author: GoodRich: Murdock, Matthews,

text:
    Lillie C. Pomeroy, George S. Pomeroy, Jr., and Robert G. Bushong, Executors of the Estate of George S. Pomeroy, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29664.
    Promulgated October 27, 1931.

      R. M. Heth, Esq., for the petitioners.

      J ohm, D. Foley, Esq., for the respondent.
   OPINION.

GoodRich:

The net income of the business conducted under the name of Dives, Pomeroy & Stewart for the period from September 21, 1922, the date of Dives’ death, to June 30, 1923, the closing business day before the agreement between Pomeroy and the executors of Dives’ estate became effective, was $552,671.47. We are asked to make an allocation of these earnings between the estate of the deceased partner and the survivor, not for the purpose of distributing the money, but to fix the basis upon which the tax liability resulting from the receipt of or the right to receive the money may be determined.

Petitioners contend that these earnings should be divided equally between these parties, for the reason that a partnership, with division of the earnings thereof upon an equal basis, existed between them during this period. In support of this contention it is urged that the agreement of March 30, 1903, discloses an intention that the business should be continued as an equal partnership until a settlement of the interest of the deceased partner could be effected by one of the methods set forth therein; that respondent is bound by statements made in the reports of his revenue agents treating the business as a partnership during this period and stating that it terminated upon the operation of the agreement of April 23,1923; and that Hellman v. United States, 70 Ct. Cls. 498, is controlling of the case at bar and requires that the tax returns filed by Pomeroy reporting the business during this period upon the basis of an equal partnership must be accepted as correct.

With this contention we can not agree. The partnership between Dives and Pomeroy was terminated by Dives’ death. The contract of March 30, 1903, provided various methods by which a settlement of his interest in the partnership might be effected, but as to the division of earnings between the date of death and the date of settlement it was silent. While the agreement contained no express provision permitting the survivor to continue the business after the death of his partner, the implication was that the business should be continued until the deceased’s interest could be settled, since it was stated that one of the purposes of the contract was to obviate “ interruption to business.” But the fact that the operation was to be continued does not mean that the division of earnings should continue on the same basis as before. The agreement contains no provision entitling the estate of the decedent to a portion of the profits during the period from his death to the settlement of his interest. At the time the agreement was reached, the partners easily could have provided for the distribution of profits during this period, but they did not do so. We can not now write into the contract such a provision for them, nor can we, by inference, set up a partnership between the survivor and the estate of the deceased partner when the contract failed expressly so to do. As we read that agreement, it is purely a contract for the acquisition by the survivor of the interest of his deceased partner, giving a choice of terms, conditions and methods of acquisition, and we find therein nothing to show that the parties intended that earnings subsequent to the death of one partner should be divided upon an equal basis, as petitioners contend. Moreover, that contract was expressly nullified by the agreement of April 23,1923.

We attach no importance to petitioner’s argument that the statements made in the revenue agent’s report relative to the termination of the partnership are controlling of this case. The rule that the conclusions of law of the revenue agent are in nowise binding upon respondent or upon this Board is too well established to merit citation or further discussion.

Petitioners’ position is not sustained by the opinion of Hellmam v. United States, supra. In that case the Commissioner of Internal Revenue sought to change the amounts chargeable as distributable income to the various members of a partnership from that disclosed by the partnership books and the tax returns on the ground that, in the case of one partner, the amount so disclosed was in excess of the percentage to which that partner was entitled under the partnership agreement. The discrepancy not being explained by the evidence, the court held that his distributable share had been shown by the best evidence available and refused to deviate from the amounts reflected by the books and tax returns of the partnership. We have no such question in the case at bar.

There is no question but that the Dives estate had the right to some share of these earnings. It was entitled to an accounting, and a distribution of the partnership assets and earnings, and could have obtained the same in a court of equity had the parties been unable to agree upon a reasonable basis of division. But here the parties did agree upon such a division. We have no doubt that the court would be guided by an agreement between the parties and that, if the parties themselves were satisfied therewith, equity would be satisfied. We ask no better guide for ourselves in the solution of the problem before us. The contract of April 23, 1923, clearly provides, inter alia, (1) tbat Pomeroy is to be paid $40,000 as compensation for Ms services as liquidating trustee and for conducting tbe business from the date of Dives’ death to the date of settlement, and (2) that $176,250 is to be paid to the Dives estate “ in full settlement of any claim * * * for profits accrued on the partnership business from the date of the death of said Josiah Dives.” These items we regard as separate and distinct, believing that the language used indicates merely the method of payment and not that the former serves to reduce the amount of the latter. We see no reason for disturbing the division of profits which the parties themselves have made and carried out. Except for this $176,250, the profits accruing to the business during the period intervening between Dives’ death and the settlement under the contract remained in the business, which was taken over by the corporation, controlled by Pomeroy. The transfer to the Dives estate of the stock of the Chantrell Plardware & Tool Company, the real estate used by that company, and the indebtedness of that company to the partnership, was a partial payment of the purchase price of the Dives interest. We are not here concerned with the price paid for Dives’ interest in the business.

In accordance with our conclusions, the profits earned by the business during the periods September 20 to December 31, 1922, and January 1 to June 30, 1923, should be taxed to Pomeroy, except $176,250 thereof, which should be allocated to and deducted from the earnings during each of said periods in accordance with the ratio of earnings of said periods.

. Despondent, in his brief, urges that Pomeroy’s taxable income be increased in the amounts of $51,316.88 for the period September 20 to December 31, 1922, and $84,933.12 for the period January 1 to June 30, 1923, on the ground that these amounts are interest, determined under clause 8 of the contract of April 23, 1923, and represented, not Dives’ share of the profits of the business, but a part of the purchase price of the Dives interest therein, and are therefore not deductible from Pomeroy’s income, under the authority of Willard C. Hill et al., 14 B. T. A. 572. While we fully recognize the principle of that case, we think it is not here applicable. In the case at bar the computation of interest on the sum of $3,750,000 served merely as a method of determining the portion of accumulated earnings to be paid the Dives estate. The amount of $176,250 was not interest, nor a part of the purchase price of Dives’ share of the partnership assets, but it was that portion of the accumulated earnings to which the parties agreed the estate was entitled.

Petitioners point out that by the deficiency notice Pomeroy is twice taxed upon the item of $40,000 paid him as compensation for his services as liquidating trustee and as salary for conducting the business during the period intervening between Dives’ death and the settlement of his interest, since it is included in the profits of the business allocated to him and again included in his “ salaries, wages, etc.,” which are a part of his gross income. This error should be corrected.

Reviewed by the Board.

Judgment will be entered fursuant to Rule 50.

Murdock,

dissenting: The prevailing opinion holds that the Pomeroy estate is liable for tax on some income, but it does not disclose whether it holds that that income represents Pomeroy’s distributive share of the income of a partnership, or his share of the income of a joint venture. The opinion permits the amount of taxable income for each year to be fixed retroactively by an agreement of the parties. This agreement was not intended to settle the rights of the parties to income as of the end of each year in question, but was a complete adjustment of their rights in the business. In my judgment, Pomeroy’s tax liability for each year should be determined on the basis of and is fixed by his rights at the end of that year, and does not depend upon any subsequent agreement of the parties. The parties may give up certain rights under a subsequent agreement, but they can not retroactively change their tax liability.

Marquette, Smith, and SterNhageN agree with this dissent.

Matthews,

dissenting: The partners shared equally in the partnership profits, notwithstanding the fact that Dives’ interest in the business was greater than Pomeroy’s. In 1903, Dives’ interest was $522,046.94 and Pomeroy’s interest $444,552.99. At the death of Dives, his interest (net worth) in the business, as reflected on the books, was $2,697,499.47, while Pomeroy’s interest (net worth) was $2,176,511.07, a difference of more than $500,000. These figures are taken from the exhibits which were attached to the stipulation and made a part of the findings of fact by reference.

