author: Teammell:

text:
    Planters Nut & Chocolate Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8788, 10081.
    Promulgated May 28, 1927.

      Leon F. Gooyer, Esq., and R. E. Glessner, Esg., for the petitioner.

      L. L. Sight, Esq., for the respondent.
   Teammell:

These are proceedings for the redetermination of income and profits taxes for the years 1917, 1918, and 1919, in the respective amounts of $6,233.78, $21,542.50, and $15,898.14. The two proceedings were consolidated for the purpose of hearing and decision.

At the hearing petitioner waived all issues except the issue relating to the deductions on account of exhaustion, wear and tear of assets.

At the hearing the petitioner and the respondent submitted a stipulation agreeing to the classification of the petitioner’s property in Suffolk, Va., in 1917, 1918, and 1919, the cost or values of such classes of property to be used for depreciation purposes and also the rates of depreciation applicable to such classes of property, leaving in dispute only the question of the correct rate of depreciation on the “ brick candy building ” and the correct rate of depreciation on candy machinery.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation engaged in the business of manufacturing and selling nut confections, principally salted peanuts and nut chocolates, and has plants located in Wilkes-Barre, Pa., Suffolk, Va., San Francisco, Calif,, and Toronto, Canada.

During the years 1917, 1918, and 1919 the petitioner owned and used in the operation of its business in Suffolk, Va., several buildings and also certain machinery, equipment, furniture and fixtures, automobiles, and trucks.

It was stipulated, that the following assets were used in its plant at Suffolk, Ya.; that their cost or value and the rate of depreciation was as follows:

Schedule A.
Depreciation sustained during gear ended December SI, 1917, at Suffolk (Ya.) plant.
Schedule B.
Depreciation sustained durinig year ended December 31, 1918, at SuffolJc (Ya.) plant.
Schedule C.
Depreciation sustained during year ended December 81, 1919, at Suffolk (Va.) plant.

The brick candy building was built by the petitioner in 1916 and 1917. It is a brick building of mill construction having wood floors and wood frame or supports, there being no steel. It is approximately 35 by 100 feet, four stories high, and has a tin roof. The building is used principally for peanut cleaning. Machinery for the shelling and blanching of peanuts is housed in it. This machinery is heavy and causes the building considerable wear. The building is immediately adjacent to a boiler room and steam from an exhaust is at all times around it. The steam exhaust under it comes up through the sides, causing considerable damage. Materials of heavy weight are stored in the building. Generally, there are in it 700 pounds of peanuts in coolers and trucks, which cause wear on the floor and walls. The building stands upon the ground which is damp from natural causes.

This building was specially built for the purpose of petitioner’s business and is adaptable to no purpose other than that for which it was built.

Considering ordinary repairs made from time to time, the building has an expected life of 40 years. A reasonable allowance for depreciation, including obsolescence, of this building is at the rate of 2y2 per cent for each of the years 1917,1918, and 1919, based upon the cost above set out.

The candy machinery of the petitioner consisted of peanut roasters, peanut blanchers, glucose tanks, marshmallow beaters, copper kettles, tin pans, wooden trays, galvanized iron pans, mixers of different kinds, scales, and those things which are necessary in the candy business.

Much of this candy machinery is subjected to heat, extreme heat in some instances. This is especially true of the roasters, which are operated at temperatures of from 360 to 400 degrees over open fires. The steam kettles, copper kettles, and glucose kettles are likewise subjected to extreme heat. The copper kettles as well as other parts and utensils ar'e over open fires. The glucose kettles are used for keeping the glucose warm in the mixtures and this is done with steam. The candy mixers and the chocolate mixers are all subjected to terrific heat, some over open fires and some by steam, the chocolate mixers having been operated under these conditions for periods of from 70 to 72 hours at a time. Practically all of the candy machinery is subjected to extreme heat, either over open fires or steam.

Because of these conditions under which it must be operated, the greater portion of this machinery depreciates rapidly. The roasters are machines consisting of numerous parts, such as cylinders, brick fireplace underneath, round-shaped hoods over the tops to retain the heat inside, sprockets, pulleys, shafting and belting, all of which is subject to rapid depreciation. Some of these parts will not last more than two or three years. The base and uprights of these machines, which are made of cast iron and constitute about 25 per cent of the entire machine, will last much longer.

A considerable portion, about 20 per cent, of the candy machinery is used in making salted peanuts. The salt causes corrosion, resulting in rapid depreciation.

About 10 per cent of the candy machinery consisted of numerous small miscellaneous items, such as metal pans and wooden trays, which last between two and three years.

The petitioner began the manufacture of candy at its Suffolk, Ya., plant in the early part of 1917, but did not engage in it as extensively as during the years 1918 and 1919, when candy was made on a very extensive scale. The depreciation of the candy machinery for 1917 was not as great as during the years 1918 and 1919. The candy sales for each of the years 1918 and 1919 were about double those of 1917. During the years 1918 and 1919 the machinery was operated frequently 14 and 15 hours a day and sometimes 24 hours. The normal working day was 10 hours. The care and maintenance of this machinery is entrusted to inefficient help.

The nature of the petitioner’s business requires frequent changes in the kinds and design of machinery due to the lessening in popular favor of the various pieces of novelty candy which it makes from time to time, necessitating a change to some other more popular piece of candy. The necessity for these changes is frequent and is anticipated. Machinery used in making a certain piece of candy having ready sales because of popular demand must be discarded when the demand ceases and some new piece requiring a different kind of machinery takes its place. A reasonable allowance for the exhaustion, wear and tear, including obsolescence, of the candy machinery for 1917 is 10 per cent, and for 1918 and 1919 is 15 per cent, based upon the cost as above set out.

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

       Building completed in 1920, therefore, no depreciation to be allowed in 1919.


source: Caselaw Access Project

author: Geeen : Van Foss AN,

license: Public Domain

text:
    Appeal of Dorothy Payne Whitney Straight, Executrix, Estate of Willard Straight.
    Docket No. 2548.
    Promulgated June 6, 1927.
    A decedent acquired certain property subsequent to March 1, 1913. 'Upon his death the property passed to his executrix and was thereafter sold by her. Sold, that the basis for determining the gain or loss resulting from the sale is the value of the property at the date of the decedent’s death and not the cost to the decedent.

      Swtagar Sherley, Esq., and Charles F. Wilson, Esq., for the petitioner.

      E. C. Lalce, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for the fiscal year ending November 30, 1919, in the amount of $261,573.93. The alleged deficiency resulted from the failure of the petitioner to include in the tax return filed by her as executrix the income received by the estate from the sale of stock owned by decedent at the time of his death, said stock having been acquired by decedent subsequent to March 1, 1913, and sold by the executrix during the taxable year for an amount in excess both of the cost to decedent and of the value as of the time of decedent’s death.
    FINDINGS of fact.
    Willard Straight, a citizen of the City of New York, died testate on the 30th day of November, 1918, and by his will, duly admitted to probate in the Surrogate’s Court of Nassau County, New York, appointed the petitioner, Dorothy Payne Whitney Straight, executi-ix of his estate. The petitioner accepted the trust imposed on her by the will and on April 12, 1919, was duly appointed and qualified as the sole executrix of the will and ever since has been and now is such executrix.
    Among other assets of the estate of Willard Straight there came into the hands of the petitioner as executrix certain stocks purchased by decedent during the years 1916, 1917, and 1918, at an aggregate cost of $2,414,978.60. The said stocks were appraised at $2,158,510 by appraisers duly appointed by the Surrogate’s Court of Nassau County, New York, which appraisal was approved by said court. The fair market value of the stocks at the date of decedent’s death was $2,158,510.
    No Federal estate tax was paid by petitioner as decedent died overseas in the military service of the United States Government and his estate was exempt from the Federal estate tax and no valuation was made of the assets of the estate for estate-tax purposes by the Bureau of Internal Revenue.
    During the fiscal year ending November 30, 1919, the petitioner as said executrix, in the proper liquidation of the estate sold these stocks for an aggregate amount of $2,639,287.96, said amount being $480,-777.96 in excess of the value of said stocks as of the date of the decedent’s death, and $224,309.36 in excess of the original cost to decedent. In determining the deficiency involved in this appeal the Commissioner included said sum of $480,777.96 as taxable income.
   OPINION.

Geeen :

The facts in the case are not in dispute and are comparatively simple. Petitioner advances two contentions: (1) That “the law does not embrace as taxable gain income arising from a sale by an executrix such as here occurred because no basis for determining the gain is here provided for”; and (2) if any taxable gain resulted, “ the basis is the cost to the testator of the stock and the taxable gain the difference between such cost and the sale price received by the executrix.”

The pertinent sections of the Revenue Act of 1918 are as follows:

Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
$ At * * 1)! *
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212 * * *.
(c) In eases under paragraph (1), (2), or (3) of subdivision (a) the tax shall he imposed upon the net income of the estate or trust and shall be paid by the fiduciary * * *. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—
(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and
(2) In the case of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.
Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”—
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but
(b) Does not include the following items, which shall be exempt from taxation under this title:
* * * * * * *
(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income).

