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: SteRNhagen :

text:
    The Duckworth Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41830.
    Promulgated October 7, 1931.

      E. B. Quiggle, Esq., for the petitioner.

      Otis J. Tall, Esq., for the respondent.
   OPINION.

SteRNhagen :

The respondent determined a deficiency of $6,837.29 in petitioner’s income tax for the fiscal year ended June 30, 1925. This resulted from the reduction of petitioner’s statutory net loss for the prior year. This, in turn, resulted from respondent’s determination as to two items. Both items were assailed in the petition, but the attack on the first item was abandoned at the hearing and in respect of this issue the respondent’s determination is sustained.

The respondent by amended answer affirmatively corrects an error in his computation, the facts of which are admitted by petitioner with whatever adjustments may follow the present decision on the issue in controversy.

The petitioner claims a credit under section 238, Revenue Act of 1926 (which by section 286 is made applicable to the fiscal year 1925) for foreign taxes. The facts are embodied in a written stipulation which is as follows:

(1) The Duckworth Company, the petitioner in this proceeding, was incorporated under the laws of New Jersey in May, 1901.
Muir, Duckworth & Company (hereinafter referred to as the partnership) is and was during the times herein mentioned, a partnership existing under the laws of Great Britain with its principal office in Liverpool, England. During said years Walter B. Duckworth of Liverpool had the controlling interest in the partnership and directed its affairs, and was also the principal stockholder, president and directing head of the petitioner.
(2) During the times mentioned the greater part of the capital and surplus of the petitioner was held by the Liverpool office of the partnership and used in its operations. It was the practice of the partnership to allow to the petitioner interest on the outstanding balances of the petitioner held by the partnership at the close of each fiscal year. For the year ending June 80, 1925, the partnership allowed to the petitioner on the outstanding balance, interest amounting to 5,719 pounds, 12 shillings and three pence in British currency.
(3)In view of the close relations between the partnership and the petitioner, the British Government charged the partnership with British income tax on the income of the petitioner, as well as the income of the partnership. For the year ending June 30, 1925, the British Government assessed against the partnership British income taxes in the amount of 1,251 pounds, 3 shillings and three pence with respect to said interest of 5,719 pounds, 12 shillings and three pence which had been allowed for that year to the petitioner by the partnership as aforesaid and said amount of tax was paid by the partnership to the British Commissioner of Inland Revenue. A certificate of L. H. .Henderson, H. M. Inspector of Taxes, Liverpool, England, showing said payment, which certificate was previously filed by petitioner with the respondent, is attached hereto and marked Exhibit A.
“I certify that the firm of Messrs. Muir, Duckworth & Co., carrying on business as Cotton Merchants at 20 Chapel Street, in the City of Liverpool, England, has been assessed to British Income Tax in respect of interest allowed to the Duckworth Company of Saxannah (a Company registered on the 16th May, 1901, in the City of New Jersey in the United States of America) for the year ending 30th June, 1925, amounting to £5719.12.3 and that the sum of £1251.3.3 the relative tax thereon has been paid by Messrs. Muir, Duckworth & Company to the British Commissioners of Inland Revenue.”
(4) Thereafter the partnership charged to the petitioner as a liability of the petitioner on the accounts of the partnership the said amount of 1,251 pounds, three shillings and three pence which had been paid as British income tax as aforesaid.
(5) It is agreed for the purposes of this proceeding that the net income of the petitioner from interest credited to petitioner by the Liverpool partnership for the fiscal year ended June 30, 1925 (computed without the deduction of income, war profits and excess profits taxes) was $27,797.32.
(6) During the times herein mentioned, the petitioner kept its books of account and made its income tax returns on the accrual basis.
(7) The net income of the petitioner for the fiscal year ending June 30, 1925, of $53,025.81 as shown by the deficiency letter, includes an item of $24,569.71 representing interest allowed to the petitioner for that year by the partnership in the amount expressed in British currency, of 5,719 pounds, twelve shillings and three pence. It is agreed that the rate of exchange on June 30, 1925, was $4.86 per pound sterling. The said amount of 5,719 pounds, 12 shillings and three pence when converted into United States currency at said rate of exchange is equivalent to $27,797.32, or an increase in the said net income of $3,227.61.
If the petitioner is entitled to credit for British income tax, such credit is limited to the ratio of $27,797.32 to $56,853.42.