Dives’ interest passed to his estate on his death, and from that date until the settlement on June 30, 1923, the estate was entitled at least to the same proportion of profits of the business as Dives would have been entitled to had he lived, namely, one-half of the income arising from the business. The fact that the executors did not withdraw one-half of the profits or that one-half was not actually distributed to such executors, does not alter the situation. The earnings of the estate’s share were constructively received by the executors. Pomeroy had also constructively received his share, although we do not know whether he drew it out of the business or not. That Pom-eroy and the Dives estate were each entitled to one-half the profits in the business is evidenced by the fact that Pomeroy so treated the income in partnership returns filed for the periods involved between the death of Dives and the settlement of the estate. I do not think it necessary to determine the legal term to apply to the relation between Pomeroy and the Dives estate during the period subsequent to Dives’ death. Neither is it necessary to determine whether Pom-eroy was required to file a return of the income of the business on a partnership form or on a fiduciary form in order to determine the issue in this case, which is, how much of the earnings of the business subsequent to Dives’ death and prior to the transfer of the business to the corporation are taxable to Pomeroy. The earnings of the business during this period belonged to the.owners, Pomeroy and the Dives estate, and I think that a division of the earnings in the same proportion that they were distributed prior to the death of Dives is all that the executors of Dives could have demanded, notwithstanding the fact that Dives’ interest was greater than Pom-eroy’s. Pomeroy could certainly have demanded no more than one-half the earnings.

At the time of the settlement effected on July 2, 1923, the Dives estate had the right to a certain portion of the assets and also a claim for the profits earned on that interest subsequent to Dives’ death. The claim of the estate for the profits accrued on the estate’s interest was settled for $176,250, an amount of money equal to 6 per cent of $3,750,000 from the date of death of Dives to the date of settlement, and this amount of money was excluded from the assets of the partnership wliich both the Dives estate and Pomeroy joined in conveying to the corporation. I see nothing in the fact that the estate’s claim for its share of the profits earned between the date of death of Dives and the date of settlement was, under the circumstances, settled for a less amount than one-half the actual earnings of the period, to justify the conclusion that at the time the income accrued the Dives estate had no claim to more than the amount subsequently agreed upon in settlement. The very language used in the agreement of settlement justifies the inference that the Dives estate had a claim for more than the amount agreed upon in settlement of the claim — “ which said amount shall be paid to the executors in full settlement of any claim they may have for profits accrued on the partnership business from the date of death of Josiah Dives.”

In my opinion, therefore, Pomeroy should not be taxed on more than one-half the earnings of the business during the period involved.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Harris Trust and Savings Bank, Executor of the Estate of Alexander Friend, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33885.
    Promulgated October 27, 1931.

      Benjamin E. Jaffe, Esq., for the petitioner.

      P. M. Qlarh, Esq., and 0. 0. Holmes, Esq., for the respondent.
   OPINION.

Van Fossan:

The problem for solution in this proceeding is whether or not any part of the payments received by the decedent, Alexander Friend, from the Brunswick-Balke-Collender Company during the period between January 1, 1924, and September 2, 1926, constituted taxable income. To solve this problem we must determine what it was that Friend acquired by reason of his agreement with Shank and wife. Such a determination involves consideration of the contract by which in the year 1922 Shank and his wife agreed to convey to the Brunswick-Balke-Collender Company the premises described in the agreement between Shank and Friend.

By the contract with the Brunswick-Balke-Collender Company Shank and his wife covenanted to convey to the corporation the real property referred to if the corporation made the payments specified and performed the covenants on its part to be performed. The contract price was $345,000. The corporation paid $45,000 in cash and agreed to pay the balance of the purchase price, namely, $300,000, in 180 monthly payments. These monthly payments did not bear interest until after maturity and no notes were given for the unpaid balance of the purchase price. By the provisions of the contract immediate possession of the premises was vested in the purchasing coiporation, which agreed to pay all taxes and to keep the property, insured. A warranty deed conveying title in fee simple to the corporation was placed in escrow, by Shank, for delivery to the purchasing corporation upon its compliance with the terms of the agreement. The sellers, however, reserved the right to reenter and repossess the premises in the event that the purchaser defaulted in any of the covenants on its part to be performed. It was also provided that whenever 60 per cent of the purchase price had been paid the Brunswick-Balke-Collender Company should be entitled at its election, upon 30 days notice, to receive the warranty deed, provided it executed and delivered a purchase-money second mortgage for the amount of the unpaid balance of the purchase price. It was also stipulated that the contract and the premises described therein were subject to the terms and conditions of a certain deed of trust conveying the premises as security for an issue of bonds totaling $180,000, of which the sum of $142,000 was still unpaid at the date of the execution of the contract. Shank and wife, as sellers, agreed to pay the unpaid balance of the mortgage and it was further agreed that the monthly amounts to be paid by the purchasing corporation should be applied first to the payment of principal, interest and other charges due monthly under the terms of the trust deed referred to. The balance of these monthly payments, if any, were payable to Shank.

In our opinion the Brunswick-Balke-Collender contract was a completed contract of sale in 1922. Seletha O. Thompson, 9 B. T. A. 1342; Old Farmers Oil Co., 12 B. T. A. 203; Harry C. Moir, 14 B. T. A. 23; aff’d., 45 Fed. (2d) 356. After the execution of the contract, the making of the initial payment, the placing of the purchaser in possession and the delivery of the deed to the escrow agent, the sellers retained only the bare legal title to the premises described in the contract and the right to reenter and repossess them in the event of the default or defaults of the purchasing corporation. If the purchasing corporation fulfilled its covenants the deed would be delivered to it and the bare title to the land reserved by the sellers would be extinguished. This bare legal title and the right to reenter and repossess the premises constituted the security held by the sellers for the payment of the balance of the purchase price. Practically, therefore, the sellers were in the same situation as if they had actually conveyed the title to the premises to the purchasing corporation and had accepted a purchase-money second mortgage for the unpaid balance of the purchase price. As a matter of fact the contract provided that the sellers were to receive such a second mortgage if the purchasing corporation elected to exercise its option and demand the deed to the premises after 60 per cent of the purchase price was paid.

It follows from the foregoing that after the agreement between Shank and wife and Friend had been fully consummated, as set out in the findings of fact, Friend acquired under that agreement only what Shank and his wife had to sell, namely, the right to receive monthly payments as specified in the Brunswick-Balke-Col-lender contract, the unpaid total of which might be converted into a purchase-money second mortgage under specified conditions, together with the right as owner of the bare legal title to repossess the premises in the event of the default of the Brunswick-Balke-Collender Company. Friend, therefore, purchased something akin to a purchase-money second mortgage, the balance unpaid thereon at date of purchase being payable in 164 stipulated monthly amounts, without interest until after maturity. In the deficiency notice, copy of which is attached to the petition herein, respondent held that the transaction entered into by Friend with Shank and wife “ partakes of the nature of a deferred payment sale on the installment basis, and that profits should be reported yearly upon payments received.” The respondent thereupon stated in the deficiency notice that since “ the purchase price was $164,000 and since the amount to be received was $213,332.15 there was a profit of $109,332.15 to be reported over the period covered by the original sale agreement.” Such a computation of profit is based on the primary assumptions that the Brunswick-Balke-Collender Company would not default in any of the monthly payments to be made by it during a period of 164 months, or approximately 14 years, and that the total sum payable in monthly amounts without interest over a period of 14 years was worth its face at the time the Brunswick-Balke-Collender contract was purchased by Friend. We are of the opinion that these assumptions are not well founded and would not furnish a proper basis for computing profits in such a case as this. It is a matter of common knowledge that the financial character and solvency of any corporation may change in a few years, that real estate may depreciate in value and that obligations that are only a second lien on real estate rarely sell for their face value. Cf. Kosmerl v. Commissioner, 25 Fed. (2d) 87, affirming 4 B. T. A. 1151.

