text:
    John Parrott, Jr., et al., Executors, Estate of Mary Emilie Parrott, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7947.
    Promulgated May 27, 1927.
    1. Where two persons own a parcel of real estate, each owning an undivided half interest therein and said property is encumbered by a mortgage given to secure an indebtedness, on which said persons are jointly and severally liable, and one of the persons dies and thereafter a claim for the entire amount of the unpaid indebtedness filed against the estate of the deceased is approved and allowed by the court, the executors may in the estate-tax return claim deduction for the entire amount of the said indebtedness, but the value of the claim of the estate against the other joint mortgagor is to be included in the value of the gross estate.
    2. Where one person dies and his estate pays the estate tax and the said estate or property is bequeathed or devised to another, who afterwards dies and whose estate is exempt from the estate tax, and the person who then receives or inherits said property or estate, later dies, all deaths being within five years, the latter’s estate can not legally exclude the amount of the value of such estate inherited, by reason of the fact that the estate of the first decedent (who was the father of the second and the husband of the last decedent) paid the estate tax on said property, the first decedent not being the prior decedent contemplated by section 403(a) (2) of the Revenue Act of 1921, nor the person from whom the last decedent’s estate was inherited.

      Henry J. Richardson, Esq., for the petitioners.

      John F. Greaney, Esq., for the respondent.

      The Commissioner determined a deficiency in estate tax under the Revenue Act of 1921 of $46,643.41 as a result of his refusal to allow as a deduction from the value of the gross estate of the decedent $130,000, representing a portion of a mortgage note of $260,000 on property in which the interests of the decedent had been included in the value of the gross estate, and his failure to allow as a deduction from the value of the gross estate the amount of $120,267.54 alleged by the executors to represent the value of property forming a part of the gross estate of two persons who died within five years prior to the death of the decedent, and which property was received by the decedent by inheritance. The executors claim that the full amount of the estate tax was paid within five years by the estate of the decedent twice removed from whom it is claimed that Mary Emilie Parrott received the property by inheritance.
    FINDINGS OF FACT.
    Petitioners are executors of the estate .of Mary Emilie Parrott, deceased, and are residents of San Mateo County, California.
    Mary Emilie Parrott died a resident of the United States of America, on March 1, 1922. At the date of her death she was the owner of an undivided one-half interest in certain real estate in San Francisco, Calif., the value of such interest being computed and included in her gross estate at $315,750. At the date of her death, this property was subject to a mortgage in the sum of $260,000, held by the Hibernia Savings & Loan Society, the mortgagee, the mortgage being originally in the sum of $340,000, given to secure a note for a like amount, both the mortgage and the note being executed December 30, 1920. The note was the joint and several obligation signed by Mary Emilie Parrott and Joseph A. Donohoe, due one year after its date. The records of the Superior Court of the County of San Mateo, California, show that the aforesaid claim of $260,000 in favor of the Hibernia Savings & Loan Society was sworn to by the president of the society, filed as a claim against the estate of Mary Emilie Parrott, was endorsed approved by the executors of the estate, and approved and allowed in the sum of $260,000 by the judge of the court, September 26, 1922.
    The amount of $260,000 of the mortgage note had not been paid at the time of the death of Mary Emilie Parrott.
    John Parrott, 2nd, husband of Mary Emilie Parrott, died January 2, 1918, and included in his gross estate and forming a part thereof was personal property situated in the United States valued at $120,267.54, which passed in the first instance to his administrators as a bequest to, or inheritance of, his son, Edmund A. Parrott.

      Edmund A. Parrott died intestate, being killed in action while in the military service of the United States, on September 26, 1918.
    The records of the Superior Court of San Mateo County, California, show in the matter of the estate of Edmund A. Parrott, deceased, that one John Parrott died January 21, 1918, and that Edmund A. Parrott died September 26, 1918, and that between said dates no decree of either partial or final distribution was made and entered in the said estate of the said John Parrott and according to said records, no distribution of any portion of the estate of the said John Parrott was formally made to the said Edmund Parrott prior to the latter’s death.
    Under the laws of succession of the State of California, the entire property of Edmund A. Parrott passed to Mary Emilie Parrott, mother of Edmund A. Parrott and widow of John Parrott, 2nd, as an.inheritance.
    An estate tax under the Revenue Act of 1918 was paid by the estate of John Parrott, 2nd, and the aforesaid amount of $120,267.54 is the value of said property placed by the Commissioner on the property for that purpose, and no portion of the same was deducted under any provision of law.
    The estate of Edmund A. Parrott was exempted from estate tax by reason of his having been killed in action while in the service of the United States Army.
   OPINION.

Littleton :

At the date of the death of Mary Emilie Parrott, she was the ■ owner of an undivided one-half interest in certain real estate in San Francisco, Calif., which interest was included in her gross estate at the value of $315,750, the other half interest in said property being owned by her brother, Joseph A. Donohoe. At the time of her death, this property was encumbered by a mortgage to the Hibernia Savings & Loan Society, on which there was a balance due of $260,000. The mortgage had theretofore been given by Mary Emilie Parrott and her brother, Joseph A. Donohoe, as security for the payment of their joint promissory note.

In the return filed by the executors of the estate of Mary Emilie Parrott, the whole $260,000 was claimed as a deduction, the Commissioner allowing as a deduction only $130,0.00 as representing the decedent’s half of aforesaid liability, disallowing $130,000 representing Joseph A. Donohoe’s half of said liability, and because of such action petitioners assign error.

The obligation was a joint and several one and Mary Emilie Parrott’s estate was liable for payment of the same and the mortgagee was within its rights in electing to file its claim against the estate and proceeding against it and not against Joseph A. Donohoe at all. Such action was taken and the claim was approved and paid by the court. The executors were thereupon subrogated to the rights of the mortgagee, and could immediately proceed against Joseph A. Donohoe for reimbursement to the extent of one-half of said liability to the mortgagee, or $130,000. Such claim for reimbursement was an asset of the estate of Mary Emilie Parrott under the provisions of section 402 of the Revenue Act of 1921 and there is no evidence that as such it was not of the value of $130,000 and collectible. At the time of her death, Mary Emilie Parrott had an equal interest with Joseph A. Donohoe in the property mortgaged and the value of this one-half interest formed a part of her estate, subject to the tax, and her interest was such that she during her lifetime, or her .executors after her death, would have the right to reimbursement for any payment she or they might be forced to make in payment of Joseph A. Donohoe’s liability to the extent of the $130,000, or one-half of their joint liability. This asset of the estate of the decedent was subject to the payment of charges against the estate, the expenses of administration, and was subject to distribution as a part of the estate.

Section 402 of the Revenue Act of 1921 provides as follows:

That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To tho extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate.

We can not agree with the contention of the executors that the claim of the estate of the decedent of the value of $130,000 of Joseph A. Donohoe, through subrogation to the rights of the mortgagee, did not constitute a part of the gross estate because the decedent did not during her lifetime discharge the obligation .of her co-maker on the note.

The fact that the $260,000 mortgage indebtedness was not paid by Mary Emilie Parrott before her' death and that she at that time did not then actually hold the claim against Joseph A. Donohoe for reimbursement of one-half the amount, makes no difference, because at the time of her death she had an equitable interest in the property mortgaged and her legal rights, by virtue of her joint liability with Joseph A. Donohoe to the mortgagee, were such as to form part of her estate at the time of her death. Such interests after her death existed in favor of her executors and in contemplation of law relate back to the date of her death. The interest in property to which the statute in section 402 (a) refers is not limited to the decedent’s proprietary interest therein. The statute says nothing about the decedent’s interest as owner but, on the contrary, expressly refers to an interest which, after his death, “ is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate.” The interest in property which the decedent at the time of her death had with respect to the matter under consideration was that interest which gave her the right to be reimbursed for any payment which she should make as a co-mortgagor and as co-maker of the promissory note in settlement of Joseph A. Donohoe’s liability thereon. Such payment, though made by her executors after her death, related back in contemplation of law to the time of her death. It will thus be seen that it is immaterial that the decedent did not at the time of her death own the claim against Joseph A. Donohoe, for if her interest therein is such that it forms a part of her estate after her death it falls within the purview of the statute as an interest at the time of her death and the value thereof constitutes a part of the gross estate subject to the tax.

It may be observed that generally acts imposing death duties are not so circumscribed as to omit property subject to administration and it is hardly conceivable that it was intended to introduce in the Federal estate tax statute an innovation in this direction with the result that the claim which the estate had against Joseph A. Donohoe for $130,000, which grew out of the note secured by a mortgage executed by the decedent as co-maker and which is applicable to the payment of charges against her estate and to the expenses of its administration and to the distribution as a part of her estate, should not be included in her gross estate at its full value of $130,000.

Whether the entire amount of $260,000 is deducted as a claim against the estate, and the claim against Joseph A. Donohoe for reimbursement included in the value of her gross estate, or whether one-half of the $260,000 is allowed as a deduction, as the Commissioner did, the result would be the same, whichever course is pursued, and the action of the Commissioner is affirmed.

The Statute of Wills of California provides:

When devises and bequests vest, — Testamentary dispositions including devises and bequests to a person on attaining majority, are presumed to vest at the testator’s death. (Section 1341, Civil Code of California, Deering, 1915.)

The succession statute of California provides:

Intestate’s estate, to ic-hom passes. — The property, both real and personal, of one who dies without disposing of it by will, passes to the heirs of th.e intestate, subject to the control of the probate court, and to the possession of any administrator appointed by that court, for the purposes of administration. (Section 1384, Civil Code of California, Deering, 1915.)