Petitioner admits that an executrix is accountable generally for tax purposes for any income of the estate in lier hands, but contends that in this particular situation there is a hiatus in the law and no basis for determining taxable gain is provided. This argument is predicated on the theory that since the executrix paid nothing for the property coming into her hands as executrix, there was no cost to the executrix and therefore there is no starting point for determining taxable gain. The Commissioner contends, on the other hand, that the estate is a separate taxable entity and that the “ cost ” of the stock to executrix, which is to be used as a basis, is the value of the stock as of the date of death of decedent.

The Revenue Act of 1918 clearly states that the income of estates shall be subject to the income-tax provisions,' and it therefore follows that petitioner, as executrix, should include such taxable gain as resulted from the sale of stocks during the taxable year m her return of income for the estate.

The second and more serious question is as to the basis to be used in the computation of the gain resulting from the sale of the stocks by the estate, and here we want to emphasize the fact that it is a sale by the executrix of property which is a part of the estate and with which the executrix is concerned only because she represents the estate and is by statute required to pay tax on its income.

The petitioner contends that the cost to the deceased should be used as the basis. The Commissioner contends that the value of the stocks as of the date of the death of the decedent should be used as the basis, there being no dispute that the appraised value fixed by the New York Surrogate’s Court is correct.

Prior to the passage of the Revenue Act of 1921 there was no statutory provision fixing the basis for either gifts, devises or bequests. The Revenue Act of 1913 and each subsequent act has had in it provisions which indicate (if they do not in fact prescribe) the fundamental principle to be applied.

Section II B of the Revenue Act of 1913, in so far as it is here material, reads as follows:

That * * * the net income of a taxable person shall include * * » income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent * * *.

It is significant that section II B excludes from income the value of property acquired by gift, bequest, etc.

The substance of this provision was reenacted in the Revenue Act of 1916. Section 2(a) of that Act, with the exception of the omission of the word “ lawful,” an omission not here material, and the elimination of the words “including the income from but not the value of property acquired by gift, bequest, devise, or descent,” is exactly the same as the quoted portion of section II B of the Revenue Act of 1913. Section 4 of the Revenue Act of 1916 provides that “The following income shall be exempt from the provisions of this title: * * * the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in income).” In the succeeding revenue acts the identical limitation provided in section 4 of the Revenue Act of 1916 has been reenacted as section 213(b) of each of the acts, changed only by the insertion of the word “ gross ” before the word “ income.”

Paragraph 44 of Regulations 33 reads as follows:

The appraised value at the time of the death of a testator is the basis for determining gain or profit upon sale subsequent to the death after March 1, 1913.

Article 1562 of Regulations 45 reads in part:

In the ease of property acquired by gift, bequest, devise, or descent the basis for computing gain or loss on a sale is the fair market price or value of the property at the date of acquisition or as of March 1, 1913, if acquired prior thereto.

Similar provisions appear in Regulations 62 and 65, and the Commissioner has consistently computed the gain on property sold by an executor to be the difference between the sale price and the value at the date of the death of the decedent, or the March 1, 1913, value if he died prior to such date.

In the case of Bankers’ Trust Co. v. Bowers, 295 Fed. 89, the court said: “ The estate and deceased were separate entities, each having a separate accounting.” See also Catherwood v. United States, 291 Fed. 560, in which the ruling of the lower court to the effect that there are not two separate entities in the person of the decedent and her estate, was reversed.

The same question was carefully considered by the Court of Claims in Nichols v. United States (decided April 4, 1927; 6 Am. Fed. Tax Rep. 6592). There that court said:

For taxation purposes tbe individual’s income during his lifetime and the income of his estate after his death are distinct things, the individual and his estate being separate entities.

The petitioner herein concedes that where property passes to a devisee or legatee, the basis is the value at the date of acquisition, but contends that an executor does not acquire property by gift, bequest, devise or descent. The answer to this contention is to be found in the case of Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509. In that case one Ryerson died in 1912 leaving a will wherein it was provided that his trustee, named therein, should take certain property with full authority to sell or otherwise dispose of it. Pursuant to the authority vested in him by the will, the trustee, in 1917, sold certain corporate stocks. The Commissioner treated the difference between the March 1, 1913, value and the sales price as income and assessed and collected the tax. The court held that the sale gave rise to income; that the trustee was a taxable person and that he was liable for the tax on the income thus derived.

In the Merchants’ Loan & Trust Co. case the court said:

Assuming for tbe present that there was constitutional power to tax such a gain or profit as is here involved, are the terms of the statute comprehensive enough to include it?
Section 2(a) of the Act of September 8, 1916 (39 Stat. 751; 40 Stat. 300, 307, § 212), applicable to the case, defines the income of “a taxable person" as including “ gains, profits and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, * * * or gains or profits and income derived from any source whatever.”
Plainly the gain we are considering was derived from the sale of personal property, and, very certainly the comprehensive last clause “ gains or profits and income derived from any source whatever,” must also include it, if the trustee was a “ taxable person ” within the meaning of the act when the assessment was made.
(4) That the trustee was such a “ taxable person ” is clear from § 1204(1) (c) of the Act of October 3, 1917, c. 63, 40 Stat. 331, which requires that “ trustees, executors * * * and all persons, corporations, or associations, acting in any fiduciary capacity, shall make and render a return of the income of the person, trust, or estate, for whom or which they act, and be subject to all the provisions of this title which apply to individuals.”
And § 2(b) of the Act of September 8, 1910, supra, specifically declares that the “ income received by estates of deceased persons during the period of administration or settlement of the estate, * * * or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be.
Further, § 2(c) clearly shows that it was the purpose of Congress to tax gains, derived from such a sale as we have here, in the manner in which this fund was assessed, by providing that “for the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.”
Thus, it is the plainly expressed purpose of the act of Congress to treat such a trustee as we have here as a “ taxable person ” and for the purposes of the act to deal with the income received for others precisely as if the beneficiaries had received it in person.

Thus the rule is settled that a trustee is a taxable person; that the sale of property by him gives rise to taxable gain and that in the case of property acquired prior to March 1, 1913, the gain is measured by the difference between the sale price and the value on that date.

The sections of the statute which impose a liability for taxes upon a trustee impose the same liability upon executors. If in the Merchants' Loan & Trust Co. case the trustee was liable for taxes, it follows inevitably that executors have the same liability.

The remaining question to be disposed of arises from the fact that in this case the property was acquired subsequent to March 1, 1913. As we have pointed out above, the provisions excluding the value of property acquired by devise or bequest have been carried into each of the revenue acts. The petitioner concedes that these provisions establish value at the date of acquisition as the measure of gain in the case of property sold by a devisee. If then the gain realized by an executor is to be computed as if he had received it as a devisee and, if in the hands of a devisee value at the date of acquisition is the basis, it follows that value as of the date of acquisition is the basis of property sold by an executor. This is but another way of giving effect to the value provisions of the statute which we have heretofore quoted.

In this case the value is less than the cost, with the result that gain is greater than it would have been if cost had been used as the basis. In the ordinary case the value is greater than cost and the gain is less than it would have been if cost had been used as a basis. In the latter case, if cost to the decedent had been used, as is here contended for, the gain thus computed would be in excess of the actual income to the estate and we would be compelled to hold that the income thus computed should be reduced by the excess of value over cost. As was aptly said in Bankers' Trust Co. v. Bowers, 295 Fed. 89, “We must accept the fact that income tax statutes are designed and intended to reach actual income received by the taxpayer.”

The court in the last paragraph quoted from the Merchants' Loan & Trust Co. case says in no uncertain language that income received by a trustee is to be taken precisely as if the beneficiaries had received it in person and holds that in the case of property acquired prior to March 1, 1913, the basis for the computation of gain or loss resulting from sale is the value on that date. While not important, it should be noted that it is the value in the hands of the trustee (the taxable person) and not the value in the hands of any one else.

The Court of Claims in Nichols v. United States, supra, had before it a question which is inseparably interwoven with the question here under consideration. There that court had before it this set of facts. The deceased was a member of a partnership. Prior to his death the partnership had earned certain fees and commissions. Subsequent to his death these fees or commissions were collected and the decedent’s distributive share thereof paid over to his executors. The Commissioner determined the value of the decedent’s interest in the partnership at the date of his death, including therein the value of the commissions earned but unpaid, and included such value in the gross estate for estate-tax purposes and the tax was paid thereon. The executors included in their return of income the amount of the decedent’s distributive share of the commissions collected subsequent to his death, paid the tax thereon, and subsequently brought suit to recover the amount so paid. After reciting the facts the court said:

* * * It thus appears that the one item has been treated as part of the value of the gross estate for estate-tax purposes and as part of the gross income of the estate for income tax purposes, and the question for decision is whether it can he made to serve in these two capacities. We think the answer must bo in the negative. For taxation purposes the individual’s income during his lifetime and the income of his estate after his death are distinct things, the individual and Ms estate being separate entities. The taxing statute makes plain this distinction, because Section 210 of the Revenue Act of 1918, 40 Stat. 1062, imposes a normal tax upon the “net income of every individual,” and Section 219 imposes the same rate of tax upon the income of estates, “ including income received by estates of deceased persons ” during the period of administration. Section 401 imposes a tax upon the transfer of the net estate of every decedent ” dying after the passage of the act. This net estate is to be determined (Sec. 402) by taking the value of the gross estate of the decedent, including therein “ the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, ” and making certain authorized deductions. * * * An interest thus ceases and the estate interest begins at the time of the death. When, therefore, an item is properly determined to constitute a part of the gross estate of a decedent for estate-tax purposes it can not by any sort of reasoning be made to constitute a part of the income of the same estate. It is a part of its corpus. * * * It is not to be presumed that Congress intended to subject the corpus of the estate to double taxation (see Supplee-Biddle Hardware Co. case, 265 U. S. 189, 195) [U. S. Tax Cases 2d Supp. 1552], though income accruing as such to the estate during administration is an addition to the estate itself, which is taxable as income. The contention of the Government that “ there can be no capital in the estate unless that which constitutes the capital item has first been treated as income, either of the decedent or of the estate,” can not be readily accepted, but when this premise is followed by the admission that the plaintiffs “ correctly argue that there was no income to the decedent” and that, therefore, the distributive share of commissions received from the partnership must be income of the estate, it is manifest that the assumed premise is itself at fault.