It appears from the evidence that contracts such as the Brunswick-Balke-Collender Company contract were bought and. sold in the Chicago real estate market just as second mortgages are bought in that same market, namely, at their fair market value. The testimony discloses that the realty which was the security for the payment of the monthly amounts to be paid to Friend was depreciating in value, that the building on the premises was not well constructed and was built for factory purposes only, and that the neighborhood of the premises was undesirable. A witness, who was admittedly qualified, testified that in the Chicago real estate market the customary and usual method of determining the fair market value of such a contract as the Brunswick-Balke-Collender contract was to discount the present worth of the deferred payments by at least 20 per cent. This percentage of discount was arrived at by consideration of the value of the land and buildings covered by the contract and the financial character of the person or corporation obligated to pay the deferred amounts. This witness also testified to the effect that at the date the right to receive the monthly payments was acquired by Friend their present -worth was $186,221.75. This testimony stands uncontra-dicted and undisputed in the record and no reason is shown why it should be disregarded by us. We have, therefore, found that the fair market value of the Brunswick-Balke-Collender contract, at the date of its acquisition by Friend, was $150,000. Since this amount is less than the cost of the contract to Friend, we are of the opinion that the cost should be recovered from the monthly payments before any taxable income will be derived. It therefore follows that during the period in question in this proceeding Alexander Friend was not required to report any taxable gain on the transaction herein considered until he had received payments in his own right in the aggregate sum of $151,384.64, the cost to him of his interest in the Brunswick-Balke-Collender contract. See Somers Lumber Co., 2 B. T. A. 106; D. M. Stevenson, 9 B. T. A. 552.

In accordance with the stipulation entered into between the parties, we find for the purpose of the recomputation of deficiencies in income tax that the adjusted net income of Alexander Friend for the year 1924 was $56,928.97; for the year 1925 his adjusted net income was $62,291.83; and for the period from January 1, 1926, to September 2, 1926, his adjusted net income was $45,587.86. The deficiencies should be recomputed accordingly.

Judgment will be entered under Rule 60.


author: Love:

text:
    Mrs. U. H. Butler, Petitioner, v. Commissioner of Internal Revenue, Respondent. George Cathey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Luke Cathey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. L. Clements, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Bess McCool, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. C. Russell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. C. C. Russell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. W. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46055-46062.
    Promulgated October 27, 1931.

      Walter E. Barton, Esq., and R. O. Winters, Esq., for the petitioners.

      P. M. Clark, Esq., for the respondent.
   OPINION.

Love:

The petitioners have abandoned the assignments of error numbered 5 and 7. Such of the remaining assignments as attack the constitutionality of section 280 of the Revenue Act of 1926, i. e., assignments numbered 2, 3, 4 and 8, are decided adversely to the petitioners on authority of Phillips v. Commissioner, 283 U. S. 589, affirming 42 Fed. (2d) 177, and 15 B. T. A. 1218; Baumgartner v. Commissioner, 51 Fed. (2d) 472; affirming 21 B. T. A. 623; Alexander v. Mid-Continent Petroleum Corp., 51 Fed. (2d) 735; and Coca-Cola Bottling Co. et al., 22 B. T. A. 686.

The sixth assignment alleges error in the respondent’s failure to exhaust available legal remedies against the taxpayer before proceeding against the transferees. It has been shown that after assessment two warrants of distraint were issued against the taxpayer and after conferences with the taxpayer were returned with notations that “ no property was found on which to levy.” It is apparent that under such circumstances further proceedings against Mrs. Cathey would have been futile and we have held in analagous cases that the respondent was not required to pursue them. B. F. Fairless, 19 B. T. A. 304; John Thomson, Jr., et al., 20 B. T. A. 1.

The first assignment of error is the only one remaining for consideration. It alleges that the respondent'erred in finding that the petitioner was liable in law or in equity as a transferee of property of Mrs. Cathey. Under the provisions of section 602 of the Revenue Act of 1928 the burden of proof is upon the respondent to show that the petitioners are liable as transferees. Since it is conceded that each of the petitioners is in fact a transferee of Mrs. Cathey, the only question presented is whether or not they are liable in law or in equity under the provisions of section 280. Each of the petitioners, except C. C. Bussell, received $5,000 in cash from Mrs. Cathey in 1924, and Mr. and Mrs. C. C. Bussell .acquired certain property from her in 1927. These are the transfers upon which respondent depends to support his determination of the petitioners’ liabilities. Since they involve two types of transfers, we will discuss them separately.

In 1924 Mrs. Cathey sold certain oil rights or royalties for $40,000 in cash. She immediately gave each of the seven petitioners herein, who are her children, i. e., each of the petitioners except C. C. Bus-sell, $5,000 in cash, as a gift. After making these gifts, totaling $35,000, Mrs. Cathey’s assets consisted of at least $5,000 in cash, surface rights to 520 acres of farm lands and a small homestead situated in Putnam, Tex. The homestead had an estimated value of $3,000 in 1927 and was then encumbered to the amount of $2,500. Evidence respecting the value of the surface rights .of the farm land has not been sufficient to warrant a finding of its value.. It does not appear whether or not this property was encumbered in 1924. Mrs. Cathey, according to respondent’s determination of her tax liability as indicated in the deficiency letters, had a total net income for the year 1924 in the amount of $45,923.13.

Bespondent contends that after making the gifts above mentioned Mrs. Cathey was insolvent, or so nearly insolvent as to render her donees liable to her creditors, or, more specifically, to charge the petitioners with her income-tax liability. Bespondent takes the position that because the value of the 520 acres of farm land has not been established we must regard it as valueless. This we are not willing to do. Such evidence as there is in the record, while not conclusive enough to warrant a finding of value, clearly indicates that the farm lands had a considerable value in 1924. The burden of establishing a transferee’s liability as such is on the respondent. Kinnett-Odom Co., 19 B. T. A. 1124. We do not believe it has been sustained in this instance.

The transfer of the farm lands to Mr. and Mrs. C. C. Bussell in 1927 remains to be discussed. Again we think the respondent has failed to- sustain his burden. The testimony is that Mrs. Cathey' transferred the farm lands to the Bussells in consideration of their agreement to assume her known debts and to support her for the remainder of her life. C. C. Bussell thereafter paid off a $2,500 note of Mrs. Cathey’s and he has contributed $600 to $750 a year to her support since 1927. The payment of the note and the contributions to Mrs. Cathey’s support certainly constitute valuable considerations for the transfer of the farm lands. When it is remembered that the value of the farm lands has not been established, the failure to sustain respondent’s burden becomes patent. We can not approve respondent’s assertion of a liability as a transferee upon such evidence as was offered in these proceedings.

Judgment will be entered for the 'petitioner.


text:
    Irving C. Ackerman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Simon Harris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30311, 31632, 31634, 40948, 40949.
    Promulgated October 28, 1931.

      A. L. Weil, Esq., and A. 8. Newburgh, Esq., for the petitioners.

      II. A. Cox, Esq., for the respondent.
   OPINION.

Van Fossan:

The first issue in these proceedings is whether a profit of $204,002 accrued to the petitioners, Ackerman and Harris as individuals, from an exchange of certain contractual interests on June 5, 1922, with Loew’s Incorporated for the stock of 15 corporations operating various theatrical enterprises, or, to state the question in the words of respondent’s brief:

Did the petitioners, who were partners, sell or surrender their rights under certain existing contracts to Loew’s Incorporated in 1922 at a profit of $204,002, thereby deriving taxable income, or did they- assign such rights to Ackerman & Harris, Inc., in exchange for its entire capital stock in a non-taxable transaction?

The evidence leads us to the conclusion that petitioners had assigned their rights under the contracts in question to Ackerman and Harris, Inc., prior to the execution of the subsequent contract of exchange dated June 5, 1922, which respondent contends gave rise to the profit in question. Moreover, at the time the contract of June 5, 1922, was prepared and presented to the petitioner, Acker-man, the president and secretary of Loew’s Incorporated were fully aware that the petitioners were no longer the real owners of the rights and interests which they agreed to convey and that they had sold and assigned all such right to Ackerman and Harris, Inc. Under the law of the State of California the assignment made by the petitioners on May 11, 1922, though made prior to the formation of the corporation, constituted, upon incorporation, a valid conveyance of such rights and interest. Scadden Flat Gold Mining Co. v. Scadden, 121 Cal. 33; 53 Pac. 440; Garretson v. Pacific Crude Oil Co., 146 Cal. 184; 79 Pac. 838.

Loew’s Incorporated insisted on the petitioners’ individual liabilty for carrying out the contract in order to be assured that certain vaudeville contracts would be fulfilled and for the further reason that they well knew their individual responsibility.