Under the California statutes and the facts of this case, there can be no question but that the property of John Parrott, 2nd, upon his death and under his will, vested in his son, Edmund A. Parrott, and that upon Edmund A. Parrott’s. death, his property was inherited by and vested in his mother, Mary Emilie Parrott. The executors of Mary Emilie Parrott’s estate claimed as a deduction from her gross estate the amount of $120,261.54 as representing the value of property previously taxed, i. e., the property which Mary Emilie Parrott inherited from her son Edmund A. Parrott, and in determining the deficiency the Commissioner disallowed the whole of this deduction.

The pertinent provisions of the 1921 Revenue Act relative to tbia matter are the following:

Sec. 403. That for the purpose of the tax the value of the net .estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
*******
(2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance * * *: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is-included in the decedent’s gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. * * *

Petitioners contend that the deduction of $120,267.54 claimed is allowable because the deaths of John Parrott and his wife Mary were within five years of one another; that the estate of John Parrott, 2nd, paid the tax and the property on which same was paid passed'to Edmund A. Parrott by will of his father, the said John Parrott, 2nd; that upon the death of Edmund A. Parrott, who was killed while in action in the Army of the United States, between the dates of the deaths of his father and mother, the same property became a part of the estate of his mother and was by the Commissioner again held liable for estate tax, it being exempt from such tax under the Federal estate tax law when Edmund A. Parrott died by reason of his having been killed in action while in service of the United States Army; and, that such property was therefore exempt from such tax as the property of his mother, Mary Emilie Parrott, when she died, because within five years of decedent’s death, the tax thereon had been paid when John Parrott, 2nd, her hüs-band died. Finally, it is contended that the property was received by Mary Emilie Parrott from her husband John Parrott, 2nd, by inheritance, not “ immediate ” but “ mediate,” through her son Edmund A. Parrott, and that the requirements of section 403 (a) (2) of the Revenue Act of 1921 are therefore met, it being the purpose of the law not to tax the transfer of the same property more than once within a period of five years.

Counsel for petitioner quotes in his brief from the Report of the Committee on Ways and Means on the Revenue Act of 1918 to show the purpose of the passage of that Act and the section thereof touching this subject, and if this Board were considering or construing that section of that Act, it would be more disposed to agree with the contention of petitioners, but it is under the Act of 1921 that this question arises and the Board must construe that Act and not the 1918 Act. The provisions on the same subject in the two acts are not the same and it is not thought a proper construction of section 403 (a) (2) of the 1921 Act heretofore quoted would authorize the deduction claimed by petitioners.

Section 403 (a) (2) of the Revenue Act of 1918 provides:

An amount equal to the value at the time of the decedent’s death of any property, real, personal, or mixed, which can be identified as having been received by the decedent as a share in the estate of any person who died within five years prior to the death of the decedent, or which can be identified as having been acquired by the decedent in exchange for property so received, if an estate tax under the Revenue Act of 1917 or under this Act was collected from such estate, and if such property is included in the decedent’s gross estate.

The same section, 403 (a) (2), of the Revenue Act of 1921 has been quoted.

The difference in the wording of the two acts is apparent.

The deduction allowed under the 1921 Revenue Act is not simply (we quote the 1918 Act) “ an amount equal to the value at the time of the decedent’s death of any property, real, personal, or mixed, which can be identified • as having been received by the decedent as a share in the estate of any person who died within five years prior to the death' of the decedent, or which can be identified as having been acquired by the decedent in exchange for property so received, if an estate tax under the Revenue Act of 1917 or under this Act [1918] was collected from such estate, and if such property is included in the decedent’s gross estate,” but such amount or value of property so deducted must be of property received by the decedent from such prior decedent by gift, bequest, devise or inheritance.

There is in this case no dispute about the fact that Mary Emilie Párrott received the property owned by Edmund A. Parrott, but petitioners insist that she received it by inheritance ” from her husband, John Parrott, 2nd, it passing through her son Edmund A. Parrott to her; that the term “ inheritance ” is broad enough to bear such construction and that the 1921 Act does not say “immediate ” prior decedent. The wording of the Act of 1921 will not, in the opinion of the Board, warrant the construction sought to be placed upon it by petitioners. Section 403 (a) (2) of the Revenue Act of 1921 is unambiguous and the language thereof should be given its natural meaning.

The act of 1918 refers broadly to “any property, real, personal or mixed, which can be identified as having been received by the decedent as a share in the estate of any person who died within five years.

Apparently it does not matter under the 1918 Act how the property is received by the decedent, nor from whom — nothing is said as to “ inheritance ” nor to receiving it from the “ prior decedent ” but if the decedent had a “share in the estate of any person who died within five years prior to the death of the decedent” and an estate tax had been paid on same within five years and such property is included in the decedent’s gross estate, deduction as to same would be allowed.

The Act of 1921 uses the terms, “ received by the decedent from such prior decedent [not decedents] by gift, bequest, device or inheritance,” the purpose evidently being to allow a deduction only on the amount or value of the prior decedent’s estate when the tax had been already once paid and when such value was included in the decedent’s gross estate.

We think under the 1921 Act it was intended to let only one transfer of an estate escape the tax and that was the estate of the '■'■prior decedent” when included in the decedent’s gross estate and on which the tax had been previously paid and the estate or property was acquired by the decedent from the prior decedent by gift, bequest, devise or inheritance.

The Edmund A. Parrott estate paid no tax, being exempt because of his army service and death as stated. His mother acquired his estate or interest by inheritance from him and not by inheritance from his father, John Parrott, 2nd, 'as insisted by petitioners. The “ prior decedent ” was Edmund A. Parrott. The said estate or its value as the property of the Estate of Mary Emilie Parrott is not again entitled to exemption.

The Board is of the opinion therefore that the result reached by the Commissioner was correct and his action in disallowing the deductions claimed is accordingly affirmed.

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: Littleton :

license: Public Domain

text:
    Lee Hickox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6702.
    Promulgated May 28, 1927.
    March 1, 1913, value of certain coal rights determined.

      Alonzo Hoff, Esq., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
    The petitioner herein seeks a redetermination of his income tax liability for the year 1921, for which the Commissioner determined a deficiency of $2,973.22, but now concedes it should b'e only $2,218.58. Petitioner contends there should be no deficiency. The only question is as to the fair market value on March 1, 1913, of certain coal rights in 160 acres of land, sold in the year 1921. The Commissioner concedes the said valuation should be $100 per acre as of March 1,1913, and petitioner insists it should be $200 an acre.
    FINDINGS OP PACT.
    The petitioner is an individual residing on Rural Route No. 4, Springfield, Ill.
    Petitioner in 1875 acquired 160 acres of land in Sangamon County, Illinois, the coal rights thereunder being included.
    The land in question is the northwest quarter of section 16, township 16 north, range 5 west, of the third principal meridian, Sanga-mon County, Illinois.
    In 1921 petitioner sold and conveyed the coal rights underlying said land for the sum of $200 an acre. He did not, in rendering his income-tax return for 1921, report said sale as he considered said coal rights to be of the same value on March 1,1913.
    The Commissioner, however, in proposing the deficiency assessment, held said coal rights worth only $75 an acre on March 1, 1913, and determined a deficiency in income tax of $2,973.22. Later he conceded it should be $2,218.58, admitting his valuation should have been $100. an acre. The coal property or acreage in question was a very choice piece of coal land.- It was exceptionally well located and the vein of coal thereon was thick and of good quality.
    The fair market value of the coal rights on March 1, 1913, was $200 an acre.
   OPINION.

Littleton :

The witnesses for petitioner were men of mature age, of business experience and familiar with the property in question and the conditions surrounding it. The petitioner was a farmer and coal operator and had been such for years. One of his witnesses was a wealthy retired banker who held large real estate investments in that county. Another was, like petitioner, experienced in the coal-operating business. One was in the real estate and investment bond business and another was a civil engineer.

No witnesses testified in behalf of the Commissioner.

Petitioner’s witnesses were especially well qualified to testify about matters of which inquiry was made.

From all of the testimony, the Board is convinced that the coal rights under the land in question, sold and conveyed in 1921 by petitioner for $200 an acre, had on March 1, 1913, a fair market value of the same amount, and we have so found.

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


author: Littleton

text:
    The Avon Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6246.
    Promulgated May 28, 1927.
    1. Rate of depreciation as determined by tbe Commissioner affirmed.
    2. Traveling expenses and loss allowed as deductions from gross income.
    3. Valuation of cotton inventory determined.

      N. W. Ellison, Esq., W. M. Parker, Esq., and E. S. Parker, Jr., Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies for the fiscal years ending March 31, 1918, and March 31, 1920, in the respective amounts of $29,141.64 and $26,120.11. In the notice of deficiency with respect to the foregoing years, the petitioner was likewise notified of the results of an examination of. its returns for the fiscal years ending March 31, 1919, March 31, 1921, and March 31, 1922, but since this examination showed either overassessménts or no change in tax liability, these years will be considered only in so far as necessary to a final determination of the issues involved in the years where deficiencies are shown.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of North Carolina with its principal place of business at Gastonia, where it is engaged in the, manufacture of cotton yarns.

