text:
    M. R. Hoffman, M. R. Hoffman, Jr., Guy S. Hoffman, P. R. Hoffman, and Marion Hoffman Bausman, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6641.
    Promulgated June 14, 1927.
    1. Jurisdiction. — Tlie petitioners in this action filed their joint petition on August 28, 1925. Thereafter, on May 17, 1926, all of these petitioners except P. R. Hoffman, were adjudicated bankrupts and at the hearing were represented by trustees in bankruptcy. Held, that the Board acquired jurisdiction by virtue of the appeal under the provisions of the Revenue Act of 1924, and is not ousted from such jurisdiction by virtue of section 282(a) of the Revenue Act of 1926. Plains Buying é Belling Assn. v. Commissioner, 5 B. T. A. 1147, followed.
    2. Individual Tax Liability of Partners. — Determination in accordance with stipulation of counsel respecting the accounts of the partnership.

      Charles G. Baher, Esq., and Ralph E. Stine, C. P. A.,_ for the petitioners.

      L. C. Mitchell, Esq., for the respondent.
    In this proceeding the petitioners seek a redetermination of the income-tax liabilities for the years 1918, 1919, and 1920, for which the Commissioner has determined deficiencies as follows:

    The trustees representing all petitioners except P. R. Hoffman entered into an agreement with the counsel for the Commissioner as to all the items in controversy entering into the computation of the tax. P. It. Hoffman did not appear at the hearing.
    On February 15, 1927, John Hertzler, Charles F. Haeger, and John A. Coyle, trustees in bankruptcy for M. R. Hoffman, M. R. Hoffman, Jr., Guy S. Hoffman, Marion Hoffman Bausman, and Esther Hoffman Schadt, as individuals and as partners trading as Hoffman Leaf Tobacco Co., filed an intervening petition, to which respondent filed answer on March 4, 1927. At the trial counsel for the trustees in bankruptcy on behalf of the taxpayers represented by them waived all minor allegations of error contained in the original and amended petition, joined with counsel for the respondent in a stipulation respecting the facts hereinafter set forth and agreeing that the tax liability of the taxpayers represented by them for the years 1918 and 1919 should be redetermined on the basis used by the respondent in his deficiency letters modified by the stipulation respecting the inventory and the expense deductions as hereinafter set forth, and agreed that the deficiencies found by the respondent for the year 1920 were correctly determined.
    FINDINGS OF FACT.
    During the taxable years 1918 to 1920, inclusive, the petitioners were members of a partnership carrying on business under the name and style of Hoffman Leaf Tobacco Co. Some time following the year 1921 and prior to May 17,1926, the membership of this partnership was changed, P. R. Hoffman retiring from the partnership, and Esther Hoffman Schadt became a member of the succeeding partnership. On May 17, 1926, the partnership and the individual members thereof, consisting of M. R. Hoffman, M. R. Hoffman, Jr., Guy S. Hoffman, Marion Hoffman Bausman, and Esther Hoffman Schadt, individually were adjudicated bankrupts.
    The partnership as it existed during the years 1918 to 1920, inclusive, carried large stocks of leaf tobacco, and the merchandise inventory for the year 1919 was of the money value of $858,862.
    During the year 1919 the then partnership in the conduct of its business expended for labor, supplies, and similar expenditures the amount of $201,877.73, which amount was a lawful deduction from gross income for the year 1919, but no part of this amount was allowed as a deduction in the computation of deficiencies shown in the deficiency letter.
   OPINION.

Trussell : Following the rule laid down by the Board in its decision and opinion in the case of Plains Buying & Selling Assn. 5 B. T. A. 1147, we are of the opinion that the Board acquired jurisdiction in this action by virtue of the appeals filed under the provisions of the Revenue Act of 1924 and prior to the adjudication of bankruptcy on May 17,1926, and that the Board is not ousted of such jurisdiction by virtue of section 282(a) of the Revenue Act of 1926.

At the trial counsel for the parties then represented agreed to and dictated into the record a stipulation in words and figures as follows: The parties to this appeal agree (1) that the inventory of January 1, 1919 was $858,862.54, (2) that in the year 1918 the Hoffman Leaf Tobacco Co. expended for labor and supplies and similar expenditures $201,877.73, no part of which has been allowed as a deduction, and that appellants are entitled to said amounts as a deduction, (3) in all other respects the Commissioner’s determinations are correct.