The petitioner contends that, under the circumstances, it may be treated as having paid or accrued British income tax in the amount charged against it by the partnership. We are of opinion that it has not paid or accrued such tax, as required by the statute, and that it may not be given the credit as if it had. The British law is not in evidence, and we are in no position to say how the British tax on the partnership was calculated, or by virtue of what law or administrative system it would involve a tax upon this petitioner’s income. Of course, we must believe that the British Government acted lawfully and correctly when it “ charged the partnership ” with the tax and that the partnership correctly paid the tax, including the “ relative tax ” in respect of the interest allowed to petitioner. The tax therefore was imposed by the foreign country upon the partnership and the partnership paid it, and we can not break it down to ascertain what relative proportion of it was ascribable to the interest account with petitioner by some method of calculation known to the British system or perhaps used only by one inspector.

As to this petitioner, there was a running commercial account with the partnership. In this, the partnership charged petitioner with a liability for part of the amount which it had paid as British income tax. Whether such amount is a deduction on other grounds we need not consider, for it is not before us. But it is clear that as to this petitioner it is not a foreign tax and can not be credited.

The Board has considered this question in Elgin National Watch Co., 17 B. T. A. 339, 362, in which it sustained the disallowance of a similarly claimed credit for foreign taxes paid by another. The Board has also frequently held that the deduction allowed for domestic taxes is only available to those upon whom such taxes are directly imposed and by whom they are gua taxes paid or accrued. Caroline T. Kissel, 15 B. T. A. 1270, 1274; Samuel Riker, Jr., 15 B. T. A. 1160, 1166; William D. Hutchins, 14 B. T. A. 421, 425; George M. Cohan, 11 B. T. A. 743, 761; A. Eisenberg, 11 B. T. A. 574, 575; Elmira Arms Co., 7 B. T. A. 703, 706; R. C. Musser, 3 B. T. A. 498.

It is nowhere suggested that the partnership was a withholding agent or that any part of the tax imposed upon the partnership was a separate tax collectible at the source by or from the partnership. At most, counsel for petitioner says that “ this situation is analogous to that of a withholding agent.” But the stipulation indicates that the partnership paid a single lump-sum tax due from it and not a separate tax, as might be supposed of a withholding agent as under the system in this country.

Lastly it can not be said, absent from the evidence of any British law, that petitioner was in any respect liable for British tax, or, in particular, liable for an income tax upon the interest account stipulated.

The respondent’s determination correctly disallowed the credit claimed, and the deficiency should be recomputed in accordance with the stipulated adjustment.

Reviewed by the Board.

Judgment will ie entered wnder Rule 50.

Van Fossan dissents.

       Sec. 238. (a) In the case of a domestic corporation the tax imposed by this title shall be credited with the amount of any income, war-profits, and excess-profits taxes paid or accrued during the same taxable year to any foreign country, or to any possession of the United States: Provided, That the amount of such credit shall in no case exceed the same proportion of the tax (computed on the basis of the taxpayer’s net income without the deduction of any income, war-profits, or excess-profits taxes imposed by any foreign country or possession of the United States), against which such credit is taken, which the taxpayer’s net income (computed without the deduction of any such income, war-profits, or excess-profits tax) from sources without the United States bear to its entire net income (computed without such deduction) for the same taxable year. * * *
      * * * ⅜ * * *
      [See also Reg. 69, art. Oil, and arts. 381 to 387.]


author: Black:

text:
    White Oak Transportation Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Seaconnet Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Northern Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. H. Sprague & Son Company, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket Nos. 18088, 18089, 34945, 34946.
    Promulgated October 9, 1931.

      William Williams, Esq., and Edmund B. Quiggle, Esq., for the petitioners.

      Eugene Meaeham, Esq., and G. E. Lowery, Esq., for the respondent.
   OPINION.

Black:

By the agreed statement of facts which was filed in this proceeding at the hearing, all issues have been eliminated except those which relate to inventories and the statute of limitations. As to these last named issues petitioners make five contentions which we shall discuss and rule upon in their order.