      During the years covered by this appeal the petitioner operated its mill 120 hours per week, while the normal run of such a mill is 60 hours per week. On account of unusual conditions during these years not only was there a greater labor turnover, but also a lower degree of efficiency among the laborers employed, particularly among the night workmen, than is normally the case. As a result of almost continuous operations, the machinery was not kept oiled and in the state of repair that is accomplished when the mill is run only 60 hours per week. A further factor which tended to accelerate depreciation is that the mill in question is located within from 75 to 100 feet of the main line of the Southern Eailway, as a result of which passing trains produce certain vibration of the plant and, in the summer when the doors and windows facing the railroad are open, cause cinders to blow in and injure the machinery.
    During the fiscal year ending March 31, 1920, petitioner paid to S. M. Eobinson $1,500 on account of traveling expenses incurred in the sale of yarns and purchase of raw materials for the petitioner.
    In 1911, petitioner purchased certain machinery and equipment incident to a change in its method of manufacture, paying therefor $62,500. The machinery and equipment was received after August, 1911, and installation was begun in 1911, though the complete installation was not effected and the machinery placed in operation until some time in 1912. This equipment was discarded in 1919, and sold as junk in August, 1919, petitioner receiving therefor $2,129.77.
    Petitioner has in its inventory for the various years on appeal raw cotton, goods in process, and finished goods. As cotton is purchased by the petitioner, it is weighed, tagged, and placed in the warehouse, an entry being made on its cotton book to show the number of the bale, the weight and cost. When cotton is placed in process, an appropriate entry is made in the cotton book to show the bale or bales withdrawn.
    The Commissioner, in valuing the raw cotton inventory, used a cost basis as disclosed by the petitioner’s cotton book and original inventory records, making corrections in the poundage used by the petitioner in preparing its returns on account of bales of cotton which had been opened by the petitioner on the various inventory dates, but not yet placed in process. With the foregoing exception, and-an arbitrary reduction in value at March 31, 1918, the inventory of raw cotton as used by the Commissioner is that used by the petitioner in its original returns, both as to poundage and cost prices. The parties are likewise in agreement as to the cotton consumed for the years in question.
    In revised inventories contended for in this proceeding, petitioner determined the cost per pound of raw cotton on hand at the various inventory dates on a weighted-average basis by taking into consideration the opening inventories and purchases of raw cotton during the year. These costs were used in valuing raw cotton which entered into goods in process and finished goods on hand at the respective inventory dates, as well as the raw cotton inventory. The foregoing method was not applied at April 1, 1917, no change being made from the original inventory as submitted.
    The Commissioner., in determining the cost per pound of raw cotton entering into goods in process and finished goods on hand at the various inventory dates, used a weighted-average cost arrived at from sufficient of the most recent purchases immediately prior to the respective inventory date to equal the raw cotton inventory on these dates.
    Both the petitioner and the Commissioner have considered the goods in process as one-half completed on the respective inventory dates and likewise both parties are in agreement as to the poundage of raw cotton entering into goods in process and finished goods on the various inventory dates.
    The Commissioner, in determining the manufacturing costs applicable to the finished goods on hand, took the total manufacturing costs for the year immediately preceding the inventory date and divided.this total by the poundage of yarn produced during the year, the resulting quotient pliis the cost per pound of raw cotton as determined above, being considered as the total cost per pound of yarn produced. The total poundage of finished goods on hand was multiplied by the foregoing total cost per pound to arrive at the total cost of finished goods on hand.
    To determine the cost of goods in process on hand at an inventory date, the Commissioner used the same cost per pound of raw cotton as in the case of finished goods and one-half of the manufacturing cost per pound as determined in the case of finished goods, the total poundage of goods in process being multiplied by the total of the two foregoing amounts to arrive at the cost of goods in process on hand.
    In the Commissioner’s computation of costs, no allowance was made for waste of cotton in manufacturing operations, other than to the extent to which it is given effect in determining unit-manufacturing costs. The percentage of waste was as follows: Fiscal year ending March 31, 1918, 18.58 per cent; fiscal year ending March 31, 1919, 19.65 per cent; fiscal year ending March 31, 1920,15.42 per cent; and. fiscal year ending March 31, 1921, 18.47 per cent. The sales of waste in the foregoing years were $9,565.52, $4,166.38, $10,690.67, and $5,925.85, respectively.
    The parties are in agreement as to manufacturing costs except that depreciation on tenement houses, and certain taxes and insurance were considered by the Commissioner as manufacturing costs, whereas the peti tioner did not so consider them in its revised computations. The taxes and insurance here in question are as follows: Fiscal year ending March 31, 1918, taxes $1,904.22, insurance $1,705.83; fiscal year ending March 31, 1919, taxes $5,316.03, insurance $952.03; fiscal year ending March 31, 1920, taxes $2,814.59, insurance $472.66; and fiscal year mding March 31,1921, taxes $7,194.03, insurance $2,553.30.
   OPINION.

Littleton

: The issues in controversy in this case are:

(1) Rate of depreciation on machinery and equipment.
(2) Whether $1,500 paid by petitioner to S. M. Robinson as traveling expenses is an allowable deduction from gross income.
(3) Whether petitioner is entitled to a loss on account of certain machinery discarded and scrapped.
(4) Basis for the valuation of petitioner’s inventory of raw cotton, goods in process, and finished goods.

The Commissioner allowed a depreciation rate of 10 per cent on petitioner’s machinery and equipment on the theory that 5 per cent is a reasonable rate for a cotton mill of this type when operated at a normal run of 60 hours per week, but that since this mill operated 120 hours per week under certain abnortiial conditions, a rate of 10 per cent was substantiated. Petitioner claims a rate of 12% per cent.

The only witness who testified with respect to the life of the de-preciable assets in question was the petitioner’s bookkeeper who had had approximately 25 years experience in bookkeeping work around cotton mills. He stated that in his opinion the life of such machinery under normal conditions was from 16 to 18 years, but that when operated under the abnormal conditions of the years on appeal, its life would be from 8 to 9 years. On the other hand he testified that machinery which was in the plant when he entered petitioner’s employment in 1917 was still in operating condition, and when testifying as to the proper rate of depreciation for some of the same class of machinery which was discarded in 1919 — a part of which period covered the years here in question — he stated that the normal life of this machinery was 20 years. Upon a consideration of the entire evidence presented, the Board is of the opinion that the petitioner has not submitted sufficient information to show that the deduction allowed by the Commissioner' is not reasonable and, therefore, it is approved.

As to the second item, we have found that $1,500 was paid by the petitioner to S. M. Bobinson in the fiscal year ending March 31, 1920, as traveling expenses incident to the purchase of its raw material and sale of yarns in the same year. This is an ordinary and necessary expense and, therefore, should be allowed as a deduction from gross income in the fiscal year ending March 31,1920.

In petitioner’s amended petition, various losses were claimed on account of machinery and equipment discarded and scrapped, though at the hearing evidence was introduced only as to certain items purchased in 1911 at a cost of $62,500 and discarded in August, 1919, when a scrap value of $2,129.77 was realized. The difference between cost and realized scrap value, less sustained depreciation, which should be computed at 5 per cent prior to April 1, 1917, and at 10 per. cent thereafter, is an allowable deduction from gross income for the fiscal year ended March 31, 1920, and should accordingly be allowed.

In regard to the inventory question, no evidence was introduced as to market values, and no contention advanced with respect to such value, petitioner being on a cost basis of pricing its inventories.

The issue raised in this case with respect to the valuation of raw cotton entering into the raw cotton inventory as well as the valuation of raw cotton entering into the inventory of goods in process and finished goods, is identical with that raised in Ozark Mills, Inc., v. Commissioner, 6 B. T. A. 1179, the petitioner there contending, as here, for the use of an average-cost basis. In the foregoing case the Board held in effect that when a taxpayer is on a cost basis for the valuation of its inventories and evidence is available from which a reasonably accurate cost can be determined, such cost should be used rather than the “ average-cost ” method of the petitioner or the “ most-recent-purchases ” method followed by the Commissioner.

The method suggested in the Ozark Mills, Inc., appeal with respect to valuing the raw cotton inventory was not only substantially followed by the petitioner in the instant case (with the exceptions noted in our findings of fact) in filing its original returns, but also approved by the revenue agent in his examination. The action of the Commissioner as to- this feature is, therefore, approved.

The Commissioner, in determining the cost of raw cotton entering into the inventory of goods in process and finished goods, computed a weighted-average cost by the use of sufficient most recent purchases immediately prior to the inventory date to equal these classes of inventory items. In the Ozark Mills, Inc., appeal, supra, the Board rejected this method as well as the average-cost method for the reason that the petitioner showed that it was possible from its records to determine a more nearly accurate actual cost. In the foregoing opinion, the Board said that a cost valuation of raw cotton entering into finished goods should be determined by the use of the costs of sufficient cotton most recently placed in process prior to the various inventory dates to equal the poundage in the finished goods inventory and that the same method should be followed with respect to goods in process.

Since the petitioner, in the present proceeding, testified that similar records are maintained as in the case of Ozark Mills, Inc., the rule laid down in that case with respect to a cost valuation of raw cotton entering into goods in process and finished goods should be followed in the instant case (giving due consideration in each instance to waste).

In addition to the valuation of raw cotton entering into goods in process and finished goods, the petitioner objects to the method pursued by the Commissioner in arriving at unit-manufacturing costs. The Commissioner determined such costs by dividing the total manufacturing costs for the year preceding an inventory date by the total poundage of finished goods produced during the year, the quotient so -obtained being considered the manufacturing cost per pound applicable to finished goods on hand at the particular inventory date being considered. Since goods in process on hand at ail inventory date were considered one-half completed — a feature on which both parties are agreed — one-half of the foregoing unit-manufacturing cost was considered as the unit-manufacturing cost applicable to goods in process.

The petitioner contends that by this method the entire manufacturing costs are first being applied to finished goods and then an additional amount to goods in process. This argument overlooks the fact that the unit cost obtained is arrived at by dividing the total pounds of yarn produced — not total pounds of finished yarn on hand — into the total manufacturing expenses for the purpose of determining what it cost to produce a' pound of finished yarn, and that included in this finished yarn is yarn which was partly completed at the beginning of the year. Obviously, such a method may not be entirely accurate for the reason that the manufacturing expenses which are included in the goods in process at the beginning of the period may differ from those in the goods in process at the end of the period. To reach that mathematical nicety for which the petitioner asks, it would be necessary to have an exact analysis of the manufacturing expenses applicable to the goods in process at the beginning of the period under consideration as well as the manufacturing expenses at the end of the period. The percentage of error which would occur by following the Commissioner’s method would be dependent upon the extent to which the amount of goods in process, stage of completion, etc., at the beginning of the period differed from those at the end.