The evidence discloses, however, that all transactions pursuant to the June 5,1922, contract were carried on with Ackerman and Harris, Inc. The stock certificates of the 15 corporations were transferred directly to that corporation. After that date the petitioners in no instance acted in their individual capacity in the management or operation of the various theatrical enterprises in which they were interested. Their withdrawal as individuals was further recognized and assured by the cancellation of their contract with the Marcus Loew Booking Agency, a subsidiary of Loew’s Incorporated. The practical effect of and intention behind the contract were to make petitioners guarantors of its performance.

Therefore, regardless of what may have been the legal effect or consequences among the parties of the action of Ackerman and Harris in signing the contract of June 5, 1922, individually and agreeing to convey something they did not own, the fact is the petitioners never received the stock which respondent held represented income to them, nor was it received by the corporation on petitioners’ behalf. It was transferred directly by Loew’s Incorporated to Ackerman and Harris, Inc. — was held by the corporation, and on later sale of the larger part of it the corporation received the proceeds and accounted for the gain. The individual taxpayers here petitioning, whose returns were made on a cash basis, received nothing in 1922 which gave rise to profit.

With reference to the second issue, relating solely to Ackerman, the evidence is convincing that the petitioner established the Hum-berstone Dog Kennels as a business enterprise and so operated them during the years under consideration. The sole issue presented at the hearing is whether or not the petitioner was engaged in the transaction as a business or a hobby. The deductions should be allowed. George D. Widener, 8 B. T. A. 651; Margaret E. Amory, 22 B. T. A. 1398.

Judgment will be entered under Bule SO.


author: Black:

text:
    Glendinning, McLeish & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 29819, 37426, 44354.
    Promulgated October 28, 1931.

      William E. Bussell, Esq., and Joseph E. Miller, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

Black:

Tbe sole issue in these cases is the respondent’s disallowance as a deduction from petitioner’s gross income of the payments made by the petitioner to the Belfast Company, as set forth in the stipulation of facts. It is contended by the petitioner that these payments were ordinary and necessary expenses paid or incurred during the taxable years in carrying on business and deductible as such and that petitioner was obligated to make such yearly payments under paragraph 6(a) of the contract set out in the findings of fact, as a sort of royalty to the Belfast Company for its good will and the use of its name and other benefits which it received from the Belfast Company, both under the contract and in subsequent dealings with the company. On the other hand, it is contended by the respondent that such payments were not business expenses, but were dividend payments or else payments made as a part of the required purchase price of the property and were not required under paragraph 6(a) of the contract, except for'one year after the date of the contract. Respondent further claims that petitioner was entitled to reimbursement of these payments by reason of the last four lines of paragraph 6 of the contract, which reads thus: “We agree further that we will procure from Glendinning, McLeish & Company, Limited, its agreement to reimburse you for any expenditures which you may make, pursuant to this clause of this agreement, on its behalf, or on behalf of its shareholders.”

Respondent urges that by reason of this alleged right to reimbursement, the payments are not allowable as deductions, even if otherwise they would meet the test of deductible expenditures. Petitioner, on the other hand, contends that this clause of the agreement relates only to subparagraph 6(b) and has nothing to do with 6(a) and that petitioner has never had any agreement to be reimbursed for payments made by it under subparagraph 6(a) to the Belfast Company in making good its guaranty of the payment of dividends on the Belfast Company’s preferred stock. ■

We will first consider this phase of the controversy before passing upon the other contentions made with reference to these payments. It is well settled by the decisions of this Board that, where the taxpayer makes expenditures under an agreement that he will be reimbursed therefor, such expenditures are in the nature of loans or advancements and are not deductible as business expenses. George M. Cohan, 11 B. T. A. 743; affirmed on this point, 39 Fed. (2d) 540; H. R. MacMillan, 14 B. T. A. 1367; Henry F. Cochrane, 23 B. T. A. 202.

An examination of paragraph 6 of the contract will disclose that petitioner obligated itself to do two things: In (a) it obligated itself to make good any deficiency in the dividends on the preferred stock of the Belfast Company, and in (b) it agreed to make good up to 100,000 pounds any deficiency in the payment of the par value of the preferred stock, if and when the Belfast Company was liquidated. It seems to us that the two concluding subparagraphs of paragraph 6 of the contract have reference to both (a) and (b) of that paragraph rather than to (b) only, as contended by petitioner. It is true that it is stipulated by the parties that the payments involved in this proceeding were made under paragraph 6(a) of the contract of February 11, 1918, and that no part of these payments has been reimbursed to the taxpayer company. These facts, however, do not remove from the case the evidence which we have before us — that petitioner has a contract under which it is entitled to be repaid these payments.

The stipulation shows that such contract is still in force and effect. In referring to the agreement of February 11, 1918, the stipulation says: “ This agreement has ever since remained in effect.” Petitioner argues, first, that the contract does not call for reimbursement of payments made under 6(a) of the contract, but even if it does, such provision of the contract has been abrogated by the course of dealing between the parties. We have no evidence that this clause of the contract has been abrogated by agreement between the parties and we have no authority to surmise that such was the case.

The determination of the deficiencies made by respondent is presumed to be correct and the burden of proof of showing to the contrary is on petitioner. Botany Worsted Mills v. United States, 278 U. S. 282; Wickwire v. Reinecke, 275 U. S. 101; Avery v. Commissioner, 22 Fed. (2d) 6. We hold that the contract under which such payments were made gives petitioner the right to be reimbursed for such expenditures, and that on that account they are not deductible. Our holding in this respect makes it unnecessary for us to decide whether such payments would, under ordinary conditions, have been allowable deductions under authority of La Monte & Son v. Commissioner, 32 Fed. (2d) 220 (a case which petitioner strongly urges in support of its contention that the deductions should be allowed).

Iieviewed by the Board.

Decision will he entered for the respondent.


text:
    Wayne Body Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85896.
    Promulgated October 28, 1931.

      George E. 21. Goodner, Esq., for the petitioner.

      J. E. Mather, Esq., and J. A. Lyons, Esq., for the respondent.
   OPINION.

Black:

Findings of fact and opinion were promulgated in this proceeding Februarjr 27, 1931, and therein it was found that petitioner had received from the transferor corporation property of a greater net value than the amount of the taxes involved in the proceeding and in the opinion it was found that petitioner was a transferee of the transferor corporation which owed the tax and was liable for the taxes due by said transferor corporation for the year 1917. The opinion directed that decision should be entered under Rule 50 of the Board’s rules of practice.

On April 21, 1931, petitioner filed a proposed settlement under Rule 50, in which computation it was determined that the amount of the deficiency owed by the transferor corporation (American Auto Trimming Company) for the year 1917 was $14,955.65, and that the liability of petitioner as transferee was for the same amount. This proposed settlement under Rule 50 was set down for hearing May 13, 1931, at which time counsel for respondent gave notice that he had no objection to the computation filed by petitioner. Whereupon, May 15, 1931, the Board entered decision that the liability of petitioner as the transferee of the American Auto Trimming Company of Detroit, Mich., was $14,955.65. No mention was made of interest. Thereafter, on May 22, 1931, respondent filed motion to amend the order of final determination made by the Board May 15, 1931, so that the liability of petitioner as transferee would be determined to be $14,955.85 plus interest from February 26, 1926.

Respondent’s said motion was set down for argument June 10, 1931, and on said date counsel for respondent and counsel for petitioner appeared and presented their arguments and submitted authorities in support of their respective contentions. The deficiency notice addressed to petitioner December 29, 1927, reads in part as follows:

As provided in Section 280 of the Revenue Act of 1026, there is proposed for assessment against you, the amount of $66,332.05 constituting your liability as a transferee of the assets of the American Auto Trimming Company (whose name was subsequently changed to the Gotfredson Corporation) of Detroit, Michigan, for income and profits taxes in the amount of $66,332.05 due from the American Auto Trimming Company for the years 1917, 1920 and 1924 as shown in the attached statement.

Then on the statement attached to the deficiency notice, after giving the amounts of the respective deficiencies claimed against the American Auto Trimming Company for 1917,1920, and 1924, the statement concludes:

Section 280 of the Revenue Act of 1926 provides for the assessment, collection and payment of the liability at law or in equity, of a transferee of property of a taxpayer in respect of the tax (including interest, additional amounts and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess profits or war profits tax Act.
The records of this office indicate that the American Auto Trimming Company was dissolved on or about August 1925 and the assets finally transferred to you.