The deficiencies may he redetermined in accordance with the foregoing findings of fact and opinion upon 16 days’ notice, pursuant to Buie 60, and judgment will he entered accordingly.


source: Caselaw Access Project

author: Thus sell :

license: Public Domain

text:
    Ajax Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7476.
    Promulgated June 14, 1927.
    Paid-in Subplus. — Cask value of coal-laud lease at the time acquired hy the taxpayer corporation determined and allowed as paid-in surplus and subject to exhaustion in the proportion that the number of tons mined each year bears to total content of recoverable merchantable coal.

      John T. Metcalf, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    The petitioner complains of a deficiency in income and profits taxes for the year 1920 in the amount of $2,723.29, resulting from (1) the rejection by the Commissioner of a claimed paid-in surplus and (2) the disallowance of a deduction for the exhaustion of the capital value of a coal-land leasehold.

      The record contains the testimony of the general manager of the petitioner corporation; an experienced coal-mine operator, owning and operating a lease adjoining the petitioner’s property; and an experienced coal-mining engineer; all of whom gave opinion evidence as to the cash value of the petitioner’s lease of coal lands at the time it was acquired. The record also contains the testimony of a person who, acting on behalf of himself and others, in the month of May, 1920, offered to purchase the petitioner’s coal-land lease, together with the improvements then made and in process of completion, and to pay therefor the sum of $200,000, and that he again renewed such offer in the month of June, 1920.
    FINDINGS OF FACT.
    During the year 1918 George P. Fitz, J. C. Jones, and B. W. Whitfield, began negotiations with the Kentucky Kiver Coal Corporation with the view of acquiring a lease of approximately 1,000 acres of coal-bearing lands in Perry County, Kentucky. The Kentucky Kiver Coal Corporation offered to give to said parties a lease of the No. 4 seam coal underlying said lands on a royalty basis of 10 cents per ton of merchantable coal, and an agreement, partly oral and partly evidenced by letters passing between the parties, for a lease of such coal properties was then made.
    At this time, in 1918, the Louisville & Nashville K. K. was building what was known as Lots Creek Extension, and. Messrs. Fitz, Jones, and Whitfield, after securing the agreement for the lease began negotiating with the Louisville & Nashville K. K. for spur track and siding facilities. These negotiations resulted successfully, thus making it practicable to mine and ship coal from the tract of land leased.
    In August, 1919, Fitz, Jones, and Whitfield associated with themselves T. C. Berger and T. J. Metcalf, and organized a corporation known as the Ajax Coal Co., with an authorized capital stock of $100,000. Of this capital stock, $52,000 was immediately taken by the said incorporators and paid for in cash. Thereafter, the same incorporators subscribed for more stock at par, and paid for the same in cash, and began making the necessary preparations for operating a coal-mining business upon the tract leased.
    On the first day of May, 1920, the agreement for a lease acquired by Fitz, Jones, and Whitfield was carried out by the execution and delivery of a formal lease made by the Kentucky Kiver Coal Corporation, lessor, to the Ajax Coal Co. as lessee, on a royalty basis of 10 cents per ton. During the year 1920, and following the completion of the Louisville & Nashville K. K. Lots Creek Extension, the Kentucky Kiver Coal Corporation leased an adjoining smaller tract of the same vein of coal on a royalty basis of 15 cents per ton.

      On the 7th day of May, 1920, one C. B. Rose, acting for himself and others, entered into a contract with Berger, Fitz, and Metcalf for the purchase of all of the capital stock of the Ajax Coal Co., and to pay therefor the sum of $200,000 on or before the 7th day of June, 1920. On that day Rose and his associates were not ready to complete and carry out their agreement to purchase and asked for an extension of time which was declined for the reason that those stockholders of the Ajax Coal Co. who had not signed the agreement hesitated to sell at the price named. A few days later Rose and his associates were ready with the sum of $200,000 to purchase the stock of the Ajax Coal Co. and renewed their offer. At this time the Ajax Coal Co. had expended, in its preparation for carrying on mining operations, approximately $67,000, and those stockholders who entered into the agreement of sale to Rose agreed that additional improvements and equipment should be acquired, making the total cost of the same $90,000. When the Ajax Coal Co. opened up its books of account it entered thereon its coal land lease as an asset at a valuation of $80,000. The amount of recoverable merchantable coal underlying the tract was approximately four million tons. The petitioner’s leasehold, when acquired, had a cash value of $80,000, and the said leasehold property was a part of the contributions made by the stockholders to the paid-in capital and surplus of the petitioner corporation.
   OPINION.

Thus sell :

The lease here under consideration conveyed to the lessee the exclusive use f,or such term of years as might be required for the mining and removal of a vein of coal, estimated to contain approximately four million tons. The lease created an interest and an estate in land separated from the fee. An interest or an estate in land is something of value the moment it is created unless, perchance, the conditions are of such an unfavorable character as to destroy the otherwise presumed value of the exclusive use of land for a period of years.