Since sufficient information was not submitted as to petitioner’s method to show that it reaches an any more nearly accurate result than that used by the Commissioner, and since, as we said in the Appeal of Demarest Silk Co., 4 B. T. A. 741, “ if the result obtained by the Commissioner in his computation is just and reasonable, this Board will not disturb it regardless of the method used in making the computation,” the action taken by the Commissioner in this respect must prevail.

In affirming the method pursued by the Commissioner, it is apparent that average rather than actual manufacturing costs are being used. Since, however, both the petitioner and the Commissioner used only total costs for the entire year, no segregation by periods being furnished, the prima facie correctness of the Commissioner’s determination in this respect'will not be disturbed.

An additional feature on which the parties are agreed is that in any valuation of the inventories of a cotton mill, consideration should be given to the waste which occurs in manufacturing operations, the only question being whether this has been done by the Commissioner. We are convinced that when the Commissioner determined a unit-manufacturing cost by dividing the total of goods produced during the years into total manufacturing expenses, waste was being considered for the reason that he was dealing with costs incident to the completion of the finished product. When, however, he applied one-half of this unit-manufacturing cost to goods in process without considering the goods in process on a finished-goods basis, the full waste is not being given consideration, and such error should be corrected in a recomputation under this decision. Similarly, the Commissioner is in error in failing to give proper consideration to the relation to cost of the amount realized from the sale of waste, which error should likewise be corrected.

Finally, the petitioner contends that taxes and insurance are not proper manufacturing costs. In the absence of direct evidence as to the character of taxes and insurance here in question, the Board can do no other than affirm the action of the Commissioner in including these items in manufacturing costs.

The controversy between the Commissioner and the petitioner as to depreciation on tenement houses as a manufacturing cost is more apparent than real. In the notice of deficiency mailed to the petitioner, the Commissioner conceded that such depreciation should be offset by the rental received from such houses and at the hearing the petitioner conceded that one item would practically offset the other. It is, therefore, the opinion of the Board that the parties themselves have, in effect, disposed of this feature. ■ •

Becomputation should be made in accordance with the foregoing.

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


author: Littleton-:

text:
    Adolph Schlett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10016.
    Promulgated May 28, 1927.
    Salary credited to the petitioner upon the books of a corporation of which he was an officer and a stockholder during the taxable years was income to him on the cash receipts and disbursements basis only to the extent received within the year.

      Harry J. Gerrity, Esq., and Thomas 0. Marlar, Esq., for the petitioner.

      A. 8. Lisenby, Esq., for the respondent.
   Littleton-:

The Commissioner determined deficiencies in the amounts of $1,586.10 for the year 1920, $276.51 for 1921, $161.95 for 1922, and $361.37 for 1923, as a result of his holding that amounts credited to the petitioner as compensation and commissions upon the books of the Acme Specialty Manufacturing Co., of which he was president and treasurer, and a stockholder, were income to him in the year in which so credited.

FINDINGS OP PACT.

Petitioner is a resident and citizen of Toledo, Ohio. During the taxable years he was president and treasurer, and a stockholder of the Acme Specialty Manufacturing Co., an Ohio corporation.

Petitioner kept his books and reported his income upon the basis of actual receipts and disbursements and the Commissioner followed that basis in his determination of the deficiencies here involved. Prior to and during the taxable years petitioner was paid a regular salary of $8,000 per year and a 5 per cent commission on sales. During the taxable years 1920 to 1923, inclusive, the amounts of petitioner’s compensation credited upon the books of the corporation and the amounts paid to him and reported as income follow:

The weekly pay roll of the corporation was about $1,800 and at the end of each of the taxable years involved the amount of cash which the corporation had on hand and in bank was not sufficient to meet two weekly pay rolls. In order to have taken care of its current operating expenses at the end of each of the taxable years in question and to have paid petitioner the entire amount credited to him upon the books, it would have been necessary for the corporation to borrow a considerable amount of money.

The deficiencies should he recomputed hy including as income to the petitioner only the amount paid to him m each of the taxable years. Appeal of Ilamj W. Gilson, % B. T. A. 1821. Judgment will he entered on 15 days’ notice, under Bule 50.


author: Littleton:

text:
    Lillian M. Goldsmith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6335.
    Promulgated May 28, 1927.

      Thomas J. Uargadon, O. P. A., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency of $31.20 for the calendar year 1924. Petitioner claims that the Commissioner erred in disallowing a deduction of $1,040 personally paid by her to one Louis Kottler to look after her interests in a corporation in which she owned a one-half interest, during her temporary residence in a State other than the State in which the business of the corporation was carried on.

FINDINGS OF FACT.

Petitioner is now a resident of Chicago, Ill. During the year 1924 she ivas a resident of St. Louis, Mo. During that year she was vice president and owned 50 per cent, or $30,000 par value, of the capital stock of William Shultan Co. engaged in business at Chicago, Ill. She received a fixed salary of $5,000 a year. Due to her absence from Chicago and her inability to protect her interest in the corporation and the determination on her part that it was necessary to have some one there to look after her interests and keep her fully advised, she personally employed Louis Kottler and paid him a salary of $20 a week or a total of $1,040 in the year 1924 to look after her interests in the corporation and to keep her fully advised in the Xiremises. She claimed the $1,040 as a deduction from her gross income as an ordinary and necessary business expense for the year 1924 and the Commissioner disallowed the same.

Judgment will he entered for the petitioner upon the issue raised on 15 days' notice, u/nder Rule 50.


text:
    Henry Eggink, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6413.
    Promulgated May 28, 1927.
    March 1, 1913, value of a one-half interest in certain real estate acquired in 1909, and the purchase price of the other one-half interest in the same property purchased March 1, 1915, determined.

      G. W. Pitts, Esq., for the petitioner.

      W. F: Gibbs, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax of $151.22 for the calendar year 1920. Petitioner claims that the Commissioner erred in his determination of the fair market value of his one-half interest in certain real estate on March 1, 1913, and the cost to him of the other one-half interest in the same property when acquired in 1915, for the purpose of the determination of the gain or'loss upon the sale of the entire property in 1920 for $37,600. The Commissioner determined that the March 1, 1913, value of the petitioner’s one-half interest in the 160 acres of land was $145 an acre, or $11,600, and that the purchase price paid by petitioner for the undivided half interest in the same property in 1915 was $145 an acre, or $11,600. Petitioner claims that three years’ rental at $480 per annum, or $1,440, for his half interest constituted a part of the purchase price paid by him for the remaining one-half interest in 1915.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Alton, Sioux County, Iowa. In 1909 he and his brother-in-law, Henry Walraven, jointly purchased a farm consisting of 160 acres, being the southwest quarter of section 10, township 94, range 47 west, in Sioux County, Iowa, for Avhich they paid $100 an acre. They each had an undivided one-half interest. At the time of the purchase the farm and the improvements thereon were in very bad condition. The purchasers repaired the residence by putting on new siding, a new roof, new floors, new doors and windows, constructed considerable fencing, erected a hog-house 24 by 32 feet and a new corncrib and granary, 24 by 32 feet, cleared the land of weeds and thistles, and otherwise improved the farm.
    On March 1, 1913, the land, buildings, and other improvements were in good condition and the fair market value of the farm on that date was $145 an. acre.
    On June 6, 1913, Henry Walraven died testate, devising and bequeathing all his property, real, and personal, including his undivided one-half interest in the aforesaid farm, to his wife. During the year 1913 and prior years petitioner had rented his one-half interest in the farm to his brother-in-law, who owned the other one-half interest, at $6 an acre, or $480 a year, payable on March 1 of each year. After the death of Walraven the widow oontinued to rent petitioner’s interest at the same yearly rental. The rental for the year ending March 1, 1913, and the rentals for the years ending March 1, 1914 and 1915, had not been paid although Henry Wal-raven’s estate was more than sufficient to pay his debts, including the rental, and his widow could have paid the rental for the years 1913, 1914, and 1915, and, although liability therefor was fully recognized, petitioner did not press the matter of payment of the rental for the time being until the widow could adjust the affairs of her deceased husband and make plans for the carrying on of farming operations.
    Early in July, 1914, petitioner discussed with Mrs. Walraven the matter of his purchasing her undivided one-half interest in the 160 acres, effective March 1, 1915, and offered as the purchase price of her interest to assume her share of a mortgage amounting to $4,917.-30, to pay $6,682.70 in cash and cancel the payment of $1,440, representing rental of his one-half interest for the years ending March 1, 1913, 1914, and 1915, the purchase price in all being $13,040. After consideration Mrs. Walraven accepted this offer and a contract wherein Mrs. Walraven agreed to sell and petitioner agreed to purchase the one-half interest, effective March 1, 1915, was entered into. This agreement was carried out and the property transferred on March 1, 1915. The Commissioner refused to allow the Cancellation of $1,440 rental as part of the purchase price paid by petitioner for the property in computing the gain or loss upon the sale thereof by petitioner in 1920 for $37,600.
   OPINION.

Littleton:

The only issues in this proceeding upon which evidence was submitted are whether the Commissioner erred in his determination that the March 1, 1913, value of the petitioner’s undivided one-half interest in the farm was $145 an acre and whether the cancellation of the rental due for his one-half interest for the years 1913, 1914, and 1915, amounting to $1,440, constituted a part of the purchase price paid for the remaining one-half interest.