The amended answer filed by respondent at the hearing, December 3,1929, contains the following paragraph:

Further answering said petition, respondent alleges that on or about December 31, 1924, the petitioner caused to be transferred to it all of the property and assets of the American Auto Trimming Company of Detroit, Michigan, without paying any consideration therefor which said assets were of a net value in excess of the taxes involved in this proceeding with interest allowed hy law. [Italics supplied.]

The motion of respondent and the argument of counsel thereon raise two questions: (1) Does the Board have any power or jurisdiction to make any. order relative to interest in these transferee proceedings? (2) If question (1) be answered in the affirmative, was the deficiency notice sent out by respondent to petitioner, coupled with the affirmative allegations made by respondent in his amended answer, sufficient pleadings upon which the Board may determine that petitioner is liable for interest ? We think both questions must be answered in the affirmative. In Henry Cappellini, 16 B. T. A. 802, we said:

While the courts seem to hold divergent views as to when interest begins to run against stockholders who are liable to creditors of a corporation, we are impressed with the decision in United States v. Snook, 24 Fed. (2d) 844, as being a fair and equitable rule to be applied in transferee cases. That decision, where the tax liability was greatly in excess of the amount received by the transferees in distribution, holds the transferees liable to the full extent of the amounts received by them with interest from “ the fair average date of receiving” the sums distributed. Cf. McWilliams v. Excelsior Coal Co., 298 Fed. 844. That method of computation represents the maximum liability of the transferees and applies where the tax and interest imposed on the corporate transferor is greater than the amount received in distribution, plus interest from that date. Where the tax and interest thereon is less than the amount distributed to any one transferee, then the liability of such transferee would be limited to the amount of tax and interest thereon.
Accordingly, it is held in these cases that the amount the respondent may assess in each case is the amount of taxes owing by the Masontown Coal Co., plus interest at the rate of 6 per cent per annum from February 26, 1926; provided, however, that the liability of any one of the petitioners shall not exceed the amount received by him in distribution, plus interest at 6 per cent per annum (the legal rate in Pennsylvania) from the date of distribution. In other words, the maximum amo'unt assessable against any one of the petitioners is the lower amount of either (1) the tax plus interest from February 26,1926, to date of assessment, or (2) the amount received in distribution, plus interest from the date thereof, viz., August 15, 1920, to date of assessment. In these eases, the amount of tax being less than the amount received in distribution, and February 26,1926, being a later date than that of the distribution, the amount assessable is $4,268.39, plus interest from February 26, 1926. An order will be entered accordingly in each of the proceedings.

This decision was followed in Louis Costanzo, 16 B. T. A. 1294; Kathleen O'Brien, 20 B. T. A. 167; Coca Cola Bottling Co., 22 B. T. A. 686.

Section 283 (d), Revenue Act of 1926, is as follows:

In the case of any assessment made after the enactment of this Act in respect of a tax imposed by any Act of Congress prior to November 23, 1921, interest upon the tax proposed to be assessed shall be assessed at the same time as such tax, shall be paid upon notice and demand from the collector, and shall be collected as part of such tax, at the rate of 6 per centum per annum, from the date of the enactment of this Act to the date such tax is assessed, or, in the case of a waiver under subdivision (d) of section 274, to the thirtieth day after the filing of such waiver or to the date the deficiency is assessed whichever'is the earlier.

It should be observed that this section makes the interest provided for a part of the tas and requires that it shall be so collected.

Section 280 provides:

Seo. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including tlie provisions in case of delinquency in payment after notice and demand. The provisions authorizing distraint and proceedings in court for collection and the provisions prohibiting claims and suits for refunds) :
(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

This section includes interest as part of the liability for which the transferee may be held to be liable and it would seem that, in fixing the amount of the liability in any given case, the Board must of necessity consider interest, as provided by law.

In Coca Cola Bottling Co., 22 B. T. A. 686, p. 702, the Board held that a penalty was an addition to the tax and that under section 280 (a) (1) the transferee was liable therefor. The Board there said:

The one unique attack upon the constitutionality of section 280 relates only to the 1925 period and is pleaded in each case as follows:
The determination of the tax contained in the said deficiency letter aforesaid is based upon the following errors, to wit:
*******
(4) That, should this Honorable Board hold that the said section of the said Revenue Act is constitutional and that the said Commissioner did not err in relying upon said section, then petitioner alleges that, although said section 280 of the Revenue Act of 1926 may authorize the imposition and assessment of tax (due by a transferor) directly against the transferee of its assets, said section of the Act does not and can not authorize the imposition and assessment of a penalty for delinquency in filing a return; and that if said section did or does authorize the assessment of a penalty against a transferee, that then, and in that case, the said section of said act is unconstitutional, null and void.
Section 280 (a) (1) of the Revenue Act of 1926 specifically authorizes the inclusion of “ interest, additional amounts, and additions to the tax ” in the amount which may be assessed against and collected from a transferee. A penalty is an addition to the tax. Gutterman Strauss Co., 1 B. T. A. 243. Section 3176, Revised Statutes as amended by section 1003, Revenue Act of 1924. A contention respecting the constitutionality of section 280 so far as it authorizes the assertion of a liability of. a transferee for penalties imposed upon his transferor, might therefore, be disposed of upon authority of CappelUm, supra, since such a contention is an attack upon a substantive provision of the said section 280. * * *

It seems equally clear that interest is likewise included with the tax as a liability for which the transferee may be held to be liable. But counsel for petitioner urges that the deficiency notice mailed to petitioner, coupled with the affirmative allegations made in respondent’s amended answer, were not sufficient to put petitioner on notice that claim was being made against it for interest and that if it was the purpose of respondent to seek to hold petitioner liable for interest on the $14,955.65 from February 26, 1926, respondent should have asked at the hearing that the deficiency be increased so as to include interest. Petitioner cites in support of his contention, section 274 (e) of the Revenue Act of 1926, which reads:

The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any • penalty, additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing. [Italics supplied.]

We think the statements of respondent in the deficiency notice mailed to petitioner, from which the appeal was taken, coupled with the affirmative allegations contained in respondent’s amended answer filed December 3, 1929, were sufficient notice to petitioner that respondent was claiming against petitioner liability for the taxes due by the transferor corporation and interest thereon as provided by law.

This interest we hold dates from February 26, 1926, because it is so provided by section 283 (d) of the Revenue Act of 1926, and petitioner having received assets as a transferee of a greater value than the tax plus interest from February 26,1926, it is liable therefor.

Complying with the views herein expressed, an order will be entered granting respondent’s said motion and our order of final determination, dated May 15, 1931, will be modified so as to include interest on $14,955.65 from February 26, 1926, at the rate of 6 per cent per annum.

Reviewed by the Board.


author: McMahon:

text:
    Darwin D. Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44776, 50946.
    Promulgated October 29, 1931.

      Frarilc J. McGuire, Esq., and William H. Watson, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

McMahon:

The parties are in agreement that the petitioner sustained a loss in the amount of $263,328 as a result of the sale by him in 1925 of his stock in the Larkin Company, Inc., of Buffalo, N. -Y., for $1,610,000. The only question presented for decision is when petitioner may deduct the loss.

The applicable statutes are sections 214 (a) (5), 202 (a) (c) (d) (e), 203 (a), 204 (b) and 212 (d) of the Revenue Act of 1926.

The respondent has held that the entire loss was sustained by the petitioner in 1925. The petitioner contends that under the provisions of section 212, supra, he is entitled to take a proportionate part of the loss during each of the years of the period over which the notes were paid. It is the position of the respondent that section 212 (d) refers only to the return of income upon transactions in which gain is derived. Petitioner contends that section 212 (d) is not limited to such cases, but that the term “ income ” as used therein comprehends likewise a “ minus ” item or a “ negative quantity ” as well as a “ positive quantity ” or “ plus ” item. To support such contention, petitioner argues that in the ordinary case where a taxpayer’s deductions exceed his gross income, the return which petitioner is required to make of such resulting negative quantity is nevertheless a return of “ income,” just as a return of a resulting-positive figure would be a return of income.