The testimony in this case all tends to prove that the conditions under which this lease was acquired were favorable to the lessee; that such conditions were more favorable than the conditions of other leases in the same territory as evidenced by the fact that the royalty paid under the lease here in question was 10 cents per ton while a lessee of an adjoining tract paid 15 cents per ton. The directors of the lessee corporation in the exercise of their judgment placed the present value of this lease made in May, 1920, at $80,000. Two other witnesses, one of whom was an experienced coal-mining operator and the other an experienced coal-mining engineer, both of whom were thoroughly familiar with coal-mining conditions in the territory surrounding the land covered by the petitioner’s lease, agreed that the present value of petitioner’s lease was at least $80,000. Another witness testified that he and his associates offered to purchase this lease in May, 1920, at a valuation of not less than $100,000, and that he renewed this offer again in June of the same year when the offer was rejected by the petitioner. We are, therefore, of the opinion that the record of this case must be taken to establish that at the time this lease was made and delivered to the petitioner corporation it had a then present value of $80,000, and at that value it was contributed to the petitioner corporation by its stockholders as a part of the paid-in capital and surplus of the petitioner, and that the lease must, therefore, be reflected in petitioner’s invested capital at the initial valuation of $80,000 and be subject to exhaustion from year to year in the proportion that the number of tons of coal mined each year is to the total coal content of the tract.

The deficiency may be recomputed in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Buie 60, and judgment will be entered accordingly.


author: Texts sell :

text:
    Charles C. Clark, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3894.
    Promulgated June 14, 1927.
    Exchange oír Coepobate Stocks. — The partnership of which petitioner was a member in 1914 acquired a corporate stock of the par value of $5,000. Later, as a result of the reorganization of the corporation, it exchanged this stock for the stock of a successor corporation of a par valye of $3,378. Held, that no deductible loss was sustained by the partners as a result of these transactions.

      Charles C. Ciarle, Esq., pro se.

      John W. Fisher, Esq., for the respondent.
    The deficiency letter dated March 3, 1925, asserts deficiencies in the amounts of $674.28 for the year 1919; $130.10 for the year 1921, and an overassessment in the amount of $29.87 for the year 1920. Only the year 1919 is involved in this proceeding.
    The petitioner alleged that the Commissioner erred in disallowing the deduction of a loss alleged to have been sustained in the year 1919.
    FINDINGS OF FACT.
    The petitioner, an individual, is engaged in the practice of law with the firm of Seerley & Clark, in Burlington, Iowa.

      In or about 1911, there was organized an Oregon corporation known as the Dufur Orchard Co., for the purpose of planting- and developing orchards. The controlling interests of that corporation planned to organize a new corporation under the name of the Northwestern Investment & Mortgage Co. for the purpose of holding the stock of the Dufur Orchard Co., and of operating a general store and a bank at Dufur, Oreg., where the orchards were located.
    The law firm of Seerley & Clark was employed by several of its clients, who held stock in the Dufur Orchard Co. and who were solicited to invest in the proposed new company, to go to Oregon early in 1913 and investigate and report as to the advisability of forming the new corporation. For the services performed a fee of $5,000 was charged and Seerley & Clark agreed to receive payment in stock of the new company, if organized.
    In August, 1913, the Northwestern Investment & Mortgage Co. was incorporated with an authorized capital stock of $500,000 of which $274,820 was issued, $185,000 for Dufur Orchard Co. stock, and the balance for cash and property.
    On January 16, 1914, there was issued to J. J. Seerley and C. C. Clark, Certificate No. 29 of the Northwestern Investment & Mortgage Co. for 50 shares of the capital stock of a par value of $100 per share. The stock was received in full settlement of the $5,000 fee charged for legal services, for both Seerley and Clark were of the opinion that the stock was well worth par. The Dufur Orchard Co. prospered at that time and continued to develop orchards.
    In 1915 there was organized the Dufur Orchard Co-owners Co., with only a nominal capital stock, for the purpose of doing the actual work of taking care of the orchards. This corporation operated in conjunction with the Dufur Orchard Co. in the development and sale of 5, 10,15, and 20-acre tracts of orchard land.
    The Northwestern Investment & Mortgage Co. was not able to sell sufficient stock to operate successfully, its debts increased, and in 1919 its stockholders decided to merge all the operations into one corporation. In 1919 the capital stock of the Dufur Orchard Co-owners Co. was increased to $1,000,000, the Northwestern Investment & Mortgage Co. was dissolved, and its stockholders received in exchange stock in the Dufur Orchard Co-owners Co.
    On December 1, 1919, there was issued to Seerley and Clark for their 50 shares of stock of the Northwestern Investment & Mortgage Co. of a par value of $5,000, Certificate No. 365 of the Dufur Orchard Co-owners Co. for 387.8 shares of a par value of $3,378. One-half of the reduction of par of the stocks received in the exchange is the amount here in controversy.
   OPINION.