Petitioner alleged in an amended petition that a first mortgage in the amount of $24,600 and bearing interest at 5 per cent taken as a part of the sales price for the property in 1920 had no fair market value and should not, therefore, have been included as a part of the sales price in determining gain or loss. No evidence was submitted upon this point and no mention was made thereof in the brief filed. There was some testimony introduced to the effect that the fair market value of petitioner’s one-half interest in the property on March 1, 1913, was $150 an acre, but in the proposed findings of fact submitted by the petitioner the Board is asked to find a fair market value on March 1, 1913, of $145 an acre, and w.e believe from a consideration of all the testimony that the value of $145 an acre was the fair market value of the property on March 1, 1913, and we have so found. This is the March 1,1913, value found by the Commissioner. While the consideration mentioned in the contract of sale and the deed of transfer of the one-half interest in the property to the petitioner was $145 an acre, the evidence shows that the consideration paid by the petitioner in 1915 for a one-half interest in this property was $145 an acre plus the amount of $1,440 rental accrued to the date of the transfer. The cost to petitioner, therefore, of the one-half interest acquired in 1915 was $13,040.

Judgment will be entered on 15 days’ notice, u/nder Bule 50.


author: Thammell :

text:
    Colonial Ice Cream Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8354.
    Promulgated May 28, 1927.
    Where it appeared that an extraordinary expenditure for advertising in a certain year resulted in benefit to a business in the year of expenditure as well as in subsequent years, and that, therefore, the entire expenditure was not of a capital nature, held, in the absence of evidence upon which a proper allocation could be made between capital and current expense, that the Commissioner’s refusal to permit any part of the expenditure to be capitalized must be approved.

      Arthur N. Presmont, Esq., for the petitioner.

      Harold Allen, Esq., for respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921 in the amount of $10,007.49. The only question at issue is whether or not a certain sum of money, expended by petitioner during the year 1920, constituted a capital expenditure.
    FINDINGS OF FACT.
    Petitioner is a Pennsylvania corporation, organized in May, 1919, witli its principal office and place of business at Philadelphia. It was organized for the purpose of engaging in the business of manufacturing and selling ice cream and ice. At organization, it had an authorized capital stock of $100,000, of which $35,000 was paid in at that time. At the end of 1919, the amount of capital stock paid in was $208,500, and at the end of 1920, the amount was $1,195,200. At the end of 1921, the amount of capital stock paid in was $1,215,200. In June, 1919, petitioner acquired property on which to build its factory, and shortly thereafter entered upon an advertising campaign to create a market for its product. On March 4, 1920, it began the manufacture of ice cream. During the month of March, 1920, petitioner manufactured about 6,000 quarts of ice cream, and from that date to the end of the year it manufactured approximately 6,000,000 quarts. During the year 1921, it manufactured over 11,000,000 quarts of ice cream and during 1922 it manufactured approximately the same quantity.
    After the organization of the corporation in 1919 it began an advertising campaign to create a market for its product, and during 1919 and 1920 expended the total sum of $206,140.63 for organization expenses, advertising expenses, ice cream cabinets and the expense of installing them. This amount the petitioner set up on its books as “ organization and development expenses ” and treated as a deferred expense to be spread over three years, claiming a deduction of $68,713.55, or one third thereof, in 1921, which deduction was disallowed by the respondent, which gave rise to the deficiency asserted.
    Of the total amount of $206,140.63, the amount of $5,198.26 was expended in 1919 for organization expenses. In 1920, $46,453.69 was spent for ice cream cabinets and expenses of installation. These cabinets had a useful life of three years. The amount of $154,488.68 was spent for advertising in 1920, which amount the respondent allowed as a deduction as expense in that year. The advertising consisted of personal solicitation of salesmen in an effort to induce retail dealers to handle petitioner’s product, and advertisements in street cars and along the highways.
    During the year 1921, petitioner spent ax>proximately the sum of $143,000 for advertising x^uposes, which amount it charged off as expense in that year. Petitioner’s return for the year 1920 showed a net oxmrating loss, with no tax due, while its return for 1921 disclosed a net income of $151,355.77.
   OPINION.

Thammell :

The essential facts in this proceeding, set out in our findings of fact, are uncontroverted. Petitioner was organized in May, 1919, and in the following month acquired property on which to erect its factory for the manufacture of ice cream and ice. Concurrently, it began an advertising campaign to create a market for its product, and during the remainder of 1919 and the year 1920, expended the total sum of $206,140.63 for organization and advertising exxienses. This amount, set up on its books as “ organization and development expense,” it treated as a deferred expense to be spread over three years, and claimed a deduction of $68,713.55, or one-third thereof, in its tax return for 1920 and a like amount in its return for 1921. Of the total amount the sum of $5,198.26 was expended in the year 1919 for organization expenses, and was a capital expenditure. Of the remainder, the amount of $46,453.69 was spent for ice cream cabinets and expenses of installation, which is a capital expenditure, leaving the amount of $154,488.68 spent for general advertising in 1920, which respondent determined to be an ordinary and necessary business expense, deductible in 1920, the year in which it was paid. Accordingly, respondent disallowed the deduction of $68,713.55 claimed by petitioner in its 1921 return. This action gave rise to the deficiency asserted. Nespondent also determined the useful life of the ice cream cabinets to be three years and allowed a deduction of one-third of the amount spent therefor for the year 1921. Petitioner asserts that the balance of $154,488.68 spent for advertising in 1920 was a capital expenditure, and that it is entitled to a deduction of one-third of this amount also for the year 1921. Thus, the sole issue tendered for consideration here is whether or not the amount expended by petitioner in 1920 for advertising constituted a capital expenditure, and whether or not it is entitled to a deduction of one-third of that amount for the year 1921.

The earnest insistence of counsel for the petitioner in presenting its theory of the case merits our careful consideration. Briefly summarized, petitioner’s contentions are that the expenditure for advertising in 1920 was made during the first year of its existence; that the amount spent for this purpose was abnormally large because of the fact that it was seeking to establish a market for its product and that it should be permitted to take deductions over a series of years for this abnormal and unusual expense in order that the subsequent years which received the benefit of the advertising might bear their proportionate part of the cost thereof. Both at the hearing and in its brief petitioner cited numerous authorities tending to support its contentions. And we may add that with the principles asserted we are in entire accord. The difficulty presented is in the application of those principles to the facts before us.

In the Appeal of Northwestern Yeast Co., 5 B. T. A. 232, at page 237, we said:

There can be little doubt in the minds of reasonable men fairly acquainted with modern business that promotion expenditures like those before us have a significance similar to the investment in more tangible assets. They fertilize the field for new production. * * *
Generally and theoretically, therefore, it is safe to say that some part of the cost of a campaign or system of promotion may be of permanent significance and may be regarded as a capital investment rather than a deductible expense.

So, in the case under consideration, it is apparent that the benefits flowing from the advertising campaign of petitioner and the expenditures made therefor in 1920, continued through subsequent-years, and to that extent may properly be regarded as a capital investment of more or less indefinite duration. It is likewise apparent that some portion of those expenditures should be regarded as current operating expenses properly chargeable against current income, since petitioner began active operations on March 4, 1920, and during that year manufactured approximately 6,000,000 quarts of ice cream. During the year 1921, petitioner manufactured about 11,000,000 quarts of ice cream and expended in round figures $143,-000 for advertising, all of which it charged to current expense. If it be conceded, as contended by petitioner, that years subsequent to 1920 received benefits from the advertising expenditure of that year, it must also be conceded that subsequent years received benefits from the advertising of 1921, which approached in magnitude that of 1920. Yet petitioner makes no such concession.

A taxpayer has no option to treat expense items as capital or capital expenditures as ordinary and necessary expenses of carrying-on a trade or business. The nature of the expenditure must be determined from the facts. Appeal of Gilliam Manufacturing Co., 1 B. T. A. 967.

Under the Revenue Acts of 1918 and 1921, a taxpayer is not permitted to use the expenses, liabilities or deficit of one year to reduce the income of a subsequent year, except to the extent permitted by the net loss provisions. The fact that petitioner had no income or an insufficient income in 1920 against which i,t could apply a deduction for the advertising expenses in question, but had a net income of more than $151,000 in 1921, can not be determinative of the issue here involved.

Inasmuch as it clearly appears from the evidence that the whole sum expended by the petitioner for advertising in 1920 did not constitute a capital expenditure, the question arises as to what portion of that sum is properly allocable to capital and what portion to expense. On this point, the record before us is silent. No evidence was offered by the petitioner from which we can determine the proper allocation, or approximate with reasonable accuracy a correct segregation. A similar situation was before us in the Appeal of Northwestern Yeast Co., supra, in connection with which we said:

From the evidence, most of which as to essential facts is not in dispute, we gather, and the Commissioner admits, that substantial sums were spent by this corporation in the early period of its existence in the promotion and expansion of its business. The taxpayer argues that all of the amount in question was so spent and lienee was an investment. The Commissioner urges that some part was not promotion and expansion b'g.t was the cost of maintenance and hence not invested but properly chargeable against current income. Thus it will be seen that the question becomes one of evidence of the extent to which the amount in question is to be classified and apportioned between capital and expense.
* * * But as to this the Board has no knowledge of the probabilities and there is no proof. It is not a matter of judicial notice, and we are not permitted to guess. If anyone has any evidence upon which an allocation can be predicated, such evidence must be produced by the petitioner. * * *
We are therefore constrained to approve the Commissioner’s disallowance notwithstanding our approval of the general contention of the petitioner’s counsel that in a proper case invested capital may include a proper part of the amounts expended for promotion in the early period of a business.

Again, in the Appeal of J. H. Sanford, 2 B. T. A. 181, we said:

A part of the expenditures which the taxpayer seeks to deduct are deductible as business expenses. The remainder are capital expenditures. We can not determine or even approximate a correct segregation. * * * Without this evidence before us we are constrained to approve the determination of the Commissioner.

See also Appeal of Bonta Narragansett Realty Corporation, 1 B. T. A. 208; Appeal of Gude Brothers, Kieffer Co., 2 B. T. A. 1029; Appeal of Sentinel Publishing Co., 2 B. T. A. 1211; Richmond Hosiery Mills, 6 B. T. A. 1247.