1

It is contended that in computing the net income of the Seaconnet Coal Company, C. H. Sprague & Son Company, and Northern Coal Company for the year 1920, they should be permitted to include in their inventories as of December 31, 1920, at its market price on that date, the coal remaining to be delivered under their respective outstanding contracts of purchase. Respondent has disallowed this on the ground that title to the coal to he delivered petitioners in 1921 on their contracts had not passed and could not be properly included in inventories as of December 31, 1920; that the losses claimed were not true losses but only anticipated losses.

Petitioners and respondent, in support of their respective contentions, cite two leading cases of the Board. Petitioners cite Amalgamated Sugar Co., 4 B. T. A. 568, and respondent cites Haas Bros., 3 B. T. A. 113, affirmed by the Circuit Court of Appeals, Ninth Circuit, Haas Bros. v. McLaughlin, 39 Fed. (2d) 381.

We think the facts in the instant case bring it within the rule announced by this Board in Haas Bros., supra. Clearly, the question of inventories is involved in the settlement of the issue now under discussion. In fact the question of what could properly be included in petitioners’ inventories as of December 31, 1920, is the main question which we must decide in ruling upon petitioners’ point No. 1. Concerning the subject of inventories, the court said in Haas Bros. v. McLaughlin, supra, as follows:

* ⅜ * At the time the contracts were a live issue, Regulation 45, article 1581 (Revenue Act of 1918, promulgated Jan. 28, 1921; amended March 3, 1922, Treasury Decision 3296, vol. 24, 1922) applicable at the time, which has the force of law, provided: “ Á purchaser should include in inventory merchandise purchased, title to which has passed to him; although such merchandise is in transit or for other reasons has not been reduced to physical possession, but should not include goods ordered for future delivery, transfer of title to which has not yet been effected.”
Claiming losses on property in income tax returns, when not supported by inventory as required by law, is not persuasive. The appellant may not “ blow hot and cold ” at the same time. Its conduct is in harmony with the last provision of Regulation 45, supra, and corroborates the record, that the merchandise was not identified, nor were the goods set apart to, or used by, appellant at any time during 1919 and 1920, respectively. The fact that appellant paid storage and insurance for December, 1920, in view of the record, is of no importance.

In Amalgamated Sugar Co., supra, urged by petitioners as the principal authority in support of their contention, the main question involved was in what year the taxpayer should accrue income on its books from sales contracts of sugar -which had actually been made. The controlling factor in that case was that the taxpayer had for years consistently kept its books on the basis of accruing as income, sales of sugar already in its warehouses, just as soon as sold, although actual delivery of the sugar might not take place until some time thereafter, in some cases running into the following year.

The question is different in the instant case. We think the distinction between Amalgamated Sugar Co., supra, and the facts such as we have before us in the instant case was properly stated by the Board in Barde Steel Products Corporation, 14 B. T. A. 209, at pages 221 and 222 of the printed report. Cf. Adams-Roth Baking Co., 8 B. T. A. 458.

2

Petitioners’ next contention is that, in any event, C. H. Sprague & Son Company should be permitted to include in its inventory as of December 31,1920, that portion of said coal, to wit, 4,516.79 net tons, which, during the year 1920 and on or prior to December 31 thereof, had been actually loaded on cars for shipment to it by the Boone County Coal Corporation, and as to which shipment had already commenced; and that the Northern Coal Company should be permitted to include in its inventory as of December 31, 1920, that amount of the coal disallowed as part of its inventory as aforesaid, to wit, 415.42 net tons, which was actually loaded on cars for shipment to it by the Raleigh Smokeless Coal Company in the year 1920, and as to which shipment had commenced on or prior to December 31 thereof. We think petitioners are correct in this contention and we sustain them. The contracts under which said coal was delivered called for delivery f. o. b. at the mines. Therefore, as soon as the coal was loaded on the cars for the account of the purchasers, the title passed to them. Lamson v. Hibbs, 120 Va. 693; 91 S. E. 750; Denteel v. Island Park Association, 229 Pa. 403. As a general rule, whenever title to goods which have been identified has passed to the buyer, he is entitled to include them in his inventory. Haas Bros., supra; Amalgamated Sugar Co., supra; Adams-Both Baking Co., supra; Barde Steel Products Corporation, supra.