Whether or not the argument of the petitioner as to the ordinary case is correct, it is our opinion that it is not determinative of the question here presented. Section 212 (d) of the Revenue Act of 1926 makes no reference to a return of losses upon the installment basis. Furthermore, other sections of the Revenue Act of 1926, which we have set forth above, do embrace such a situation as is herein presented and provide for the deduction of such a loss in the year in which 4;he' transaction occurred. As stated in Botany Worsted Mills v. United States, 278 U. S. 282, “When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. Raleigh, etc. R. R. Co. v. Reid, 13 Wall. 269, 270; Scott v. Ford, 52 Ore. 288, 296.”

The Supreme Court has also stated in Gardner v. Collins, 2 Pet. 58, 92, “ What the legislative intention was, can be derived only from the words they have used; and we can not speculate beyond the reasonable import of these words.”

The same question was presented for consideration in George P. Sacks, 23 B. T. A. 307, wherein we stated:

The stipulated facts leave, if doubtful whether the transaction was in any event within section 212 (d). But aside from that, there is no reason to read the statute as applying the installment method to such a loss. As to ai regular installment dealer, the installment method is expressly applied to profits. As to casual transactions, the word “ income ” is used. Both, in our opinion, exclude the spreading of a loss. This has been the Commissioner’s ruling since before 1925. I. T. 2063, C. B. III-2, p. 108. The statute imports the Commissioner’s regulations as to installment sales, and these do not provide for spreading such a loss.

We bold that tbe petitioner is not entitled to any deductions in tbe years 1926 and 1921 on account of tbe loss sustained upon tbe sale of tbe stock in question.

Keviewed by the Board.

Judgment will be entered for the respondent.


author: McMahon: TRAmmell,

text:
    Harry A. Daugherty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41905.
    Promulgated October 29, 1931.

      Jay G. Halls, Esq., and E. H. MoDermott, Esq., for tbe petitioner.

      F. B. Shearer, Esq., for the respondent.
   OPINION.

McMahon:

The question presented is whether the respondent erred in including in petitioner’s taxable income for the year 1926 the amount of $47,180.28, which was paid to petitioner’s wife as a result of petitioner’s unqualified assignment to her of an undivided one-half interest in the contract of November 5,1923, with Estelle G. Howland.

Despondent takes the position that the income in question constitutes compensation paid by or on behalf of Mrs. Howland to petitioner for his personal services as attorney, and contends that such income was first taxable income to petitioner, citing Lucas v. Earl, 281 U. S. 111.

After carefully considering the evidence in the instant proceeding, we are of the opinion that the income in question amounted to compensation paid to the petitioner for personal services rendered to Mrs. Howland. It is true that petitioner regarded his a nominal representation and there was an understanding, among all the parties concerned in the suit, that petitioner should not be required to render further services with regard to the prosecution of the suit after the contract was entered into. Petitioner did not in fact render services after such time, but the evidence discloses that prior to the time the contract was entered into petitioner had rendered some professional services. At the time of the agreement petitioner still represented Mrs. Howland as attorney. At the suggestion of Campbell to petitioner that Mrs. Howland was entitled to a substantial interest in the trust estate, petitioner conferred with her, and brought Campbell and Fischer into the contemplated litigation in her behalf. It is reasonable to infer that he gave her some advice upon the subject. He was present at the conference when it was decided to proceed with the litigation. Under the agreement in question Mrs. Howland agreed that the attorneys, including petitioner, should receive an amount equal to 40 per cent of any money or property she might be awarded as full compensation for services. The case, then, falls within the principle laid down in Lucas v. Earl, supra, wherein it was held that under the Eevenue Acts of 1918 and 1921 income derived from salaries, wages or compensation for personal services is taxable to the person earning the same, even though there was a preexisting arrangement between such person and his wife to the effect that all such income should be treated as owned by them as joint tenants. The Eevenue Act of 1926, with which we are here concerned, is not different in this regard from the Eevenue Acts of Í 918 and 1921. See sections 210, 211, 212(a) and 213 (a) of the Eevenue Act of 1926. To the same effect, in principle, are Edward J. Luce, 18 B. T. A. 923, and John Leo Stack, 22 B. T. A. 707.

The petitioner cited Copland v. Commissioner, 41 Fed. (2d) 501; Eugene Seigel, Executor, 20 B. T. A. 563; Rosenwald v. Commissioner, 33 Fed. (2d) 423; and Shellaberger v. Commissioner, 38 Fed. (2d) 566. However, those cases are clearly distinguishable from the instant proceeding, since they did not deal with the assignment of income derived from salaries, wages, or compensation for personal services.

We hold that the respondent did not err in including the amount in question in petitioner’s taxable income.

Eeviewed by the Board.

Judgment will be entered for the respondent.

TRAmmell,

dissenting: In my opinion, the res which gave rise to the income was assigned, not the income from the contract. This distinguishes this case from the principle of the Earl case.

Smith agrees with this dissent.


text:
    Palm Beach Mather Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43850.
    Promulgated October 29, 1931.

      James J. O'1 Byrne, Esq., for the petitioner.

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

McMahon:

Petitioner alleges three errors and these will be disposed of in the order stated.

1. With respect to the first assignment of error, relating to the addition to nét income for the taxable period of $13,887.86, representing collections received during taxable period on sales made prior thereto, petitioner contends that, having changed its method of reporting taxable income from the accrual to the installment basis, collections in the taxable period on account of sales made in prior periods should be excluded from gross income of the taxable period for the reasons (a) that petitioner, having reported in prior taxable periods entire profit from sales effected during such periods and paid taxés thereon, the inclusion in the gross income of any portion of such collections in the taxable period involved would result in double taxation, and (b) that such collections in the taxable period reported as income in prior years are but a return of capital and consequently not taxable.

(a) With respect to the effect of change of method of accounting, we desire to emphasize by repeáting what was said in Blum's, Inc., 7 B. T. A. 737:

* * * -while the fact that the entire profits from the sales represented by those accounts were included in gross income for 1917, in accordance with the method then employed for returning income, presents a situation with a strong appeal, we can not overlook the fact that income taxes we levied, upon the gains and profits of annual periods, mid that each annual period must necessarily, under the provisions of the taxing statutes, stand by itself. Appeal of Atkins Lumber Co., 1 B. T. A. 317. Any situation which arises, in arvy taxable year, whether it involve the inclusion of a gain or profit in gross income, or the deductibility of an item of expense or loss, must be considered in relation to the method employed in returning income for that year. The fact that certain accounts receivable of a prior year have been included in the income of that year does not determine the treatment to be accorded them in a subsequent year, after a change in the method of returning income, when they are ascertained to be worthless and uncollectible. The deduction which a taxpayer is entitled to make from the income of any taxable year, on account of debts ascertained to be worthless and charged off within that year, depends entirely upon the method employed in returning income for that year. The rule is that all items of income and 'expenses and losses must be consistently accounted for on the same basis. Appeal of Henry Reubel, 1 B. T. A. 676; United States v. Mitchell, 271 U. S. 9; Appeal of Owen-Ames-Kimball Co., 5 B. T. A. 921. * * * [Italics supplied.]

To same effect are Warren Reilly, 7 B. T. A. 1327; Mayer & Co., 9 B. T. A. 815; J. B. Bradford, Piano Co., 15 B. T. A. 1045; and C. Niss & Sons, Inc., 22 B. T. A. 732.

In Blum's, Inc., supra, the question of double taxation was not raised, but in the case of Mayer & Co., supra, this question was raised and it was there said:

Petitioner’s last contention is that it should not be required to report, in the year received, installment payments on goods sold in previous years where the income from such sales has been returned for taxation. The principal ground for this contention is that it results in double taxation. Double taxation is not to be presumed, but if the taxing statute is clear, it is not invalid. Cf. Ernest M. Bull, Executor v. Commissioner, 7 B. T. A. 993. Here the express words of section 212(d) require that all installments received in the taxable year shall be returned. * * *

To constitute such double taxation the second tax must be imposed upon the same property, by the same state or government, during the same taxing period (37 Cyc. 754). In the instant proceeding the tax will be imposed in different taxing periods.

Petitioner relies on the case of United States v. Supplee-Biddle Hardware Co., 265 U. S. 189, but the question involved in that case was whether proceeds from life insurance policies on the life of one of its officers paid to a corporation in the death of such officer was income to the corporation and taxable as such. This case is distinguishable from the instant proceeding.