For the reasons indicated, the determination of the respondent is approved.

Judgment will be entered for the respondent.


author: Trussell:

text:
    Appeal of Secor Hotel Co. Appeal of Deshler Hotel Co.
    Docket Nos. 5023-5025.
    Promulgated May 28, 1927.
    1. Good Will, Obsolescence of. — Good will is not property of the kind subject to a deduction for obsolescence under the provisions of section 234 (a) (7) of the Revenue Act of 1918.
    2. Value of Leasehold. — The March 1, 1913, value of taxpayer’s leasehold determined on the basis of capitalizing the difference between the rent reserved in the lease and the rent which the lessee would pay, making such a lease on March 1, 1913, over the remaining period of the lease.

      Rolland L. Nutt, Esq., Clarence W. Nutt, Esq., and Elmer E. Dams, Esq., for the petitioners.

      John D. Foley, Esq., for the Commissioner.
    In two separate letters dated April 22, 1925, the Commissioner served notices of deficiencies upon the Secor Hotel Co., of Toledo, Ohio, in the amount of $588.99 for the year 1916, and $35,514.11 for the year 1919, and in another letter of the same date he served notice upon the Deshler Hotel Co. of Columbus, Ohio, of a deficiency in the amount of $29,925.57 for the year 1919. The same letters contained advice respecting over assessments for other years which are not here in controversy. The deficiencies against the Secor Hotel Co. and the Deshler Hotel Co. for the year 1919 are based on a consolidated return for that year. The Secor Hotel Co. filed two separate appeals docketed as Nos. 5023 and 5024, and the Deshler Hotel Co. filed a separate appeal docketed as No. 5025. By agreement of counsel, these three cases were tried together and will be so disposed of. The several petitions alleged a number of errors on the part of the Commissioner, but at the trial all of these were waived except two, as follows:
    1. That the Commissioner disallowed a claimed deduction from gross income of the Secor Hotel Co. for the year 1919 based upon an alleged loss resulting from the enforcement of national prohibition, and the consequent discontinuance of the operation of the hotel bar, where intoxicating and other beverages and refreshments had been sold.
    2. That the Commissioner refused to allow the Secor Hotel Co. to take a deduction from gross income based upon the alleged exhaustion of the March 1, 1913, value of the lease of the hotel property.
    FINDINGS OF FACT.
    1. The Secor Hotel Co. is an Ohio corporation organized in 1908 and has since operated the Secor Hotel, located in Toledo.
    2. The Deshler Hotel Co. is a corporation which operated the Deshler Hotel in Columbus for the years 1917, 1918, and 1919. It filed a return consolidated with that of the Secor Hotel Co. as an affiliated corporation.
    3. In the fore part of the year 1908 the Commonwealth Building Co. was constructing a modern ten-story hotel building in Toledo. This building was financed in part by $450,000 of 5 per cent bonds sold to the citizens of the community. Desirous of obtaining a suitable tenant to operate the hotel it entered into negotiations with prominent hotel operators which negotiations finally culminated in a lease with L. C. Wallick and London I. Wallick of New York City. A lease was executed for a term of 20 years commencing August 1, 1908, and terminating July 31, 1928. ■
    That portion of the lease provided for the payment of rent on an agreement that the land which was the subject of the lease had a value of $170,000, that the actual cost of the buildings and improvements placed, thereon by the lessor was to be estimated, and agreed to, and that the amount of annual rent paid was to be computed as 5 per cent on the first $450,000 of the total cost of land and buildings and 6 per cent on the balance of such costs for the first 5 years. For the second 5 years, the rent was to be 5 per cent on the first $450,000 of cost and ly<¿ per cent upon the remaining portions of such cost, and for the last 10 years, 5 per cent upon the first $450,000 cost and 8% per cent upon the remaining portion of such cost. Thereafter, the amounts of rent under these provisions were computed as follows:
    $40,500 for tlae first five years (Aug. 1, 1908, to July 31, 1913.)
    $52,500 for the next five years (Aug. 1, 1913, to July 31, 1918.)
    $56,500 for the last ten years (Aug. 1, 1918, to July 31, 1928.)
    These payments are an average of $53,000 per year for the last 15 years of the term of the lease.
    The lease provided that the lessee should pay taxes and assessments, and make such repairs as were necessary, and contained the other usual covenants.
    The lease further provided that the lessee should maintain a first-class hotel, equal in all respects in accommodations, style, and management to the best hotels of its class and construction in cities of the United States of the approximate size of the City of Toledo.
    The said lease was assigned and transferred on July 80, 1908, to the Secor Hotel Co., the taxpayer herein, which has operated said hotel under the lease ever since.
    The valuation of this property for the purpose of local tax assessments was for the year 1913:
    Land- $219, 000
    Building- 573, 000
    4. The taxpayer, the Secor Hotel Co., also operated in connection with the hotel a bar at which intoxicating liquors were sold. The bar was furnished with expensive fixtures and catered to a high-class trade. In addition to the guests of the hotel, many local business and professional men were in the habit of patronizing this bar. It became a public meeting place for many of the leading citizens of Toledo, and because of the quality of its service, and special brands of liquor it developed a profitable business. The taxpayer kept a record of the gross profits of the bar upon its books. To determine the net profit of the bar for income-tax purposes, the taxpayer de-, ducted expenses directly attributable to the bar, including a portion of the overhead expenses of the hotel. Cost of the bar fixtures was not kept separately upon the books, as all the furniture of the hotel was purchased at one time, but the revenue agent valued the fixtures at $18,000. The net profits as computed by the taxpayer for the years 1909 to 1913 were as follows:
    Year Net profits
    1909_$20, 779. 70
    1910_1_ 13, 952. 82
    1911_ 13, 993. 88
    1912_ 18,275.76
    1913 (2 months)_ 3,899.21
    Total_ 70, 901. 37
    Average profit per year $17,016.36.
    The taxpayer computed the value of good will of the bar as follows :
    Investment in- bar_$18, 000. 00
    Average inventory, Jan. 1, 1909, to March 1, 1913_ 6, 058.15
    Total tangible investment_ 24, 058.15
    Fair earnings on above tangible investment at 8%_ 1, 924. 65
    Average profit per year_ 17,016. 36
    Less fair earnings on tangible investment_ 1, 924. 65
    Earnings on intangible investment (goodwill)_ 15,091.71
    5. At the end of the year 1918 it became evident that the sale of intoxicating liquor would be prohibited within the next year. National prohibition legislation required the taxpayer to cease its business of selling liquor July 1, 1919. The taxpayer’s bar after said period lost the patronage of those that came for the purpose of obtaining their favorite beverages. The bar, together with its fixtures, was used for other purposes than the sale of liquor. The taxpayer alleges obsolescence of good will for 1919 in the sum oí $100,611.40. The Commissioner refused to allow any value for obsolescence of good will of the said bar.
   OPINION.

Trussell:

(1) The subject of a claim for loss on account of the obsolescence or destruction of the good will of a business which has been compulsorily terminated by reason of prohibition legislation was the subject of consideration of the Board in the case of the Manhattan Brewing Co., 6 B. T. A. 952, and by the United States Circuit Court of Appeals in the case of Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, where it was held that good will is not such a kind of property, a deduction for the obsolescence of which was provided for in section 284 (a) (7) of the Revenue Act of 1918. Those decisions are controlling in the instant case.

(2) The record contains a variety of opinion testimony respecting the March 1, 1913, value of the Secor Hotel Co.’s leasehold of land and buildings. One witness gave it as his opinion that on March 1, 1913, the land had a value of $328,000 and the building a value of $792,000. Another witness testified that the Toledo Real Estate Board Valuation Committee made an appraisal as of March 1, 1913, and found the land to have a value of $342,000 and the building a value of $896,000, and the same witness expressed the opinion that these values were the true values. These two and other witnesses also gave a variety of testimony respecting the value in use of hotel properties, estimating the same on the basis of a certain unit value per room per year, and as a result of all such testimony all of these witnesses testified to high values on this leasehold as of March 1, 1913.

One outstanding thought in all this testimony is that in 1908 the lessor and lessee agreed that the land subject to this lease had a value of $170,000 and that the rent finally agreed to on a percentage basis indicated a building cost of approximately $650,000. The witness whose testimony seems be the most convincing gave as his opinion that on March 1, 1913, the land value was $228,000 and the building value $792,000. On the basis of the agreed 1908 value, this taxpayer was able to procure a lease, during the last 15 years of which he must pay an average annual rental of $53,000. Upon the same basis, if he had been negotiating a lease in 1913 and upon a valuation of land of $228,000 and a building value of $792,000, and the same percentages as a basis for annual rent, this taxpayer would have been able to acquire a lease for the same 15 years at an average rental of $57,400. The difference between the average rental which the taxpayer will pay under the lease acquired and the average rent which he might have been required to pay had he negotiated the lease in 1913 is $4,400 per year, and we are of the opinion that this figure, on the basis of 15 annual payments represents the March 1, 1913, value of the leasehold, and such value is found by the use of ordinary interest- tables to be about $26,000, and we therefore find that the March 1, 1913, value of the taxpayer’s leasehold was $26,000, Appeal of Northern Hotel Co., 3 B. T. A. 1099, and that in the readjustment of its income-tax returns for the years here under consideration it should be allowed a deduction from gross income equal to one-fifteenth of $26,000.

The deficiencies may be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursumt to Bule 50, and judgment will be entered accordingly.


text:
    G. L. Holton, Executor, Estate of Emily F. Turner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4214.
    Promulgated May 28, 1927.
    The evidence fails to show that earnings out of which a dividend was paid on July 10, 1922, were accumulated prior to March 1, 1913, and were therefore subject to tax under the provisions of the Revenue Act of 1921.