It is true that on the estate of this decedent no estate tax was paid but we regard that fact as of no importance and treat the question as if this decedent had had a net estate upon which the estate tax had been paid. It is clear that under ordinary circumstances the value of the stocks sold by the decedent would have been included in the value of the gross estate and we hold, as did the Court of Claims, that the whole thereof became a part of the corpus of the estate. It is a matter of no importance that at the time they became a part of the corpus their value was less than their cost to the decedent. The rule is the same whether their value is above or below such cost.

As was said by the Court of Claims, “The income of an estate which the statute taxes .is, generally speaking, the income which accrues after the estate begins, and it begins with the decedent’s death.” The estate did not receive or acquire income when the stocks passed to it upon the decedent’s death. What it received was a part of corpus of the estate, no part of which could at the same time be income. It is expressly provided that in the computation of gain from such sale there shall be exempt “ the value of property acquired by gift, bequest, device, or descent” and this we expressly hold is applicable to sales by an executor. To hold otherwise would result in the application of one rule for the computation of gain or loss on a sale by an estate and an entirely different rule for such a computation in the case of a sale by a legatee or a devisee.

In Merchants’ Loan & Trust Co. v. Smietanka, supra, the court held that income received by a trustee of an estate is to be computed and taxed the same as that of a beneficiary and we hold precisely the same as relates to the income of an executor of an estate, for, as we have pointed out, both are taxed under the same sections of the revenue acts. In the Appeal of Elizabeth J. Bray, Administratrix, 4 B. T. A. 42, we reached the same conclusion, but did not set forth in the opinion our reasons therefor.

The Circuit Court of Appeals for the Second Circuit in Rice v. Eisner, 16 Fed. (2d) 358, had before it the question of the basis to be used in the computation of the gain from the sale of property acquired by gift.

In arriving at his conclusion that the value on the date of acquisition (that date being subsequent to March 1, 1913) was the basis, Judge Learned Hand said:

On the main point we have no question that the learned District Judge was right. The first paragraph of Subdivision B of section 2 of the Act of October 3, 1913 (38 Stat. 167), provides that the income taxable “shall include gains, profits, and income derived from * * * sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, * * * or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent.” This is the only relevant enactment, and the question is whether it includes “ gains • * * * derived from sales” of personal property acquired by gift. Section 2(a) of the Act of September 8, 1916 (Comp. St. § 6336b), defines taxable income in the same language, but omits the words “including the income from but not the value of,” etc., just quoted. These occur, however, in section 4 of that act (Comp. St. § 6336d), among the exemptions allowed as follows: “The value of property acquired by gift, bequest, devise or descent (but the income from such property shall be included as income).” "We can see no conceivable difference between the meaning of the two statutes; the fact that in the first the exemption is coupled with the definition of the taxable income, while in the second it is placed among the exemptions, is of no consequence whatever.
That appreciation in the corpus of property received upon bequest is taxable under the act of 1916 was expressly held in Merchants’ L. & T. Co. v. Smietanka, 255 U. S. 509, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305. True, in that ease the person assessed was a testamentary trustee, but that can make no difference, for trustees are taxed like other individuals. Nor can it, of course, be a distinction that the case at bar involves a gift, and not a bequest. Gray v. Darlington, 15 Wall. 63, 21 L. Ed. 45, was definitely held to be inapplicable because of the difference in language of the statutes, and Lynch v. Turrish, 247 U. S. 221, 38 S. Ct 537, 62 L. Ed. 1087, was distinguished because no gains had been made since the law was passed.
By section 2(c) of the Act of 1918, it was provided that the gain derived from the sale of the property acquired before March 1, 1913, should be taken as its appreciation since that day, and the same provision was contained in section 202 of the Act of February 24, 1919 (Comp. St. § 0336%bb). Until 1921 nothing specific was said about computing the gain on gifts and bequests, but by section 202(a) (2) of the Act of Kovember 23 of that year (Comp. St § 6336%bb), it was provided that, when gifts were made before January 1, 1921, their value should be taken as of the time of their acquisition, and thereafter at the time when the donor acquired the property. The argument is that then for the first time did Congress mean to tax the profit on gifts at all, since only then did it provide a means for computing it. If so, Congress did not mean to tax the appreciation of purchased property between 1913 and 1916, because only in 1916 was any rule laid down which professed to cover it, and then only in a form equally applicable to gifts and bequests. The argument proves too much.
The act of 1921 was apparently passed for quite another reason; that is, in the future to prevent donors from escaping the high taxes prevailing by giving property to their wives or children. As the latter would be allowed on any subsequent sales to subtract the value of the gift when they received it, and as a gift was not a sale as regards the donors, all increment escaped taxation which had accrued during the ownership of the donors. As to earlier gifts the rule remained as it had been in practice applied before the act of 1921 was passed. From this no inference can be made that, before the statute fixed the rule, gifts were not to be taxed at all, but rather that the computation of profits upon gifts had been left to the regulation of the department, as it had certainly been on purchases for the first three years. As difficulties in administration arose, Congress met them, following probably the suggestion of the department itself.
The exemption in all the statutes of the corpus of gifts and bequests shows that in the minds of those who drew the acts it was thought open to question whether even this might not be considered income. To suppose that in addition they meant to exempt profits upon them, while taxing profits on purchases would be a curious inversion of any fair incidence of the tax. Conceivably one might imagine the opposite a tenable notion; but the suggestion of the plaintiff appears to us to presuppose, not only a baseless, but an unjust, distinction. We have no doubt, quite independently of authority, that from the outset the profits on gifts and bequests was included with gains derived from the sale of all kinds of property, however acquired. So much for the plaintiff’s liability.

The provisions of the statute considered by Judge Hand are the same as those considered by us. The basis for the computation of gain or loss resulting from the sale of property of an estate by an executor, is the same as the basis in the case of sale of property acquired by gift, namely, the value at the date of acquisition if that date be subsequent to March 1, 1913, and since an executor is a taxable person, the gain to the estate must be computed on that basis and the tax paid thereon. The Commissioner’s regulations have always prescribed this basis. The law has been changed only in its minor details. In all of the revenue law, there are few better illustrations of legislative approval of departmental regulation. If needed, much support for our conclusion is to be found in this legislative history. In so holding we are aware that our conclusion can not be reconciled with that reached by the Court of Claims in McKinney v. United States, 62 Ct. Cls. 180. However it seems to us that court did not have brought to its attention the full force and effect of the principles established in the Merchants' Loan & Trust Co. case. We also have the advantage of having the opinion of Judge Hand in the Rice case.

Judgment will he entered for the Commissioner.

Phillips concurs in the result.

Smith dissents.

Van Foss AN,

dissenting: I am unable to concur in the prevailing opinion of the Board. It has long been accepted as almost axiomatic that an executor “ stands in the place and is regarded as the representative of the deceased person for the purpose of settling his affairs and distributing his estate.” 11 R. C. L. 23. The reasoning-employed in the majority opinion seems to me to disregard utterly this conception and to ignore also the fundamental fact that Congress intended to tax actual profits received from a sale of property and did not contemplate fictitious or arbitrary bases for determining the same. Goodrich v. Edwards, 255 U. S. 527.

In McKinney v. United States, 62 Ct. Cls. 180, in which a writ of certiorari was refused by the Supreme Court, a case in all essential respects identical with the instant case, the Court of Claims held directly the opposite of the view adopted by the Board. I believe that the reasoning of that case is sound and that the same principles should govern here.

Aeundell and Trussell concur in the dissenting opinion.


author: Marquette:

text:
    Mosher Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1886.
    Promulgated June 7, 1927.
    1. The real estate involved herein was sold in the year 1919 and not in the year 1918 as claimed by the petitioner. Therefore, no part of the profit arising from such a sale may be included in the petitioner’s invested capital for the year 1919.
    2. Certain alleged worthless debts held to be proper deductions in computing the petitioner’s net income for the year 1920.

      G. Drummond Hunt, Esq., and Loyd B. Smith, G. P. A., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies for the years 1919 and 1920 in an amount less than $10,000.