3

Petitioners next contend that C. PI. Sprague <⅞ Son Company should be permitted to deduct as an accrued liability for the year 1920 the amount of $4,803.56, representing the difference between the contract price of the coal which it failed to take when tendered to it by Quemahoning Creek Coal Company and the price at which such coal was sold in the open market by (¿uemahoning Creek Coal Company. We sustain petitioners in this contention. The evidence shows that the petitioner C. H. Sprague & Son Company kept its books on the accrual system. The liability was one which petitioner admitted and accrued as a liability on its books and respondent erred in disallowing it. Lucas v. American Code Co., 280 U. S. 445.

4

Petitioners in their fourth point ask that it be held that no additional assessment of income and profits taxes for the year 1920 can be made against either Northern Coal Company or C. H. Sprague & Son Company on account of the tolling of the statute of limitations. We think this contention must be sustained.

The consolidated return for the affiliated corporations for the year 1920 was filed by the Seaconnet Coal Company April 12, 1921, and under the statute of limitations applicable to the year 1920, the period of limitation as to this return in ordinary course would expire A.pril 12, 1926.

The return contained elaborate schedules showing the separate income and expenses of each one of the affiliated corporations from which its net income could be calculated and the amount of taxes allocable to each determined. Under these circumstances the return acted as a return for each of the separate corporations and the statute of limitations applicable thereto began to run just as if a separate return had been filed by each of the several corporations. Stetson & Ellison, 11 B. T. A. 397; affirmed on review, 43 Fed. (2d) 553. No claim is made that the statute of limitations has run against the assessment and collection of so much of the deficiencies as is properly chargeable to petitioners Seaconnet Coal Company and White Oak Transportation Company, but that it has run against the assessment and collection of deficiencies against the Northern Coal Company and C. H. Sprague & Son Company.

The facts with reference to the execution and filing of waivers by these two last named petitioners have been fully stated in our findings of fact. The first waivers signed extended the time in which the Commissioner might make assessment and collection of any additional tax due for 1920 to December 31,1926. If the deficiency notices to petitioners Northern Coal Company and C. H. Sprague & Son Company had been mailed within that time, they would have been timely. But this was not done and the statute of limitations had run in favor of these two petitioners prior to the time the next waivers were executed, to wit, April 12, 1927.

Prior to this time, February 26,1926, the Revenue Act of 1926 was passed, which contained section 1106, which not only barred the remedy but extinguished the liability. Therefore the waivers executed on April 12, 1927, by the Northern Coal Company and C. PI. Sprague & Son Company were ineffective. The deficiency notices which were mailed to them on December 31,1927, on the strength of these waivers were too late. Steiner Mfg. Co., 18 B. T. A. 740; United States Refractories Corporation, 23 B. T. A. 872; Knight-Campbell Music Co., 23 B. T. A. 1233.

5

Petitioners’ fifth and last contention is that the Seaconnet Coal Company and White Oak Transportation Company are liable only for their proportional share of the income and profits taxes of the affiliated group for the year 1920, computed on the basis of their respective net incomes. We think this contention must be sustained.

Respondent contends that even though the statute of limitations has run against the assessment and collection of any deficiency against either Northern Coal Company or C. PI. Sprague & Son Company, nevertheless the letter which they signed dated June 3,1927, directing the Commissioner of Internal Revenue that any deficiency in their tax as finally determined be assessed against the Seaconnet Coal Company, is effective to give the Commissioner the right to assess and collect from the Seaconnet Coal Company any deficiency for 1920 due by Northern Coal Company and C. H. Sprague & Son Company. We do not think so.

If, because of section 1106 of the Revenue Act of 1926, the waivers executed by these two petitioners on April 12, 1927, were ineffective to revive any liability against petitioners for the tax, we think that for the same reason any statement in the letter dated June 3, 1927, authorizing the Commissioner to collect from the Seaconnet Coal Company was ineffective to give the Commissioner any right to assess and collect from Seaconnet Coal Company taxes computed against Northern Coal Company and C. H. Sprague & Son Company which had already been extinguished by section 1106 of the Revenue Act of 1926. The letter could not revive them.