      Thomas B. Dempsey, Esq., and Earl L. Wisdom, Esq., for the petitioner.

      L. O. Mitohell, Esq., for the respondent.
    This is an appeal from the determination of a deficiency by the Commissioner of $3,182.66 for 1922. The case was submitted on depositions taken in Los Angeles, Calif.
    The error alleged is that the Commissioner computed a surtax on a dividend received by the petitioner in 1922 when such dividend was nontaxable, since the distribution was made by the distributing corporation, the Turner Oil Co., from earnings which had accumulated prior to March 1, 1913, and was, therefore, exempt from tax under the provisions of section 201 of the Revenue Act of 1921.
    FINDINGS OF FACT.
    On July 10, 1922, Emily F. Turner (now deceased) was the owner of 82,474 shares of the capital stock of the Turner Oil Co., out of a total issued and outstanding capital stock of 135,000 shares. On that date, the Turner Oil Co. paid a dividend of 50 cents per share, amounting to $67,500, of which amount said Emily F. Turner received $41,237.
    In 1904, the Turner Oil Co. (hereinafter referred to as the Oil Company) acquired all of the capital stock of the Densmore-Stabler Refining Co. (hereinafter referred to as the Refining Company), and on March 1, 1913, held all of this stock (except five qualifying shares). In 1910 there was a reduction in the capitalization of the Refining Company, but this did not affect the ownership of its stock by the Oil Company. The same condition as to stock ownership existed in 1916 when the Refining Company was dissolved and its assets taken over by its parent, the Oil Company, at their book value. Neither the value of the Refining Company’s assets nor its stock increased in value from March 1,1913, to date of liquidation in 1916.
    The surplus account of the Oil Company showed a surplus on March 1, 1913, of $215,105.54 and the evidence submitted for the Refining Company showed a surplus on the same date of $90,033.54, making a total for the two companies of $305,139.08. Both companies showed small profits or losses during the years 1913, 1914, and 1915, but either on account of losses or dividend payments, the surplus of the Oil Company had decreased to $147,366.80 on December 31, 1916, and that of the Refining Company, to $73,433.62, making a combined total of $220,800.42. There was an increase in the combined surplus of the two companies during 1916 of $9,469.15. A dividend of $9,450 was paid by the Oil Company on April 15, 1916, and another on March 13, 1917, of $20,250, the two taken together mpre than consuming any earnings from March 1, 1913, which had not theretofore been distributed. Either through losses or dividends, the entire income from 1917 through 1920 was dissipated. The income for 1921 and 1922, up to the date of the dividend payment in question, was insufficient of itself to make the petitioner subject to surtax. On December 81, 1921, the surplus on the books of the' Oil Company was $178,916.61, which was changed but slightly on July 10, 1922, the date the dividend in question was paid, since the earnings were negligible for this period.
   OPINION.

Littleton :

The only question for consideration in this case is whether the dividend which the petitioner received on July 10, 1922, was paid by the Turner Oil Co. out of earnings accumulated prior to March 1,1913, and was therefore exempt from tax under the provisions of section 201 (b) of the Revenue Act of 1921, the pertinent part of which is as follows:

For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since ^February 28, 1913, have been distributed. * * *

We have found as a fact that all earnings which accrued from operations from March 1, 1913, to the date of the dividend here, sufficient to make the petitioner subject to surtax, had disappeared either through dividend payments or losses from operations, and we are also of the opinion that no profit was realized through the liquidation of the Refining Company by the Oil Company. The only question which remains is whether the earnings of the Refining Company which were accumulated prior to March 1, 1913, and which came to the Oil Company through liquidation of the Refining Company in 1916 would be exempt from tax when distributed to the stockholders of the Oil Company in 1922.

In the first place it should be noted that the statute here in question says “ any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax after the earnings and profits accumulated since February 28, 1913, have been distributed.” Prior to March 1, 1913, the earnings of the Refining Cpmpany, which came to the Oil Company through liquidation in 1916, had accumulated in the hands of the Refining Company, but this was not true with respect to such earnings to the Oil Company. Prior to 1916 the Oil Company was merely a stockholder of the Refining Company and had no right to the earnings of the Refining Company until they came to it through liquidation in 1916, and therefore can not be said to have accumulated in the hands of the Oil Company until 1916.

By the liquidation, the Oil Company came into ownership of these earnings and they then became a part of its surplus, but this was not true prior to this time. True, the Oil Company owned stock of the Refining Company which did not have a greater value in 1916 than it had on March 1, 1913, but by the exchange of this stock for the assets of the Refining Company in 1916, a closed and completed transaction was effected on which a gain or loss might have been computed. It was then that the earnings of the Refining Company were accumulated to the Oil Company and not before, and consequently would not be exempt from tax under the provisions of section 201 (b) of the Revenue Act of 1921.

What part of the entire dividend here in question was paid from earnings of the Oil Company which had accumulated prior to March 1, 1913, and what part from the earnings of the Refining Company which came to the Oil Company in 1916, the evidence in the case is insufficient to determine.

The action of the Commissioner must, therefore, be affirmed.

Judgment will be entered for the resfondent.


author: LittletoN :

text:
    Appeal of Alfons Wile.
    Docket No. 5228.
    Promulgated May 28, 1927.
    Section 214(a) (8) of tlie Revenue Act of 1918 does not authorize a deduction for obsolescence of good will.

      Ferdinand Tcmnenbaum, Esq., for the petitioner.