      FINDINGS OP PACT.
    The petitioner is a corporation organized about the year 1908. under the laws of the State of Texas, with its principal office and place of business at Dallas, Tex., and it is and was at all times herein mentioned, engaged in business at that place. From some time in the year 1917, and until May 1, 1918, all of the capital stock of the corporation was owned and held by the following persons:
    W. S. Moslier. Grace M. Jones.
    Mrs. J. E. Moslier. T. J. Moslier.
    Miss M. E. Moslier. Thomas J. Jones.
    N. S. Mosher, Trustee.
    W. S. Mosher, T. J. Mosher, M. E. Mosher and Grace M. Jones are brothers and sisters, Mrs. J. E. Mosher is their mother, and Thomas J. Jones is the husband of Grace M. Jones.
    For many years prior to the early part of the year 1916, one Ellingsworth was in the employ of the petitioner as a bookkeeper, and was the owner of a few shares of its capital stock. He held this stock under an agreement that if he should leave the employ of the corporation he would sell the stock to W. S. Mosher as trustee for the other stockholders, at its book value. Ellingsworth left the corporation in the year 1916, and when W. S. Mosher attempted to exercise the option a dispute arose as to what Ellingsworth should receive, due to the fact that certain real estate owned by the corporation had greatly appreciated in value. This real estate had been acquired prior to March 1, 1913, at a cost of $24,416.09 and on that date it had a fair market value of $153,739. Ellingsworth’s stock was finally sold to W. S. Mosher as trustee some time in the year 1917.
    After the purchase of Ellingsworth’s stock, and prior to May 1, 1918, it was decided by the stockholders of the corporation at an informal meeting, that for business reasons stock should be sold to persons other than members of the Mosher family. However, in order to avoid any further disputes such as had occurred with Ellingsworth, it was also decided to separate the real estate of the corporation from the other assets, and to sell it to W. S. Mosher as trustee for all of the stockholders for $153,739, at which amount it had been carried on the corporation’s books since about June 1, 1917. W. S. Mosher agreed to give his note to the corporation for $153,739, with interest at 6 per cent per annum. The corporation also agreed to lease the real estate from W. S. Mosher and to pay for the use thereof an annual rental equal to 6 per cent of $153,739, and to pay the taxes on the real estate. The agreement mentioned was not reduced to writing.
    On May 1, 1918, ten shares of the stock of the corporation were sold to Fred Hicks and ten shares to J. M. Shaw, both employees thereof, and on that date two certificates of stock were issued by the corporation to W. S. Mosher, trustee, one of which was transferred by him to Hicks and the other to Shaw, with the endorsement thereon “subject to the conditions agreement this date.” The conditions of the agreement mentioned were that Hicks and Shaw would not sell their stock without giving W. S. Mosher a six-months option to purchase it; that the value of their stock was to be determined by the value of the assets of the corporation exclusive of the real estate; that the real estate would be separated from the assets of the corporation, and that in lieu thereof there would be substituted W. S. Mosher’s note for $153,739. During the period May 1, 1918, to December 31, 1918, inclusive, no money was actually paid by the corporation to W. S. Mosher for the use of the real estate mentioned, nor was any money paid by Mosher to the corporation as interest on the amount of $153,739. The corporation paid the taxes on the real estate for the year 1918.
    On January 3, 1919, at a meeting of the board of directors of the petitioner corporation, W. S. Mosher, T. J. Mosher, M. E. Mosher and T. J. Jones being present, the following resolution was adopted:
    RESOLUTION OF THE BOARD OF DIRECTORS OF MOSHER MANUFACTURING COMPANX
    Whereas, heretofore prior to the first day of June, 1918, it had been arranged by this company to sell and convey the real estate holdings of this company in the city of Dallas, exclusive of all buildings, machinery, fixtures and other improvements thereon, to W. S. Mosher, with a view of separating the real estate holdings of this company in the city of Dallas from its other property and plant; it being the purpose and intention to secure other real estate in or near the city of Dallas, and ultimately to remove the plant to such new location. And, whereas, it has been heretofore arranged, prior to June 1, 1918, that the said W. S. Mosher, for the use of himself and his associates, should have an option on the said real estate holdings in the city of Dallas at the book value of such holdings as of June 1, 1918. And, whereas, the book value of the said real estate, as of June 1, 1918, has been ascertained to be the sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739.00) dollars.
    Now Be It Resolved By the Board of Directors, That the vice-president of this company, joined by the acting secretary, shall, in the name of this company, execute to W. S. Mosher a proper deed of conveyance conveying to the said W. S. Mosher all of the real estate holdings of this company in the city of Dallas for the consideration of the said sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739.00) dollars; such conveyance reserving all buildings, machinery, fixtures and other improvements on the said property, with the right to remove the same within a reasonable time after the expiration of the lease to be made by the said W. S. Mosher to Mosher Manufacturing Company; the said consideration to be paid according to the terms of the vendor’s lien note for the said sum of $153,739, payable ten- (10) years after date, with interest thereon at the rate of six per cent per annum, the interest payable semi-annually; together with the privilege of the prepayment of the full amount, or of any multiple of ten thousand ($10,000) dollars, on the first day of June or the first day of January of any year, sixty days previous written notice of such prepayment having been given; the vendor’s lien is to be retained to secure the payment of the said note, and also the said W. S. Mosher is to execute, when requested, a deed of trust upon the said property, with power of sale, in the usual form, to further secure the payment of the said vendor’s lien note.
    And Be It Further Resolved, That this company be authorized to accept from the said W. S. Mosher a lease for the said real estate at an annual rental of nine thousand, two hundred and twenty-four and 34/100 ($9,224.34) dollars, plus all taxes accruing against the said property; such rental to be paid at the end of each six months, corresponding to the dates of interest payments on the said vendor’s lien note; such lease to extend for the said term of ten years, but may be terminated prior to the expiration of said ten years if this company shall secure and remove to a new location in or near the city of Dallas; and with the privilege on the part of the lessee of removing from the said premises, within a reasonable time after the termination of the lease, all buildings, machinery, fixtures and other improvements.
    Meeting adjourned.
    (Signed) Thomas J. Jones,

      Acting Secretary.

      On January 3, 1919, the corporation, pursuant to the resolution of the same date above set forth, executed and delivered to W. S. Mosher, a deed to the real estate hereinbefore mentioned, which deed is in the words and figures following:
    The State of Texas,

      County of Dallas.

    Know All Men by These Presents : That Mosher Manufacturing Company, a private corporation organized under the laws of the State of Texas, and having its domicile in the City of Dallas, in Dallas County, Texas, in consideration of the sum of one dollar to it paid, and in further consideration of the sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739) dollars, to be paid according to the terms of a certain vendor’s lien note of even date herewith, executed by W. S. Mosher to Mosher Manufacturing Company, payable ten (10) years after date, with interest at the rate of six per cent per annum, the interest payable semi-annually, with the privilege of prepayment of the full amount, or of any multiple of ten thousand ($10,000) dollars, on tire first day of June or the first day of January of any year, upon sixty days previous written notice, do by these presents grant, sell and convey unto the said W. S. Mosher, of Dallas County, Texas, the following described real estate situated in the City of Dallas, in Dallas County, Texas, to-wit:
    First Tragt : Beginning at a point where the east line of Austin Street intersects the south line of the right of way of the Gulf, Colorado & Santa Fe Railway switch, which runs from the main line to Water Street; Thence in a southeasterly direction, with the east line of said Austin Street, about 272 feet to the center of Mill Creek; Thence in an easterly direction, up the center of said Mill Creek and with Cockrell’s line, to the division line between the Sickles and Cockrell land; Thence in a northwesterly direction, with said division line, about 10 feet to the southwest line of Lamar Street; Thence in a westerly and northwesterly direction, with the southwest and west line of said Lamar Street to the south line of said right of way of said Gulf, Colorado & Santa Fe Railway; T,hence in a westerly direction, with the south line of said right of way, about 213 feet to the place of beginning; being all the land lying between Austin and Lamar Streets and between the said Gulf, Colorado & Santa Fe Railway right of way and Mill Creek and Cockrell’s land, save and except a strip 30 feet in width out of said tract, being fifteen feet each side of the center of the main track of the Dallas Rapid Transit Railway Company as it runs through said tract, the northeast line of said right of way intersecting the west line of Lamar Street at a point 42 feet southeast of the right of way of the Gulf, Colorado & Santa Fe Railway, and intersecting the south line of the right of way of said Gulf, Colorado & Santa Fe Railway at a point 41 feet west of the west line of said Lamar Street; and being the same land conveyed by Luther Rees and wife to Theodore Mosher by deed dated December 1, 1889, recorded in book 134, page 323, of the deed records of Dallas County, and later conveyed by Mrs. J. E. Mosher to Mosher Manufacturing Company.
    Secoh-d Tract: Being a part of blocks numbers four hundred and nineteen (419) and four hundred and twenty-one (421), of the City of Dallas, and comprising two pieces as follows: Beginning at the intersection of the north line of Cadiz Street and the east line of the Dallas Terminal right of way; Thence east along the north line of Cadiz Street about 320 feet to the west line of Lamar Street; Thence northwardly, along the west line of Lamar Street, 307A feet to Mill Creek, proceeding thence in the same line 517 feet to the southeast corner of Mosher Manufacturing Company’s lot; Thence westwardly, along Mosher’s line to the center of Mill Creek; Thence down Mill Creek to the east line of the Dallas Terminal right of way; Thence southwardly, along the said right of way, to the place of beginning; containing about five (5) acres. Also beginning in the center of Mill Creek on the west line of the eastern branch of the Dallas Terminal right of way, immediately south of Mosher’s Foundry; Thence in a southerly direction 287 feet to the intersection of the right of way of the two branches of said Terminal Railway; Thence northwardly along the east line of the western branch - of said right of way, 355 feet to the center of Mill Creek; Thence up said Creek to the beginning; containing about one-half (%) acre. The said second tract, comprising said two pieces of land, being the same property conveyed by Clarence M. Cockrell to Mrs. J. E. Mosher by deed dated January 1, 1903, and later conveyed by Mrs. J. E. Mosher to Mosher Manufacturing Company.
    But there is reserved from this conveyance all the buildings, machinery, fixtures and other improvements on the said property, with the right to remove the same within a reasonable time after the expiration of the lease to be made by the said W. S. Mosher to Mosher Manufacturing Company.
    To Have and to Hold the above described premises, together with all and singular the rights and appurtenances thereto in any wise belonging, unto the said W. S. Mosher, his heirs and assigns forever. And the grantor does hereby bind itself and its successors to warrant and forever defend, all ánd singular, the said premises unto the said W. S. Mosher, his heirs and assigns, against every person whomsoever lawfully claiming or to claim the same, or any part thereof. The vendor’s lien is expressly retained against the above described property to secure the payment of the said note and all interest thereon according to its terms. The said note is to be further secured by a deed of trust upon the said property, with power of sale, in the usual form, to be executed by the said W. S. Mosher when requested.