It may be stated in this connection that the letter dated June 3, 1927, was the first and only agreement entered into by the Northern Coal Company and C. H. Sprague & Son Company that their taxes for 1920 should be assessed and collected from the Seaconnet Coal Company. There had been no implied agreement that this should be done. The testimony at the hearing was to the definite and positive effect that the only agreement that this should be done was the written agreement dated June 3, 1927, introduced at the hearing by respondent.

Reviewed by the Board.

Decision will l>e entered for petitioner Northern Coal Company in Docket No. 81¡91¡S, and for petitioner C. H. Sprague <& Son Company in Docket No. SJfilfi. As to petitioner Seaconnet Coed Company, Docket No. 18089, and petitioner White Oak Transportation Company, Docket No. 18088, decision will be entered under Rule 50.

Smith and Aettndell dissent on the fourth and fifth points.


author: Steenhagen :

text:
    Freeman-Hampton Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33336, 41011, 45479.
    Promulgated October 12, 1931.

      H. Kennedy McCook, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Steenhagen :

The respondent determined deficiencies in petitioner’s income taxes of $1,576.65 for the fiscal year ended June 30, 1924, $2,588.24 for the fiscal year ended June 30, 1925, $937.46 for the ensuing six months ended December 31, 1925, $3,011.12 for the calendar year 1926, and $388.80 for 1927. The petitioner claims deductions for depreciation based on certain expenditures admittedly made in its business of producing oil and gas. The respondent denied the claimed deductions for depreciation and allowed instead deductions for depletion in respect of the same items based on the undisputed expenditures.

The case was submitted entirely on the following stipulation of facts:

I. Petitioner is a Texas corporation engaged in the production of oil and gas. During the respective taxable periods herein involved, petitioner was the owner of certain oil and gas leases and, during said periods, expended certain sums of money in connection with discovery, exploration, drilling and development of said leases. All of said sums of money were capitalized on petitioner’s books. Certain proportions thereof represented expenditures for physical properties and the remainder represented incidental expenditures made for wages, fuel, hauling, etc., in connection with the exploration, drilling and development of said leases. Said last-mentioned expenditures were not represented by physical properties.
2. In arriving at the respective deficiencies set forth in the sixty-day letters, the Commissioner adopted petitioner’s capitalization of said exploration, drilling and development costs for wages, fuel, hauling, etc., and ruled that the amounts thereof should be returned to the petitioner through deductions for depletion.
3: Petitioner contends that said exploration, drilling and development costs for wages, fuel, hauling, etc., should be returnable through depreciation.
4. In the event the Board should hold that said exploration, drilling and development costs for wages, fuel, hauling, etc., are returnable through depletion, it is stipulated that the deficiences for the respective taxable periods are:
Fiscal year ended June 30, 1924-$1, 518.37
Fiscal year ended June 30, 1925- 2, 58S. 24
Period, July 1 to December 31, 1925- 937.46
Calendar year 1926_ 3, Oil. 12
Calendar year 1927_ 388.90
4. If, on the other hand, the Board should hold that said exploration, drilling and development costs for wages, fuel, hauling, etc., are returnable through depreciation rather than depletion, it is stipulated that the deficiencies for the respective taxable years are:
Fiscal year ended June 30, 1924___ $421. 88
Fiscal year ended June 30, 1925- 655. 07
Period, July 1 to December 31, 1925 (overpayment)- 954. 65
Calendar year 1926- 1, 643.46
Calendar year 1927--- 59.45

At the hearing it was pointed out that the stipulation was inadequate in that it furnished no primary facts, but only applied ambiguous to inconclusive descriptions and characterizations to expenditures the amounts of which were not stated, and thus in effect was merely the submission of an abstract controversy depending only on terminology. Counsel for petitioner, upon whom rests the burden of proof, nevertheless rested upon the stipulation, and contends that the issue is controlled favorably by A. T. Jergins Trust, 22 B. T. A. 551.