Furthermore, we have held in Ernest M. Bull, Executor, 7 B. T. A. 993; George D. Widener et al., 8 B. T. A. 651; and Ella C. Loose, Executrix, 15 B. T. A. 169, that estate tax and income tax are different in kind and incident; are not mutually exclusive because imposed in respect of the same matter; and therefore such double tax is not invalid.

Petitioner in its brief relies upon and quotes at length from the opinion in the case of National Bank of South Carolina v. Lucas, 36 Fed. (2d) 1013, wherein the Court of Appeals of the District of Columbia reversed National Bank of South Carolina, 10 B. T. A. 642. In that case the court held that the provisions of sections 212 (b) and 213 reposed in the Commissioner sufficient discretionary power to allow as a credit or a deduction from gross income on the return of one year, amounts therein included which .had been returned and taxed in a prior year. Section 212 (b) provides that if the method of accounting employed by the taxpayer does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does'clearly reflect the income, and section 213 provides that all items of income enumerated therein shall be included in the gross, income for the taxable year in which received by the taxpayer, unless, under permitted methods of accounting, any such amounts are to. be properly accounted for as of a different period.

With all due respect to the court, we can not subscribe to the view that these provisions repose any such discretion in the Commissioner. However, even if the language of those sections could be construed to repose such discretion in the Commissioner, in our opinion, such discretion, if any, is limited by the provisions of the revenue acts expressly setting forth the deductions and credits which may be allowed.

Furthermore, in this proceeding, we are governed by section 212 (d), which expressly provides as follows:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. * * * [Italics supplied.]

This same question was before the Board in Mayer & Co., supra, and since that case involved the same question and the same section of the revenue act, it is controlling in this proceeding. See Jacob Brothers Co. v. Commissioner, 50 Fed. (2d) 395.

(b) With respect to the first assignment of error petitioner further contends that collections in the taxable period covering sales made in prior periods and previously reported as income are not income in the taxable period, but represent in fact a return of capital and therefore are not taxable; that under an accrual basis of accounting, accounts remaining unpaid become accounts receivable, which is an asset account; and that collections on account of accounts receivable in subsequent periods are return of capital to the extent of the value of the accounts receivable at the time they were acquired, citing Ruth Iron Co., 4 B. T. A. 1151, in support thereof.

As before stated, gross income is determined according to the method of accounting employed in the taxable period and not according to the method of accounting employed in previous periods. The statute expressly provides the method for computing income . for sales on the installment plan, being a certain proportion of the “ installment payments actually received ” in the taxable period. The Board has consistently held that, upon a change from the accrual to the installment basis of accounting, collections in the taxable year on account of accounts receivable representing sales in prior years are income in the taxable year.

The relief provisions of section 705 of the Revenue Act of 1928 are not applicable to the instant proceeding.

It is true that accounts receivable on an accrual basis increase assets and surplus by the amount of profits included in the accounts receivable, but on the cash basis and installment basis of accounting profits are earned only wben the accounts receivable are collected, and therefore on those bases of accounting accounts receivable are not considered asset accounts. See Great Bear Spring Co., 12 B. T. A. 383.

The Ruth Iron Co. case, supra, is not in point as the notes in question were capital on March 1, 1913, the notes representing part of the purchase price paid prior to March 1,1931, for capital assets. A change in the method of accounting would not affect the character of the items. The transaction constituted an exchange of capital.

The determination of the respondent in this respect .is therefore approved.

2. The second assignment of error, relating to the correctness of the percentage of profit to be applied to collections on the installment sales basis received during the taxable period, was waived by counsel at the hearing, it being conceded by counsel for the petitioner that .24919 was the correct percentage to be applied. The determination of the respondent in this respect is therefore approved.

3. With respect to the third assignment of error, relating to the refusal of respondent to eliminate from net income upon petitioner’s demand, the sum of $12,487.14, being the balance in an account designated reserve for bad debts, petitioner contends that the balance in the account, reserve for bad debts, is not income in the taxable period merely because in that period petitioner changed its accounting from an accrual basis to the installment basis. Petitioner claims it erred in reporting such balance as income for the taxable period and therefore this item should be eliminated.

In changing from the accrual basis of accounting to the installment sales basis, petitioner had to make certain adjustments in its books of account, and in making these adjustments an erroneous entry of any item to income, or a mere adjustment of accounts to effect the change from one method to the other, does not create income if in fact it was not income in the taxable period.

The Board held in the case of Fibre Yarn Co., 10 B. T. A. 479, that a reserve, set up for a future loss in 1919, written off the books in 1922, and credited to surplus account, was not income in 1922; and that the bookkeeping entry made in 1922 did no more than restore to surplus a portion thereof previously set aside for a special purpose. In Blum’s, Inc., supra, it is stated that:

The deduction which a taxpayer is entitled to make from income of any taxable year on account of debts ascertained to be worthless and charged off within that year, depends entirely upon the method employed in returning income for that year. The rule is that all items of income and expenses and losses must he consistently accounted, for on the same basis. [Italics supplied.]

As to income the installment basis of accounting is the same as the cash basis, i. e., actual receipts only are income. The reserve for bad debts consisted, not of accounts actually written off on the books of account, but amounts credited to that account and charged to profit and loss. The accounts receivable .account was not affected by these entries. As the accounts receivable of petitioner are collected from time to time the amounts actually received will be income, under the installment plan, in the year actually received, as heretofore stated.

The determination of the respondent in refusing to eliminate the balance of the reserve for bad debts in the amount of $12,487.14 from income in the taxable year is therefore not approved.

Judgment will be entered wider Rule 60.


author: Teammell:

text:
    W. B. Harbeson Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33076, 51012.
    Promulgated October 30, 1931.

      E, Barrett Prettyman, Esq., for the petitioner.

      Arthur Garnduff, Esq., for the respondent.
   OPINION.

Teammell:

Numerous issues were raised by the petitioner in its pleadings respecting deductions claimed by it from income for the taxable years and disallowed by the respondent. At the hearing petitioner conceded the correctness of the respondent’s action as to certain of the said deductions, thus abandoning in effect its contentions to that extent. It results from' these concessions of the petitioner that the respondent’s determinations on those points now stand unchallenged, and further detailed reference thereto is unnecessary here.

Also, at the hearing respondent conceded that the petitioner is entitled to certain claimed deductions in addition to those theretofore allowed. These additional deductions now conceded by the respondent are set out in our findings of fact hereinabove, and will be given effect in redetermining the deficiency.

The issues remaining for consideration may be briefly stated as follows: (1) Disallowance by the respondent of a deduction in 1923 of $250 claimed on account of alleged loss on the Camp Walton News; (2) disallowance by the respondent of a deduction claimed from income for 19-21 on account of the cost of two Ford automobiles in the amount of $1,060.50; (3) disallowance by the respondent of a claimed deduction from income ■ for 1921 on account of repairs to track scales in the amount of $820.96; (4) disallowance by the respondent of a deduction from 1926 income claimed as an advertising expense paid through a chamber of commerce; (5) disallowance by the respondent of a deduction from 1926 income of the amount of $801.69 expended in-said year by the petitioner for the personal comforts of an officer' of the company in connection with his residence; (6) disallowance by the respondent of deductions in 1927 on account .of two alleged bad debts in the total amount of $4,881.05; and (7) the correct allowance for depreciation and depletion in each of the taxable years. These issues will be discussed in the order above set out.

, Issue (7). The petitioner made no reference to this issue in its brief, nor offered any evidence thereon at the hearing. For lack of proof to show error, the action of the respondent is, therefore, approved.

Issue (¾). The petitioner claimed a deduction from income for 1921 in the amount of $1,060.50 representing the cost of two Ford automobiles. The evidence shows that one of the automobiles was used by the petitioner’s land man who looked after all of its logs, and the other was used by the logging superintendent in the woods. It is further shown that these automobiles were completely worn out and junked in approximately six months from the date of purchase. Respondent disallowed the claimed deduction on the ground that these automobiles were capital expenditures.