      Tliis conveyance is executed in pursuance of a certain resolution of the board of directors of Moslier Manufacturing Company duly passed on the 3rd day of January, 1919, which said resolution is in words and figures following, to-wit:
    “Whereas, heretofore prior to the first day of June, 1918, it had been arranged by this company to sell and convey the real estate holdings of this company in the city of Dallas, exclusive of all buildings, machinery, fixtures and other improvements thereon, to W. S. Mosher, with a view of separating the real estate holdings of this company in the city of Dallas from its other property and plant; it being the purpose and intention to secure other real estate in ra-near the City of Dallas, and ultimately to remove the plant to such new location. And whereas, it has been heretofore arranged, prior to June 1, 1918, that the said W. S. Mosher, for the use of himself and his associates, should have an option on the said real estate holdings in the city of Dallas at the booh value of such holdings as of June 1, 1918. And, whereas, the booh value of the said real estate, as of June 1, 1918, has been ascertained to be the sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739.00) dollars.”
    “ Now Be It Resolved by the Board of Directors, That the vice-president of this company, joined by the acting secretary, shall, in the name of this company, execute to W. S. Masher a proper deed of conveyance conveying to the said W. S. Mosher all of the real estate holdings of this company in the city of' Dallas for the consideration of the said sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739.00) dollars; such conveyance reserving all buildings, machinery, fixtures and other improvements on the said property, with the right to remove the same within a reasonable time after the expiration of the lease to be made by the said W. S. Mosher to Mosher Manufacturing Company; the said consideration to be paid according to the terms of a vendor’s lien note for the said sum of $153,739, payable ten (10) years after date, with interest thereon at the rate of six per cent per annum, the interest payable semi-annually; together with the privilege of the prepayment of the full amount, or of any multiple of ten thousand ($10,000) dollars, on the first day of June or the first day of January of any year, sixty days previous written notice of such prepayment having been given; the vendor’s lien is to be retained to secure the payment of the said note, and also the said W. S. Mosher is to execute, when requested, a deed of trust upon the said property, with power of sale, in the usual form, to further secure the payment of the said vendor’s lien note.”
    In Witness Whereof, Mosher Manufacturing Company has caused this instrument to be executed by its vice-president and its acting secretary, and has caused the corporate seal of the said company to be affixed, this 3rd day of January, 1919.
    Mosher Manufacturing- Company,
    ByT. J. Mosher, Vice-President,

    Attest:
    Thomas J. Jones, Aotiny Secretary.

    The State of Texas,

      County of Dallas

    Before me, J. D. Harman, a Notary Public in and for Dallas County, Texas, on this day personally appeared T. J. Mosher, vice-president, and Thomas J. Jones, acting secretary, of Mosher Manufacturing Company, known to me to be the persons whose names are subscribed to the foregoing instrument, and acknowledged to me that they each executed the same for the purposes and consideration therein expressed, and as the act and deed of the said Mosher Manufacturing Company.
    Given under my hand and seal of office, this 3rd day of January, 1919.
    (Signed) J. D. Habman,

      Notary Public, Dallas County, Texas.

    In consideration of the conveyance to him of said real estate, W. S. Mosher executed and delivered to the corporation a note as follows:
    Dallas, Texas, January S, 1919.

    $153,739.00
    Ten (10) years after date, for value received, I promise to pay to Mosher Manufacturing Company or order the sum of one hundred and fifty-three thousand, seven hundred and thirty-nine ($153,739.00) dollars, with interest thereon from date until paid at the rate of six per cent per annum, the interest payable semi-annually; both principal and interest payable at Dallas, Texas.
    This note is given in payment of certain real estate in block number four hundred and nineteen (419) and block number four hundred and twenty-one (421) in the city of" Dallas, in Dallas County, Texas, on South Lamar Street, Austin Street and Cadiz Street, this day conveyed to W. S. Mosher by Mosher Manufacturing Company; the said deed reserving, however, all buildings, machinery, fixtures and other improvements on the said property; and the vendor’s lien is retained in the said deed to secure the payment of this note, and is hereby acknowledged.
    All past due interest on this note shall bear interest at the rate of eight per cent per annum.
    The maker hereof shall have the privilege of the prepayment of this note in full, or of any multiple of ten thousand ($10,000) dollars, on the first day of June or the first day of January of each year, sixty days previous written notice of such prepayment having been given.
    This note is to be further secured by a deed of trust upon the said property to be executed by W. S. Mosher when requested.
    (Signed) W. S. Mosheb.
    (Revenue Stamps, $30.76.)
    On the 3d day of January, 1919, the said W. S. Mosher and the other members of the Mosher family, who were stockholders of the corporation, executed the following written instrument:
    The State of Texas,

      County of Dallas.

    Whereas, by deed dated January 3, 1919, Mosher Manufacturing Company did convey to W. S. Mosher certain real estate in blocks 419 and 421, of the City of Dallas, in Dallas County, Texas, on South Lamar Street, Austin Street and Cadiz Street; the said deed reserving all buildings, machinery, fixtures and other improvements on the said property, the said deed retaining the vendor’s lien to secure a certain note of even date therewith for the sum of one hundred and fifty-three thousand, seven hundred and thirty-nine, ($153,739) dollars; reference to the said deed and note being hereby made.
    Now this instrument is for the purpose of declaring that I, the said W. S. Mosher, do hold the title to the said property under the said deed in trust for the following stockholders of Mosher Manufacturing Company in proportion to their holdings in the capital stock of the said company, as follows:
    W. S. Mosher- 358 shares
    Mrs. J. E. Mosher- 358 shares
    M. E. Mosher_ 358 shares
    Grace M. Jones- 340 shares
    Thomas J. Jones_ 18 shares
    Theodore J. Mosher_ 358 shares
    W. S. Mosher, Trustee!_115 shares
    And it is also declared that the said vendor’s lien note has been executed on behalf of and as representative of the several interests hereinabove set out.
    In Witness Whereof, I have executed this declaration of trust this 3rd day of January, 1919.
    (Signed) W. S. Mosher.
    The undersigned stockholders of Mosher Manufacturing Company do hereby confirm the trust so declared in the foregoing declaration of trust on behalf of W. S. Mosher.
    (Signed) Mrs. J. E. Mosher.
    (Signed) M. E. Mosher.
    (Signed) • Grace M. Jones.
    (Signed) Thomas J. Jones.
    (Signed) T. J. Mosher.
    Since January 3, 1919, the corporation has not actually paid any money to W. S. Mosher as rent for the said real estate, nor has W. S. Mosher paid any money to the corporation as interest on said note for $153,739, because one obligation exactly offsets the other. The corporation has continued to pay the taxes on said real estate.
    On December 31, 1920, one Ñ. H. Jones owed the petitioner on either an account or a promissory note, the amount of $9,569.74, of which the amount of $5,520 was secured by a lien on some tools. Jones had gone into bankruptcy some time prior to December 31, 1920. The petitioner was advised by its credit man that $4,049.74 of the account or note, representing the part of the debt not secured by the lien, was worthless and on January 15, 1921, that amount was charged off on the petitioner’s books by a journal entry as of December 31, 1920.
    On December 31, 1920, the Simplex Ice Machine Co. owed the petitioner $1,397, which was carried on its books as an account receivable. The Simplex Ice Machine Co. had gone into bankruptcy prior to December 31, 1920, and from information acquired through its credit man, it appeared to the petitioner that there was no prospect of anything being recovered on the account. It was, therefore, charged off as worthless by a journal entry written on January 15, 1921, effective as of December 31, 1920. On May 31, 1921, outside parties put up some money for the bankrupt and $739 was paid to the petitioner on the account.