      Bruce A. Low, Esq., for the Commissioner.
    The Commissioner determined a deficiency of $142.28 for the calendar year 1920. The petitioner was one of the partners of the firm of Julius Wile Sons & Co., and he claims that the March 1, 1913, value of the good will of that firm was $448,353.50. Petitioner claims that the useful value of the good will of the partnership was destroyed by prohibition legislation; that the usefulness of such good will was ascertainable on January 1, 1918, -and that a deduction should be allowed for obsolescence thereof over the period January 1, 1918, to January 16, 1920, the latter date being the effective date of the Eighteenth Amendment to the Constitution of the United States prohibiting the manufacture and sale of intoxicating liquors for beverage purposes. The position of the taxpayer therefore is that for the year 1920 the Commissioner should have allowed a deduction for obsolescence under the provisions of section 214 (a) (8) of the Revenue Act of 1918, of an aliquot part of the March 1, 1913, value of the good will.
    The Commissioner allowed no deduction for obsolescence of good will.
    BINDINGS OB BACT.
    Petitioner is a resident of New York and since 1901 has been a member of the partnership of Julius Wile Sons & Co., which, during the period from 1887 to 1920, was engaged in the importation and sale of wines and liquors for beverage purposes. From the effective date of the Eighteenth Amendment to the Constitution of the United States prohibiting the importation and sale of intoxicating liquors for beverage purposes on January 16,1920, the partnership of Julius Wile Sons & Co. has been engaged, and still is engaged, under the same name in the importation and sale of wines and liquors for non-beverage purposes.
    Prior to January 16, 1920, the partnership “ advertised and sent salesmen throughout the United States to secure business and also had a force of sales promotion representatives; men who went about from place to place where wines and liquors were used and sold and endeavored to promote the sale of the particular brands for which Julius Wile Sons & Co. were the United States agents.” Among the brands of wines and liquors sold by the partnership were Bur-don’s sherry, Blanat brandy, Piper Heidesieck champagne, Cazalis and Prats vermuth brandy, Cunliffe, Dobson & Co. clarets and Sautermes de Muller’s ports. These brands were carried and sold only by the partnership of Julius Wile Sons & Co. to wholesale liquor dealers.
    Arthur B. Leffler, a member of a partnership known as John Eeffler & Co. engaged as a wholesale dealer in liquors for beverage purposes, prior to January 16, 1920, purchased a large amount of the wines and liquors of the brands mentioned from Julius Wile Sons & Co. to fill orders from customers calling for those brands. Subsequent to January 16, 1920, Leffler was engaged in the sale of liquors at wholesale for nonbeverage purposes under United States permit and continued to purchase wines and liquors from Julius Wile Sons & Co. Subsequent to January 16, 1920, the drug trade to which Leffler sold would order sherry, brandy, and the like without specifying whether they desired imported or domestic brands. Prior to the effective date of the Eighteenth Amendment Leffler employed salesmen to engage exclusively in the sale of wines and liquors to retail liquor dealers. Thereafter he employed new salesmen familiar with the drug sales, some of whom were also drug salesmen. Although Leffler received no specific demand for the particular brands of wines and liquors handled exclusively by Julius Wile Sons & Co. he continued to purchase from that firm by reason of his past relations and dealings with it and because of his friendship with persons connected with the partnership. From January 16, 1920, to the end of the year 1920 Leffler purchased wines and liquors from the partnership of Julius Wile Sons & Co. in the amount of approximately $5,000. During the year 1918 Leffler’s purchases from Julius Wile Sons & Co. were between $20,000 and $25,000. For 1919 he was in business six months, during which time his purchases from this partnership were approximately $15,000. The three outstanding brands purchased by Leffler from Julius Wile Sons & Co. were Blanat' brandy, Burdon’s sherry and Cazalis sherry. The margin of profit upon the liquors sold for beverage purposes was greater than the profit upon liquors sold for non-beverage purposes. Leffler discontinued selling liquors for beverage purposes on June 30, 1919, and dismissed his salesmen. When operations were resumed under Government permit new salesmen familiar with the drug trade were employed. The compensation paid to salesmen prior and subsequent to January 16, 1920, consisted entirely of commissions upon liquors sold.
    For thirty-three years prior to January, 1920, one Solomon Lands-mann was engaged in dealing generally in imported wines at wholesale and retail, some of which were imported by himself and a portion purchased from other importers, among whom were Julius Wile Sons & Co. Among the spirits purchased from this partnership were Note’s wines, Cunliffe, Dobson & Co. clarets and Blanat wines, Piper Heidesieck champagne, Burdon’s sherry, and Garner’s cordials. Prior to January 16, 1920, Landsmann received numerous orders for these brands. During the period of his operations prior to January, 1920, Landsmann, after he had selected and decided upon the brands of wines and liquors that he desired to handle, devoted himself to recommending and advertising those particular brands. There were many brands of imported wines and liquors upon the market but Landsmann, by reason of his friendly relations with certain individuals connected with Julius Wile Sons & Co., favored them in wines and in some cases handled their brands exclusively, particularly Piper Heidesieck champagne.-
    Subsequent to January 16, 1920, Landsmann has been engaged in the importation and sale of wine for sacramental purposes and has continued to purchase from Julius Wile Sons .& Co., the number of purchases being fewer but the quantity of each purchase larger. Subsequent to January 16,1920, Julius Wile Sons & Co. discontinued carrying certain brands of wines and liquors which it had theretofore handled. The profit upon the wines sold for sacramental purposes was smaller, and the number of sales were fewer, but the quantity of each sale was larger than during the period prior to January 16, 1920. The profits from this business by Landsmann during 1920 were in excess of the profits from sales for beverage purposes during 1918 and 1919. During 1920 Landsmann’s purchases from Julius Wile Sons & Co. amounted to $50,000.
    For twenty-two years prior to 1920 one Joseph Goldsmith had been in the employ of Julius Wile Sons & Co. as a salesman. The partnership sent Goldsmith to Spain in 1909, where he remained approximately six months making a study of the manufacture of different brands and grades of sherry and port wines. Thereafter he devoted his .time to selling these brands and grades of wines in the United States for Julius Wile Sons & Co. Subsequent to the effective date of prohibition Goldsmith continued as a salesman for the partnership supplying wines and liquors to those holding permits to purchase. Subsequent to January 16,1920, particular brands of wines and liquors were not so important as before, that is to say the demand that had theretofore been established for specific brands no longer existed as an element in the profitableness of the business of a particular dealer, to use the words of a witness “ Persons holding permits to purchase just wanted something with a kick in it,” and the success of a dealer depended largely upon his ability to influence the holder of a permit to purchase from him, as a result of good salesmanship, the grade of the merchandise offered on account of prior relations, friendship, reliability, and by reason of the price at which the spirits were offered.
    Subsequent to January, 1920, persons and firms who had theretofore dealt with the partnership of Julius Wile Sons & Co. and who held Government permits continued to purchase from him, and many others who had not theretofore been in this business or who were not regular customers of the partnership also purchased its merchandise in 1920 and subsequent years.
    Prior to and subsequent to 1920 the partnership paid Goldsmith a salary and, in addition, a commission of from 5 to 10 per cent of the sales.
    Since 1879 one Henry Dorn has been connected with the partnership of Julius Wile Sons & Co. and since 1895 he has been its principal salesman. He sold wines and liquors to hotels, restaurants, family liquor stores, and jobbers. In order to induce these various hotels, etc., to purchase the brands of liquors and wines sold by the partnership, Dorn would have friends of his call for these brands at hotels and restaurants, and when they were with other individuals and when ordering from jobbers. Dorn was well known to all persons dealing with the partnership of Julius Wile Sons & Co. In 1920 Dorn ceased soliciting purchases of wines and liquors. However, many persons and firms holding permits to purchase, having either known him in the past or who were advised by some one who had known him to purchase from Julius Wile Sons & Co., called upon him and made purchases of wines and liquors. In this way Dorn made sales during 1920 of approximately $200,000, which was greater than his sales during 1918 and 1919.
    Alfred Freund, connected with the firm of Frank Kraus & Co., engaged as a wholesale dealer in wines and liquors for thirty years prior to January, 1920, purchased considerable quantities of wines and liquors from Julius Wile Sons & Co. and sold the same by brands to saloonkeepers and individuals. Purchasers of such spirits ordered by brands. Subsequent to January 16, 1920, this firm for a time sold liquor and wines to holders of Government permits. Specific brands were not so important after January, 1920, strong alcoholic content being the principal requirement. Frank Kraus & Co. continued to make purchases from Julius Wile Sons & Co. after the effective date of prohibition. This firm had been purchasing the brands sold by Julius Wile Sons & Co. for a period of about twenty-five years prior to 1920. By reason of restrictions and competition in the sale of intoxicating liquors for nonbeverage purposes, the firm of Frank- Kraus & Co. discontinued business after about one year.
    Julius Wile Sons & Co. was the exclusive American agent for certain imported wines and liquors and sold almost exclusively to wholesale wine and liquor dealers and to hotels and restaurants. Occasional sales were made to retail dealers. From January 16,1920, the business of importing wines and liquors was continued by the partnership and such spirits were sold for nonbeverage purposes to those holding United States permits, first, for medicinal; second, for sacramental; and third, for manufacturing purposes.
    Prior to January and March, 1913, the partnership of Julius Wile Sons & Co. employed a number of men of acquaintance in this line to exploit and advertise the brands of wines and liquors sold by the partnership, in hotels, restaurants, clubs, railway dining cars, and political clubs. These particular men were not salesmen; they took no orders. They were paid stipulated sums for their services, and reimbursed for amounts spent by them in bringing the wines and liquors to the attention of others. These amounts were charged upon the books to an account styled “ Piper Heidesieck expense account.” The partnership also expended sums for advertising its various brands in catalogues or price lists of its customers, various public or private programs and occasionally through billboard and similar advertising methods, and charged such amounts to “ advertising account.” In 1919 the partnership had about 2,800 active accounts upon its books. After January 16, 1920, about 35 of these secured Government permits and continued to purchase wines and liquors from the partnership. During the year 1920 the partnership had fewer salesmen than in prior years.
    Prior to January 16, 1920, 75 per cent of the partnership’s trade consisted of wines and cordials and subsequent to that date 75 per cent of the sales consisted of Scotch whiskey and 25 per cent of wines. No cordials were sold after January 16, 1920, since importation was not permitted. Some of the brands of wines sold prior to January 16, 1920, were not handled thereafter. On January 16, 1920, the partnership discontinued purchasing certain brands of wines and liquors from some foreign manufacturers which it had theretofore represented in the United States and purchased other brands from other manufacturers at lower prices than it had theretofore been paying.
    The partnership of Julius Wile Sons & Co. enjoyed large earnings almost constantly from 1879. During the period from 1903 to 1912 the net profits, and the capital and surplus of the partnership were as follows:

      The gross sales and net profits before deducting interest on the capital and net profits after deducting interest on the capital for the calendar years 1913 to 1920, inclusive, were as follows:

    The advertising and promotion expenses for the years 1903 to 1920, inclusive, were as follows:

   OPINION'.

LittletoN :

Whatever value the good will of Julius Wile Sons & Co. may have had on March 1, 1913, no deduction on account of destruction or obsolescence thereof due to prohibition legislation is allowable from gross income under the provisions of section 214 (a) (8) of the Revenue Act of 1918. Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; Manhattan Brewing Co., 6 B. T. A. 952; Olt Bros. Brewing Co., 6 B. T. A. 974.

On the authority of those decisions the action of the Commissioner in refusing to allow this petitioner a deduction of any amount as obsolescence of the March 1, 1913, value of the good will of Julius Wile Sons & Co., a partnership for the calendar year 1920, is affirmed.

Judgment will he entered for the Commissioner.

Smith not participating.


text:
    Mattie F. Henry, Conservatrix and Ex Officio Administratrix of the Estate of Samuel Farlow, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7268.
    Promulgated May 28, 1927.
    Value of mortgage notes owned by decedent at the time of his death determined.

      George II. Wilson, Esq., and Carl G. Schmiedeskamp, Esq., for the petitioner.

      A. EL. Murray, Esq., for the respondent.
    The Commissioner determined a deficiency in estate tax of $1,824.02’. The administratrix claims that the Commissioner erred in including in the gross estate of the decedent certain mortgage notes at their face value.
    FINDINGS OF FACT.
    Mattie F. Henry is the administratrix of the estate of Samuel Farlow, who died November 23, 1923, a resident of Camp Point, Ill. At the time of his death Farlow owned among other property the following promissory notes secured by mortgages and executed by the following individuals in the amounts shown:
    J. O. Gibbs, 3 notes, executed Oct. 21, 1921_$12, 000
    J. O. Schieferdecker, 1 note, executed May 6, 1925- 18, 000
    George W. Deterding, 7 notes, executed April 11, 1920_ 8, 700
    On January 28, 1925, the estate sold all of the above-mentioned notes at public sale, after due advertisement and pursuant to the order of the county court for the following amounts:
    J. O. Gibbs_$3, 650
    J. O. Schieferdecker_15, 750
    George W. Deterding_ 8,000
    The value of the above-mentioned notes on November 23, 1923, the date of the death of Samuel Farlow, was as follows:
    J. O. Gibbs_$1,050
    J. G. Schieferdecker_15, 750
    George W. Deterding- 8, 000
    By order of the county court administratrix fees were allowed and paid in the amount of $10,000. The Commissioner allowed a deduction on this account of $6,000. There was also allowed and paid by order of the county court attorneys’ fees in the amount of $12,000. The Commissioner allowed a deduction of $6,000 on this account.
   OPINION.

Littleton:

From a consideration of the evidence submitted the Board is of the opinion that the value of the several notes herein-before mentioned at the time of the death of Samuel Farlow on November 23, 1923, was not more than the amounts for which said notes were sold by order of the court in January, 1925. Several witnesses testified that the said notes on November 23, 1923, Avere worth slightly less than they were at the time they were sold in 1925. The Commissioner, therefore, erred in including the said notes in the gross estate at their face value. The administratrix fees and attorneys’ fees paid by order of the court should be allowed as deductions from the gross estate.

Judgment will be entered on 15 days1 notice, wader Rule 60.