' Capital expenditures ordinarily result in the acquisition of assets having periods of useful life in excess of one year, and in such cases the cost is returnable through deductions for depreciation spread over such periods, as the assets are worn out or consumed in the process of earning income. Where the period of useful life is one year or less, that is, where the asset is worn out and discarded within one year of its purchase, the entire cost is deductible from the income of that year, whether the expenditure be designated as expense or capital. We think the amount here in question constituted an allowable deduction from the petitioner’s income for 1921. On this issue the respondent’s action is reversed.

Issue (3). The petitioner also claimed, and respondent disallowed on the same ground as assigned in the preceding issue, a deduction from its 1921 income in the amount- of $820.96 representing cost of repairs to its track scales. These scales were a part of one of the petitioner’s sawmill plants at the time acquired by the petitioner, and were subject -to inspection of the railroad company, which required that the scales be properly maintained in order for the petitioner’s weights to be accepted. It is shown that these scales were not rebuilt in 1921, but were merely repaired. . We think the evidence establishes that the expenditure in question represents maintenance expense, and is an allowable deduction. The respondent’s action on this issue is reversed.

Issue (4). The petitioner claimed a deduction of $750 for alleged advertising expense, from its income for 1926, which deduction was disallowed by the respondent with the following explanatory statement.

Advertising $750.00. Chamber of Commerce advertising fund. Amounts expended for advertising other than trade advertising are not deductible from income.

The petitioner offered no evidence on this issue, but stated its position thereon at the hearing as follows:

The petitioner concedes the fact stated in the sixty-day letter in regard to that item that this was the Chamber of Commerce Advertising Fund but claims that the adjustment is erroneous upon the face of the sixty-day letter and it is unnecessary for us to submit any proof or any argument in regard to it, resting our contention on that item on the face of the sixty-day letter.

The petitioner in its brief argues that if it is established that a' given item is in fact an advertising expenditure, it is an ordinary and necessary business expense, and its deductibility necessarily follows. The facts admitted are so meager as to throw no light on the circumstances surrounding the alleged expenditure, nor- is it clearly shown that the amount in question constituted a business expenditure rather than a donation. While it was claimed by the petitioner as an advertising expense, it was disallowed by the respondent as such, and the explanatory statement of the latter merely contains the ambiguous words “ Chamber of Commerce advertising fund.” We do not know to what chamber of commerce the amount was contributed, where it was located, what relation it borfe to the petitioner’s business, nor when or in what manner the fund was expended, if in fact it was expended. These facts were undoubtedly within the knowledge of the petitioner’s officers, and apparently could have been easily established, since one of its principal executives was present and testified at the hearing. However, the petitioner offered no explanatory testimony, but contented itself with admitting the bare facts stated by the respondent in his deficiency notice. From the very meager facts so stated and admitted, we can not say that error is shown on the face of the record. Respondent’s action on this issue is therefore approved.

Issue (5). This issue is in substantially the same situation in respect of proof of error as the preceding one.- The respondent disallowed a deduction from the petitioner’s 1926 income in the following language:

Residence expense $801.69. Expenditures incurred for tire personal comforts of an officer of the company and form no part of the corporate expense.

At the hearing, petitioner’s counsel stated in this connection:

The petitioner concedes the fact stated in that sixty-day letter in regard to that item, that is, that these were expenditures incurred for the personal comfort of an officer, but claims on the face of that statement the deduction is a proper one and the disallowance is improper upon the face of the sixty-day letter, since, if these were expenditures incurred for the personal comforts of an officer they must necessarily be and form an additional compensation, and therefore they are deductible to the corporation.

In addition to what we have said in connection with the preceding issue, so far as applicable here, it may be pointed out that section 284 (a) (1) of the Revenue Act of 1926 provides.for the deduction of all ordinary and necessary corporate expenses, including a reasonable allowance for salaries or other compensation for personal services actually rendered. No evidence was offered on the present issue, other than as above indicated. We do not know the nature and extent of the services rendered by the petitioner’s officers in the taxable year, nor what salaries or other compensation were paid to them for such services. Even if it be conceded that the expenditure in question constituted additional compensation for services rendered, we can not say that the disputed item, in connection with the other amounts paid to the officers, if any, represented reasonable compensation for personal services actually rendered. For lack of proof to show error, the action of the respondent on this point is approved.

Issue (6). In 1927 the petitioner charged off its books as worthless a debt owing to it by the Maxwell Lumber Company of St. Petersburg, Fla., in the amount of $3,181.05, and also charged off as worthless in the same year a debt owing to it by the Hall Lumber Company of Auburndale, "Fla., in the amount of $1,100. The petitioner claimed a deduction from its 1927 income on that account in the aggregate amount of $4,881.05, which deduction respondent disallowed. We think the record establishes that the petitioner made reasonable efforts to collect these two debts, and was justified in charging them off as worthless in 1927. The respondent’s action on this issue is reversed.

Issue (7). Depreciation and depletion are the major issue in these cases, and relate to all of the taxable years. Deductions allowable for both depreciation and depletion can be computed from the same factors; hence the separate consideration of depletion is unnecessary.

The parties have agreed that the deductions in question shall be computed for all years by the unit-of-production method. To that end, they have also stipulated (1) the depreciated cost of the petitioner’s sawmill plants at January 1, 1920, the beginning of the first taxable year, and the salvage values; (2) the cost of additions made to the plants during the taxable years; (3) that the plants were acquired subsequent to March 1, 1913, and hence no question of value at that date is involved; and (4) the amount of timber cut by the petitioner’s plants during each of the years from 1920 to 1930, both inclusive. All the factors have thus been stipulated, except two. The parties are in disagreement only as to the amount of. the timber acquired by the petitioner during the taxable years, and as to when the timber so acquired became available for the purpose of computing the deductions.

The parties stipulated that 184,045,193 feet were cut at the De-Funiak plant during the years 1920 to 1930, both inclusive. At the end of 1930 the evidence establishes that an accurate cruise was made of the timber remaining, which disclosed 16,393,000 feet. The actual total acquired to the end of 1930 was, therefore, 200,438,193 feet. Our next problem is to determine when this timber became available, and this can be done only by reference to the petitioner’s record of purchases as shown by its books. No difficulty would be presented if the books showed the above figures, but they disclosed an apparent total of 255,991,556 feet. However, there were included in this book total 11,052,800 feet designated “ exchanges ” which the petitioner now concedes were not additional acquisitions but were in fact reductions. Since this amount was added in the above mentioned total and treated as an acquisition instead of as a reduction, the apparent total of 255,991,556 feet must be reduced by 22,105,600 feet, or twice 11,052,800 feet, leaving 233,885,956 feet. This latter amount must be further reduced by 12,500,000 feet, representing the Fuss & Wick-ersham tract, which was purchased in 1928, has not yet been cut, and was not-included in the cruise estimate of 1930. This leaves 221,-385,956 feet as the total acquisitions shown by the books. Since the total actual acquisitions, as above pointed out, amounted only to 200,438,193 feet, it is evident that the book figures were excessive to the extent of 20,947,763 feet.

We must next determine from the record where this excess occurred. The evidence affirmatively shows that all tracts were correctly entered on the books and actually cut out substantially according to the book figures, except the Walton, DeFuniak, and Geneva tracts. No cruise was made of these tracts at the time of purchase, but the timber content was estimated by dividing the purchase price by $5 per thousand feet. A shortage from the book figures was physically demonstrated when these tracts were cut. We are satisfied from the evidence and have so found that these three tracts were entered on the books as containing 20,947,163 feet in excess of the actual timber contained thereon. It merely remains therefore to allocate the excess in the book figures to these three tracts, which we have done on the basis of estimates made from the cruise of contiguous tracts in 1930. The results are set out in our findings of fact hereinabove.

We have also found as a fact that the timber purchased by the petitioner in the taxable years did not become available until the respective dates of purchase. Much evidence was offered by the petitioner on this point, which we think clearly justifies the finding made. It is shown that these tracts were previously owned by other lumber companies, or by turpentine operators or others, under such circumstances that the petitioner could not reasonably have anticipated, prior to actual purchase, that it would ever be able to acquire such timber for cutting. The situation here is similar to that discussed by us in Colmer-Green Lumber Co., 12 B. T. A. 256, and in McGlure Pine Co., 20 B. T. A. 560. See also Bacon-McMillan Veneer Co., 20 B. T. A. 556.

Judgment will be entered u/nder Bule 60.