      The respondent, upon audit of the petitioner’s income and profits-tax return for the year 1919, reduced invested capital by the amount of $129,322.91, representing appreciation in the value of the real estate hereinbefore mentioned, and upon audit of the petitioner’s return for the year 1920 he disallowed as deductions from gross income the debts due the petitioner from E. H. Jones and the Simplex Ice Machine Co., which were charged off as above set forth.
   OPINION.

Marquette:

The first question presented for determination by the record in this proceeding is whether the petitioner is entitled to include in invested capital for the year 1919, the amount of $129,322.91, representing the appreciation in the value of its real estate which was realized upon the sale thereof to W. S. Mosher under the circumstances set forth in the findings of fact. It is the contention of the petitioner that shortly prior to May 1, 1918, it made to W. S. Mosher, as trustee for the other members of the Mosher family, what may, for the lack of a better term, be called an equitable conveyance of the property; that although the formalities necessary to convey the legal title were not consummated until January 3, 1919, the conveyance in reality T/as made prior to May 1, 1918, so as to invest W. S. Mosher with all the essential ownership, and that the purchase price became a debt due the corporation at that date which should be considered in determining surplus and profits as of December 31, 1918, and invested capital for 1919.

Upon consideration of the record before us we are of the opinion that the contention of the petitioner can not be sustained. The minutes of the meeting of the directors of the corporation held on January 3, 1919, recite that prior to May 1, 1918, an option had been given to W. S. Mosher to purchase the real estate in question, and the same recital is included in the deed conveying the property. Without specifically attacking the minutes or the deed, the petitioner has attempted to show that the recitals therein are not accurate and do not reflect what actually took place. However, they have failed to convince us on that point. Placing on the testimony the interpretation most favorable to the petitioner, it establishes no more than that shortly prior to May 1, 1918, the stockholders of the corporation at an informal meeting orally agreed to sell the real estate to W. S. Mosher as trustee at its book value. Even if we were to hold, which we do not, that real estate can be conveyed in the manner claimed by the petitioner, the evidence falls far short of establishing that any such conveyance was made in this case. A contract to sell real estate is not a conveyance thereof; it is not self-executing and an oral contract could not even be enforced. The status of the real estate involved herein, and of the several parties who were interested in the transaction with reference to it, was the same between the date of the agreement to sell and January 3, 1919, as it had been before the agreement was made. In our opinion there was no conveyance of the real estate until January 3, 1919, and the Commissioner, therefore, properly excluded the appreciated value of the real estate from the petitioner’s invested capital for the year 1919.

The petitioner, however, urges that if we hold that no sale of the real estate took place in the year 1918, the appreciation in the value thereof should nevertheless be included in invested capital for 1919, because such appreciation had occurred prior to March 1, 1913, and was a part of surplus or undivided profits as of that date. This contention has been effectively answered, adversely to the petitioner, by the decision of the United States Supreme Court in the case of LaBelle Iron Works v. United States, 256 U. S. 377, and a further discussion of this point will serve no useful purpose.

With reference to the debts due to the petitioner from E. H. Jones and the Simplex Ice Machine Co., which it claims as a deduction from gross income for the year 1920, we are satisfied that the debts were worthless in 1920 and were proper deductions from gross income in that year.

Judgment will be entered for the respondent on 15 days’ notice, under Bule 50.


author: Lansdon:

text:
    F. J. Ross Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7281.
    Promulgated June 7, 1927.
    1. Petitioner was not entitled to classification as a personal service corporation during the taxable year.
    2. An amount authorized as a drawing account for the president of the petitioner was a proper deduction from gross income as an ordinary and necessary business expense incurred in the taxable year.

      Benjamin Mahler, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    The respondent asserts a deficiency in income and profits tax for the period from March 15 to December 31, 1920, in the amount of $7,361.85. The petitioner raises two issues: (1) That it is entitled to classification as a personal service corporation, and (2) that it had no taxable income in the year 1920.

      FINDINGS OK FACT.
    The petitioner is a New York corporation with its principal place of business in the City of New York. It was incorporated early in March, 1920, and began operations March 20 of that year. During the taxable period it had outstanding 512 shares of capital stock of the par value of $100, each, all issued for cash. Of this stock, 510 shares were the property of F. J. Ross. One share, each, was in the names of O. M. Seymour and Norwood Weaver. It is not clear whether the shares of Seymour and Weaver were paid for and owned by them or were transferred or issued to them by Ross as qualifying shares. During the taxable period Ross, Weaver, and Seymour, were the executives of the petitioner, and held the offices of president, vice president, and secretary-treasurer, respectively.
    The business of the petitioner is the operation of an advertising agency. Merchants, manufacturers, and others, desiring to secure larger markets for their wares, are its clients. The activities consist in securing clients, in conferring with them, in formulating advertising policies, in preparing advertising text and illustrations, in contracting for space in periodicals, and in furnishing clients with information and advice as to the best methods of merchandising their commodities to the public. The business is departmentalized as follows:

      Account Execution: Men whose principal work under the direction oí Boss is handling the accounts of the various clients.

      Accounting: Bookkeepers who keep all the petitioner’s books and accounts and bill clients for services rendered.

      Art: Under an art director does hand lettering and rescaling of pictures for illustrations. During the taxable period no art work was done by the director except after conference with Boss.

      Contracts: Employees in this department keep records of the circulation and distribution of periodicals and of advertising rates charged by publications, place all orders for space used by clients, check all periodicals to see that orders for space are executed as provided by contract.

      Copy: This department prepares the text used in various forms of advertising. No new copy was written during the taxable period except after conference with Boss.

      Mechanical: Plate making, typesetting, and mat making and similar mechanical work is done or supervised by the personnel of this department.

      Research: Under the immediate direction of Boss, the employees of this department assembled, filed, and indexed data necessary in planning advertising campaigns for clients. This information was largely secured by questionnaires which when filled out were assembled and analyzed and became the bases of recommendations which Boss made to clients.
    The executives held daily conferences in which policies were discussed and decided. No formal meetings of stockholders or directors were held during the period in question, nor was there ever any record or minutes of the informal daily conferences or meetings.-

      Prior to the organization of the petitioner, Ross had been an executive of the Blackman-Ross Co., which conducted an advertising agency in New York, and, for the last three years of his connection With such company, received compensation in the average amount of $27,000 per annum. When he organized the petitioner, Ross brought into the business eight valuable accounts which he had handled for the Blackman-Ross Co., and such accounts yielded about 95 per cent of the income earned by the petitioner during the pexiod in question.
    Ross calls himself an advertising counsel. Ho solicits business, advises with clients, makes studies of the merchandise to be sold, and of the markets, briefs all information connected with the business advertised, confers with clients, has copy and designs xarepared; with consent of clients, selects periodicals as advertising media, contracts for space, and, through his organization, sees that all orders are executed according to terms of contracts with clients and publishers.
    The petitioner’s income, for the most part, is derived from differentials between the prices paid to periodicals for space and its charges to clients for services. Such differential averaged about 13 per cent of the contract price for space used during the taxable year. Clients are billed for services on or about the 15th of each month, and payments for current service are usually received before the end of the month.. Publishers bill the petitioner for space orders about the 25th of each month. Collections from clients are usually received in time to meet all billings for space. Orders to publishers usually provide for a 2 per cent discount if bills are paid before the 10th of the succeeding month, and contracts with clients for a 2 per cent discount, if bills are paid by the 10th. These discounts balance each other, except when clients fail to pay on time to secure discounts, in which case the publishers’ discount becomes income to the petitioner. During the taxable year the petitioner paid for all sjxace in time to secure the 2 per cent discount. Contracts with publishers provided for payment for space by .the petitioner.
    The balance sheets of the petitioner at March 20 and December 31, 1920, are as follows:

      The following is a statement of the income and expenditures of the petitioner for the taxable period:
    Income:
    Commissions and fees_$139,907.14
    Gash discounts_ 1,260.53
    Bank interest_ 734. 55
    141,902.22
    Less:
    Department expenses, five departments_ $1,334. 82
    Administration expense, depreciation on . furniture and fixtures_ $1,283. 86
    General expenses_ 9, 732. 59
    Postage_ 620.49
    Advertising_ 2,092.97
    Bent_ 15, 642.85
    Stationery and supplies_ 4, 736. 98
    Taxes_ 50.00
    Telegrams_ 255.70
    Telephone_ 865. 32
    Travel_ 3, 820. 09
    39,110. 85
    Pay roll:
    Account executives_ 9,742.64
    Accounting department_ 2, 378. 00
    Art department_ 8, 857.40
    Checking department_ 1,200. 00
    Contract department_ 4,120.00
    Copy department_ 11,123.20
    General office_ 5,954.50
    Mechanical department_ 6,201.76
    Besearch department_ 2, 857.25
    Shipping department_ 1, 816.34
    Stenographic department_ 4,400.68
    58, 651.77
    Officers’ salaries:
    Vice president-8,481.06
    Secretary_ 8, S84.92 17,365. 98 116,463. it

    Net income- - 25,438.80
    At tlie beginning of operations the directors of the petitioner determined that Boss should have a drawing account of $400 per week. For some time this amount was paid to Boss each week, but, later in the year, such payments were discontinued and the amounts theretofore paid to Boss were returned to the petitioner. No other formal corporate action fixing compensation for Boss was taken during the year, but the matter ivas often discussed in the presence of the directors, and it was the understanding of all that Boss should receive all the net earnings of the petitioner for the year 1920 as his salary for such year. Early in 1921, the amount of $25,438.80 was credited to Eoss on the books and be was given four notes of the corporation in that aggregate amount. These notes were all paid during the year 1921, and the amounts thereof, were included by Eoss in his personal income-tax return for such year, and the Federal tax thereon was paid.
    The petitioner made a personal service corporation return of income for the period herein involved, in which it took no deduction from gross income on account of salary for Eoss paid or incurred during the taxable term. Upon audit of such return the respondent disallowed personal service classification, and determined the deficiency here in controversy, without the allowance of any deduction from gross income on account of salary for Eoss. The amount of $400 per week was a reasonable salary for the services rendered by Eoss during the taxable year.
   OPINION.