Texts sell :

It does not appear from this record that the corporate stocks involved in this action were listed on any exchange or had any definitely known and readily determinable market value. In the circumstances of this case we may, in valuing these stocks, look to the value of the net assets of the issuing corporations. Apparently the successor corporation issued its stock against the same assets represented by the stock of the predecessor corporation. Whatever investment value was represented by the stock of the Northwestern Investment & Mortgage Co. that same investment value, as represented by corporate assets, continued to be the basis of value of the stock of the Dufur Orchard Co-owners Co., and the stock of the latter company represented the same cost to Seerley and Clark as the cost of the former company. The record contains no reliable data from which we can find any definite loss in the value of the corporate assets represented by these stocks, and we are, therefore, of the opinion that the petitioner can not, in the year 1919, claim a loss resulting from the exchange.

The deficiency in tax for the year 1919 is $67fB8, and judgment will he entered accordingly.

Trammell concurs in the result.


author: Trammell: Trussell,

text:
    William A. Buttolph, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6027.
    Promulgated June 14, 1927.
    Husband and Wiee. — Tlie petitioner and his wife originally made a joint return for the calendar year 1922. Thereafter, and on March 6, 1924, they made separate individual returns for the year 1922 in which the separate income of each was shown, and filed such separate returns as amended returns for the year 1922. Held, that having originally made a joint return for the year 1922, they may not thereafter, by filing amended separate returns, have their tax liability determined upon the basis of such separate returns. R. Downes, Jr., 5 B. T. A. 1029, followed.

      Milton D. Bloch, G. P. A., and Peter J. Vandenhergh, O. P. A., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
   Trammell:

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $130.54.

The petitioner alleges that the Commissioner erred in denying the taxpayer and his wife the right to file individual amended returns of income for the years 1921 and 1922 when joint returns of income were originally filed.

BINDINGS OP PACT.

The petitioner is an individual residing at 5429 Cornell Avenue, Chicago, Ill., and was during the year in question, employed at a salary of $12,204 as general western sales manager for the LaSalle Extension University.

In 1913 petitioner’s wife, Miriam L. Buttolph, purchased a 36-apartment building, located between 49th and 50th Streets on Prairie Avenue, Chicago, at a cost of $101,000, the land being valued at $27,000, and the building at $80,000. The title to this property is in the name of Mrs. Miriam L. Buttolph, and the property and the income therefrom are her separate estate and property. The net income from this property, after deducting maintenance cost, depreciation, etc., for the year 1922, was $9,159.91. During all the years from 1913 to 1922, inclusive, the petitioner and his wife, in an effort to comply with the requirements of the income-tax laws, made and filed joint income-tax returns showing the gross income and deductions of both husband and wife. During all of these years the petitioner was unconscious of his and his wife’s right and privilege under the said tax laws of making separate tax returns and of having their income-tax liability computed separately.

Early in the year 1924, having been advised of his and his wife’s right to make separate income-tax returns, they then made separate returns for the. calendar year 1923, and on or about March 6, 1924, they made separate income-tax returns upon proper department forms for each of the calendar years 1919, 1920, 1921, and 1922, and asked to have their tax liability for those years redetermined upon the basis of such amended separate returns and made a claim for refund of amounts claimed to have been paid in excess for said years.

On June 26, 1925, the respondent mailed to the petitioner a deficiency letter in which there were shown deficiencies and overassess-ments as follows:

In this deficiency letter the respondent said:

Xour amended returns for 1919 and 1920 have been accepted. The amended returns for 1921 and 1922, and the claim for the refund of a portion of the tax liability for these years are rejected * * *.

On August 6, 1925, the petitioner brought this action for a re-determination of the above-described deficiency for the calendar year 1922.

Judgment will he entered for the respondent. See B. Downes, Jr., v. Commissioner, 5 B. T. A. iom.