The Jergins decision is not determinative here. There it was held that the drilling and development expenditures there involved “ constituted a part of the physical structure recoverable through depreciation.” Here it is expressly stipulated that the expenditures in question “were not represented by physical properties.” There the expenditures were “ in connection with development and drilling,” while here they are “in connection with exploration, drilling and development of said leases.” Since the J ergins case had nothing to say about exploration costs, it would, on that account alone, be no precedent here, where the amounts are not given and no segregation has been or can by the Board be made.

Treating the case, therefore, as uncontrolled by the Jergins case, the respondent has set forth numerous considerations for saying generally that costs of exploration, drilling and development are not to be held, as a matter of law, recoverable through depreciation, instead of depletion, as his regulations contemplate. If we could take judicial notice of the premises of this argument, such as the methods and practices of the oil-producing industry, it would require careful consideration before rejecting it. But these are matters of which proof or authoritative recognition should be in the record. Upon such a record establishing the premises, the merits of the issue could be discussed and substantively decided.

This case, however, must go against the petitioner, because it can not be held upon this stipulation that, as a matter of law, expenditures in connection with exploration, drilling and development of oil leases not represented by physical properties are the basis of annual deductions for depreciation and that the respondent was legally in error in applying to them the statutory provision for depletion deductions.

In accordance with the amounts specified in the first of the alternative paragraphs numbered 4 of the stipulation,

Judgment will be entered for the respondent.


author: Smith:

text:
    S. G. Armstrong, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35096.
    Promulgated October 12, 1931.

      Galvin Glarhe, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

Smith:

Under certain conditions, individuals are permitted to deduct from gross income “ losses sustained during the taxable year ” and “ debts ascertained to be worthless and charged off within the taxable year.” (See section 214 (a) (5) and (7) of the Revenue Act of 1921). The petitioner claimed the deduction of the difference between his advances to and his ■ withdrawals from the enterprise with Wood as a loss on his 1923 income-tax return, but, on brief, argues for the allowance of this deduction as a bad debt.

In 1923 the petitioner discovered that Wood had previously abandoned the enterprise. As and when Wood disposed of the petitioner’s interest in the livestock, without accounting to petitioner therefor, the petitioner sustained a loss. The respondent has determined that this loss was not sustained in the taxable year 1923, even though it was not until that year that the petitioner ascertained the fact. The ascertainment of a loss within a taxable year is not the criterion imposed by the statute for a loss deduction. Such deductions are allowable only in the year in which the loss is sustained. See Lemuel S. McLeod, 19 B. T. A. 134. Cf. F. W. Darling, 19 B. T. A. 337, affd., 49 Fed. (2d) 111; certiorari denied, 283 U. S. 866; Edward H. R. Green, 19 B. T. A. 904; Leigh Carroll, 20 B. T. A. 1029; Lucas v. American Code Co., 280 U. S. 445. There is nothing to show that the petitioner did not sustain the loss in question prior to the taxable year before us, and upon this consideration of the claimed deduction we must approve the respondent’s disallowance of same.

There is some merit to the argument that the deduction should be allowed as a bad debt, since the petitioner had a claim against Wood for the difference between the amount of petitioner’s advances and the reimbursements in the event of a determination of the agreement. Cf. A. W. Skaer, 10 B. T. A. 247. However, assuming but not deciding that the claimed deduction represented a bad debt which petitioner ascertained to be worthless within the taxable year 1923, we would still have to sustain the respondent’s disallowance thereof, since there is nothing before us to show that this amount has ever been charged off by the petitioner. As we said in Rufus H. Syfers, 22 B. T. A. 736, 737, “ both the ascertainment of the worthlessness of the debt and its charge-off within the same taxable year, are conditions precedent to its deduction.” Cf. St. Joseph Valley Bank, 15 B. T. A. 185; C. P. Mayer, 16 B. T. A. 1239; Ewald & Co., 18 B. T. A. 1130; Lester G. Hathaway, 21 B. T. A. 1280.

The cases (Edward F. Dalton, 2 B. T. A. 615; Gus Linn, 4 B. T. A. 76; Emil Stern, 5 B. T. A. 89; Charles H. Boulden, 7 B. T. A. 490) cited by petitioner are distinguishable in that there was a definite finding that the debt was charged off.

Judgment will be entered for the respondent.