Lansdon:

The record contains evidence that convinces us that capital was a material income-producing factor during the taxable period. In addition to Seymour and Weaver, who were designated as officers and apparently were stockholders only to the extent necessary to qualify them as directors, there were “ account executives ” and other employees who, during the period here involved, received pay in the total amount of $58,651.71. We believe that such an expenditure must have been for the purpose of securing additional income, and it is reasonable to assume that services secured at such cost were of an income-producing nature. It is evident that much of the income of the petitioner was produced by employees who were not stockholders.

In its income and profits-tax return, in which it claimed personal service classification, the petitioner made no deduction from gloss income on account of salary for services rendered by its principal stockholder and president, Eoss. In the event that the Board finds that it is not entitled to personal service classification during the taxable year, the petitioner makes the alternative contention that it is entitled to deduct from its gross income a reasonable salary for its president, who was chief executive and general manager. The petitioner is a close corporation operating under the laws of New York. Informal action of the directors of such corporation in that State is sufficient to create salary liability.

To bring itself within the statute providing for the deductions here claimed, the petitioner must prove that it either paid the salary or incurred a liability for such payment in 1920. At the very beginning of the petitioner’s operations it was determined by informal corporate action that Boss should have a drawing account in the amount of $400 per week.

It is alleged that the drawing account provided for. Boss by the petitioner was not intended to represent and did not represent the full measure of his compensation and that from the very first it was clearly understood, and the directors of the petitioner all agreed that, for the taxable period here involved, Boss should receive all the net profits as his salary. Shortly after the close of the year 1920, and prior to the closing of the petitioner’s books of account thereof, this understanding was carried out, and Boss was paid the amount of $25,438.80, as his compensation for personal services rendered during the year 1920. The necessary entries and adjustments were made on the books as of that year. That one of the several entries required to complete the record was' erroneously dated in January, 1921, is not material, since all the accounting entries relating to the salary in question were adjustments of the petitioner’s books for 1920. If the petitioner incurred a salary for Boss during the taxable year its liability therefor can not be affected by accounting entries whether made in error or otherwise, as it is now well established that tax liability may not be determined by mere bookkeeping entries. In the light of all the evidence, we are convinced that the petitioner incurred liability for a salary for Boss during the taxable period.

Having decided that the petitioner incurred liability for salary to Boss for services rendered in the year 1920, we must now determine the amount of such liability. The evidence discloses that Boss had drawn an average salary of $27,000 for three years preceding his organization of the petitioner; that he was then generally known as a competent, successful and experienced advertising man; that other concerns were ready to employ him at a salary much higher than the amount here in controversy; and that the large earnings of the petitioner were due largely to his knowledge, ability, and industry. All these averments may be admitted without in any way strengthening or affecting the claim of this petitioner. The salaries drawn by Boss from previous employers, or that may have been offered him during the taxable year, can hardly be regarded as fair measures of the value of his services to the petitioner. The reasonableness of salary for services rendered relates more closely to the value of such services to the employer than to the competency or ability of the man employed. A man worth $75,000 per year to one corporation may not be worth half that amount to another engaged in a similar business, if the opportunities for producing income are less by half or more.

We are convinced that a liability to pay Boss a salary in the amount of $400 a week was established by proper corporate action and that, in the circumstances of this petitioner, such a salary was reasonable. In the light of all the evidence, we are of the opinion that the petitioner is entitled to deduct from gross income for the taxable year .the amount of $400 per week from March 15 to December 31, 1920, as salary for its president.

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


author: Teussbll:

text:
    Good Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket 5220.
    Promulgated June 7, 1927.
    1. Invested Capital. — The petitioner corporation conducted its internal affairs mucli in the nature of a partnership keeping no regular surplus and undivided profits accounts as commonly understood. It did keep individual stockholders’ accounts to which each year it credited each stockholder’s proportion of the earnings and, when losses occurred, charged to those accounts a proportionate part of the losses. Withdrawals from these accounts were freely made by the several stockholders and not in proportion to stock ownership. One of the stockholders allowed his account to accumulate into large figures while another stockholder owning the same amount of stock drew largely from his account and frequently such account showed a deficit. The petitioner paid 6 per cent interest upon the credit balances in these accounts and those stockholders having overdrafts paid interest to the petitioner. Selll, in view of the continuous practice of the several stockholders, the credit balances in these accounts must be taken to represent corporate earnings distributed and not surplus or undivided profits within the meaning of section 326 of the Revenue Act of 1918.
    2. Depreciation. — Depreciation at the rate of 10 per cent applied upon diminishing balances in the petitioner’s account of furniture and fixtures held to be a reasonable allowance for exhaustion, wear and tear of such properties used in the petitioner’s business.

      A. E. Graupner, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes in the amount of $2,231.03 for the calendar year 1919, as determined by the Commissioner in his letter dated May 8, 1925.
    The iietitioner alleges that the respondent has erroneously—
    (1) Excluded from invested capital $41,396.68 of surplus profits of the corporation appearing in special “ stockholders surplus ” accounts on December 31, 1918.
    (2) Allowed for depreciation of furniture and fixtures, a deduction of $723.36 instead of $1,145.36 for the year 1919.

      (3) Reduced invested capital as of January 1, 1919, by an adjustment for the income and profits taxes payable for the year 1918, based upon a tax liability of $20,865.20 instead of approximately $12,000 for the year 1918, the alleged overstatement of tax liability being due to the respondent, (a) excluding from invested capital $110,999.93 of surplus profits of the corporation appearing in “ stockholders surplus ” accounts on December 31, 1917, and (b) allowing for depreciation of furniture and fixtures a deduction of $594.12 instead of $956.69 for the year 1918.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office at 303 East 134th Street, New York City.
    The Good Manufacturing Co. was originally organized by one J. N. Crabb, the inventor of a tub and basin stopper, in or about 1896 under the laws of Indiana, writh a capital stock of $3,000, divided into 30 shares of the par value of $100 each, and with its principal place of business at Indianapolis, manufactured and sold the patented stopper and other plumbing supplies.
    During the period from 1896 to December 24, 1898, A. F. Riegger and his brother, C. Riegger, acquired for $3,000 in cash, the entire issued capital stock of the Good Manufacturing Co. Each brother acquired an equal number of shares but after December 24, 1898, the stock was issued 14% shares to each of the brothers and one share to Caroline Riegger, their mother, for which she paid nothing and which she held merely to qualify as a director. The two brothers developed and operated the business, C. Riegger remained in the office and A. F. Riegger went on the road to establish trade. After the first election of officers and directors in 1898, there were no stockholders’ nor directors’ meetings until December 1, 1905, and the business was conducted as though it were a partnership. The Rieg-ger brothers would confer and decide as to all matters pertaining to the business, but kept no minutes nor memoranda with respect thereto. The officers and directors, by name only, continued as such without reelection. The Riegger brothers each received a salary of about $1,200 per annum during the period from 1898 to December 1, 1905, and the profits were left in business as a part of the capital. On December 1, 1905, the accumulated and undivided profits amounted to $133,071.58 charged to the company’s surplus account.
    In December, 1905, the Riegger brothers decided to sell a one-fifth interest in the business, or one and one-half shares to each of two employees, W. Cronyn and F. H. Samuels. The stock of the Good Manufacturing Co. had a book value of approximately $4,500 a share in December, 1905, but the stock was sold to Cronyn and Samuels for $3,000 a share as they could not afford to pay more. To prevent Cronyn and Samuels participating in the accumulated profits in excess of what they had paid for, the Riegger brothers, on January 6, 1906, debited the amount of $46,071.58 on the company’s surplus account which showed a total of $133,071.58 and credited the same to the following accounts:
    Capital Stock_$3, 000. 00
    C. Riegger surplus_!_20, 817.93
    A. IP. Riegger surplus_20,817. 93
    Caroline Riegger surplus_ 1,435.72
    Prior to that time no capital stock account had been carried on the books. Immediately after January 6, 1906, the Caroline Riegger account was debited by $1,435.72 and one-half of the said amount was credited to the surplus account of each of the Riegger brothers. The amount of $87,000 remained in the surplus account of the company. The above credits and debits were made by the Riegger brothers, but no formal stockholders’ or directors’ meetings were held nor resolutions passed, authorizing the said book entries. Substantially all of the capital and surplus on December 1, 1905, in the amount of $133,071.58 was invested in such assets as were necessary to the ordinary and usual operation of the business.
    No change was made in the management of the business after December 1,1905, except that Cronyn and Samuels were asked to express their opinions on business matters. The corporate form was practically ignored and the business run as a partnership. The Rieggers considered that they owned the corporate assets rather than merely its capital stock and acted accordingly.
    In June, 1913, the Good Manufacturing Co., the petitioner was organized under the laws of New York, with a capital stock of $3,000 ■ divided into 30 shares of the par value of $100 each, and it continued the business of the Indiana company which had been previously moved to New York City. The Indiana corporation was dissolved and its assets transferred to the petitioner, and the capital stock book and books of account were continued in use without any change. In fact there was no change made as to anything except that the Good Manufacturing Co. became a New York corporation instead of an Indiana corporation. The stockholdings and management of the business remained the same.
    The Riegger brothers, Cronyn and Samuels, were each paid regular salaries and the net profits for each year were annually credited to the personal accounts of the stockholders in proportion to their stockholdings. Against the personal accounts the stockholders were at liberty to make withdrawals of a portion or all of the amounts credited thereto’ and all of the stockholders made withdrawals. A. F. Eiegger was the only stockholder who allowed his proportionate share of the profits to accumulate to his account, while each of the others made regular withdrawals in each year and occasionally overdrew. When the said accounts were overdrawn the stockholders paid to the petitioner, interest on the debit balances. Semiannually the petitioner credited to the stockholders’ personal accounts, interest at the rate of 6 per cent per annum on the average credit balance.
    To prevent payment to the stockholders of the $87,000 surplus which had not been credited to their personal accounts, A. F. Eiegger secured the adoption on May 1, 1915, of the following resolution:
    That the amount $87,000 which has heretofore been recorded upon the corporation’s books as a surplus, is not and has never been a surplus in the accepted sense, but has been money loaned without interest, by the individual stockholders for the purpose of carrying on the business, that it shall now be transferred back to the account of each stockholder, except the sum of $9,000 which shall remain as surplus, as heretofore, that the amounts so transferred are not to be drawn against by any stockholder but shall remain as a permanent loan, without interest, until such time as any stockholder shall withdraw from the corporation in which case it shall be paid, to the withdrawing stockholder, in six months after written notice has been given.
    The above was the first formal resolution passed by the petitioner" and the only one with reference to the distribution of profits or surplus. In accordance with that resolution the following entries were made on the books:
    C. Riegger, loan account without interest_$35,100
    Caroline Riegger, loan account without interest_ 35,100
    W. Cronyn, loan account without interest_ 3, 900
    F. H. Samuels, loan account without interest_ 3, 900
    At that time A. F. Eiegger had transferred all of his holdings to the mother’s name, for personal reasons not material in this proceeding, but shortly thereafter they were transferred back to his name.
    On May 22, 1917, the petitioner’s capital stock was increased from $3,000 to $90,000 and the new stock was issued to the stockholders in proportion to their stockholdings. On the petitioner’s books the transaction was reflected by debiting each stockholder’s “ loan account without interest,” by the portion of the $78,000 credited thereto in 1915, and by debiting the petitioner’s surplus account by $9,000 which had been left therein in 1915, and by crediting $87,000 to capital stock account. The above method was used to capitalize surplus and profits which were already employed in the business. The new stock issue did not affect the stockholders’ accounts, the balances of which were on January 1, 1917, as follows: A. F. Eiegger, credit, $119,856.44; C. Riegger, debit, $9,405.98; Cronyn,. credit, $160.82; and Samuels, credit, $2,563.92.
    On November 1, 1918, the petitioner’s capital stock was increased from $90,000 to $190,000 the new stock being issued to the stockholders in proportion to their stockholdings and was reflected on the books by debiting each stockholder’s account with his proportionate share and crediting such amounts to capital stock account. None of the stockholders had a sufficiently large balance to his credit to cover his proportion of the new stock issue, except A. F. Riegger, so his account was debited by $56,722.23 which was credited to the personal accounts of the other stockholders as follows: C. Riegger, $44,651.05; Cronyn, $5,887.43; Samuels, $4,998.45, for which latter -amounts A. F. Riegger took the personal notes of the other three and said amounts were paid back to A. F. Riegger personally with interest.
    The stockholders’ accounts, usually designated by the stockholder’s name only or sometimes by his name followed by “ surplus,” for the years 1918 to 1919, inclusive, are as follows:

      Tbe losses occurring in 1915 and 1917 were debited proportionately against each stockholder’s personal account, and in that manner the losses were absorbed.
    The capital stock of the petitioner from its organization to 1920 was owned as follows:

    For the years prior thereto and for the taxable year involved the petitioner has taken and been allowed, by the respondent, a deduction from gross income of the amount of interest credited annually to the average credit balances of the. stockholders’ accounts.
    Each of the stockholders reported in his individual income-tax return for the year in which the credit was made, the amount credited to his personal account, as a dividend and paid the surtax thereon.
    The petitioner’s furniture and fixtures account begins in 1898 and is continued on through the year 1919, showing additions and the depreciation deduction taken each year during that period.' For the period from 1913 to 1917, inclusive, $3,625.74, the amount taken as a deduction for depreciation of furniture and fixtures, was credited directly to the asset account. In determining the amount of depreciation for the years 1918 and 1919, it was computed at Ihe rate of 10 per centum per annum on the balance remaining in the asset account after crediting or reducing. that account by the sum of $3,625.74.

      Depreciation schedule

   OPINION.

Teussbll:

The petitioner contends that the sum of the credit balances remaining in the stockholders’ surplus account and being $110,999.93 on January 1, 1918, and $41,396.68 on January 1, 1919, were earned surplus and undivided profits which should be included in invested capital for the said year respectively, and petitioner’s counsel have argued that the rule of law enunciated by the Circuit Court of Appeals in Eaton v. English & Mersick Co., 7 Fed. (2d) 54, applies to the facts of this case.

In the English & Mersick case, supra, the court had before it t> corporation which carried its surplus and undivided profits in personal stockholders’ accounts from which such stockholders made withdrawals relatively in proportion to their stock ownership and allowed large balances to accumulate from year to year which the court held were true surplus and undivided profits. In the instant case, similar personal stockholders’ accounts for corporate profits constitute a part of the petitioner’s accounting system. There appears to have been no corporate resolution authorizing these accounts as they existed during the taxable year and there is equal lack of any recorded action respecting withdrawals therefrom. And, therefore, in our interpretation of the facts contained in the instant case, we must rely wholly upon the actions of the corporation and its stockholders. Here, we find corporate profits credited to stockholders’ accounts, that one stockholder allows his account to accumulate into a large credit balance, while another stockholder, having the same stock ownership, draws his account down to small balances and sometimes his account shows an overdraft. From these facts we must conclude that all the funds credited to these accounts were subject to withdrawal it any time any stockholder chose to make a withdrawal and, further, the corporation itself appears to have recognized that the credit balances in these accounts did not belong to it when it authorized and paid interest upon such credit balances and claimed that interest as a deduction from gross income. The stockholder having the large credit balance reported the amount of corporate profits annually credited to his account in his individual income-tax return as dividend income subject to surtax only and testified that he believed the other stockholders did the same, all of which indicates that both the corporation and the stockholders regarded the credit balances in these accounts as the property of the stockholders. There is nothing in the record of this case which could lead us to conclude that the stockholders’ withdrawals from their accounts were in the nature of loans from the corporation to the stockholder, and, if not loans, they must have been dividends. Compare Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982, affirmed by the Circuit Court of Appeals, 17 Fed. (2d) 79. If the above conclusions are warranted by the facts, the instant case differs substantially from the English & Mersick case, supra,, and we are, therefore, constrained to hold that the credit bal-anees claimed by the petitioner as surplus and undivided profits during the years 1918 and 1919 were not of such a character that they could be included in invested capital as earned surplus. Cf. Kelly-Buckley Co., 1 B.T. A. 1154; Wm. H. Davidow Sons Co., 1 B. T. A. 1215.

During the years 1918 and 1919 the petitioner has been allowed a deduction from gross income on account of the exhaustion, wear and ■ tear of furniture and fixtures computed at the rate of 10 per cent upon the diminishing balances in the furniture and fixtures account. We are of the opinion that the deduction for exhaustion, wear and tear of petitioner’s furniture and fixtures on the above basis has furnished a reasonable allowance for the exhaustion, wear and tear of the properties referred to.

Having taken the view as above set forth, we find that the petitioner’s invested capital for the year 1919 has been properly computed in so far as it is affected by the asserted tax liability for the year 1918, and that the deficiency for the year 1919 is $2,231.03.

Judgment will be entered accordingly.