Trussell,

dissenting: The Revenue Act of 1921 is a part of a general system of taxation for the purpose of raising monies to defray the expenses of operating the Government of the United States. The system as it exists today began about August 5, 1861, when a law levying internal revenue taxes was enacted, and the organized system begun on that date has continued and grown until the present time. During all of this period, by various acts of Congress and at various times, the Government has collected taxes known as internal revenue taxes, upon numerous objects, occupations, and incomes, and it has developed the system known as internal revenue taxation. From the earliest of these revenue acts, persons liable to pay taxes thereunder have been required to file tax returns which have at all times been the basis upon which the Government assessed and collected the taxes provided for by law and, during all of these years by virtue of a consistent administrative practice, all internal revenue taxpayers have been accorded the privilege of correcting mistakes in their returns and of so amending and reforming such returns as to accord to each taxpayer the maximum of his rights under the statutes to the end that he should not at any time pay taxes in excess of the amounts required by the specific provisions of the acts of Congress. The privilege of so making modified and amended returns has over all the years from 1861 to the present time grown into a prescriptive right which has not been seriously disputed or denied to any taxpayer until, under the Revenue Act of 1921, the respondent now denies those husbands and wives who, either through inadvertence or lack of knowledge, made joint income-tax returns when they might to their advantage have made separate returns.

The basis of this denial on the part of the respondent is found in the language of section 223 (b) of the Revenue Act of 1921, which is as follows:

If a husband and wife living together have an aggregate net income for the taxable year of $2,000 or over, or an aggregate gross income for such year of $6,000 or over—
(1) Each shall make such a return, or
(2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income.

The words contained in the above-quoted section, which were new to the Revenue Act of 1921, are “ in which case the tax shall be computed on the aggregate income.” The respondent has interpreted these words to mean that when a husband and wife have once made a joint return for a given year they are prohibited from thereafter making or offering separate returns for the same year and having their liability to income tax for that year determined upon the basis of separate returns, and that by virtue of these words the petitioner in this case and any other husbands and wives who may, for the years 1921 and 1922, have made joint returns, have been by act of Congress deprived of the right of modifying such returns so as to have their taxes determined upon the basis of each one’s separate income. The respondent has freely granted to this petitioner and his wife that right and privilege for the years 1919 and 1920 the same as he has granted it time without number to other taxpayers in prior years. When Congress enacted these words into the Revenue Act of 1921, did it intend to abrogate a right which then had more than half a century of consistent administrative practice as its foundation and which up to that time had never been questioned ? Or, were these words, first introduced into the Revenue Act of 1921, intended to convey an entirely different meaning? A return, under the internal revenue laws, is the basis on which assessment of taxes is made. The language of the 1921 Act here quoted clearly means that when the Commissioner has before him a joint return of husband and wife containing the items of gross income and deductions pertaining to each of them, he may not be required to make separate computations of tax liability for husband and wife separately but shall compute the tax upon the aggregate of the two incomes. But, when these taxpayers have come forward and offered separate returns as amendments to their original joint returns, these amended separate returns relate back to and become a part of the original return and from that time on the Commissioner has not before him a single joint return but two separate returns of two taxpayers, and, with such separate returns before him, he should make computations of tax liability in accordance with the separate net income of each taxpayer. It seems to me impossible that Congress intended to deprive husbands and wives who once made a joint return of the privilege of amending such returns when the right of amendment is freely accorded to every other internal revenue taxpayer. In fact, it appears that this petitioner might, in 1924, have come to the Commissioner, presented an amended return which might have modified every item of gross income and every item of deduction, and changed the whole basis of computing tax liability in every respect except the one of separating his wife’s income from his own, and the Commissioner would have raised no objection to such amendment.

For the year 1921, more than seven million taxpayers made income-tax returns and every one of these, except those husbands and wives who made joint returns, might at any time within the period of the statute of limitations have come forward and claimed the right to reduce their tax liability upon the basis of amended returns, provided, in such amended returns, the provisions of the law respecting the reporting of gross income and deductions were properly followed. I can not believe that this taxpayer has been deprived of the same right by any act of Congress or by any interpretation thereof which is authorized by law.


author: Marquette:

text:
    Harbour-Longmire Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6905.
    Promulgated June 14, 1927.

      O. H. Garnett, Esq., for the petitioner.

      John, D. Foley, Esq., for the respondent.
   Marquette:

This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $1,026.97. The issue presented is whether the petitioner was, during that year, affiliated with the Harbour-Longmire Co., of Enid, Olda.

FINDINGS OP FACT.

The petitioner is a corporation organized under the laws of Oklahoma in the year 1911, with its principal office at Oklahoma City, and it is and has been at all times herein mentioned, engaged in selling furniture and house furnishings at that place. During the year 1921 its capital stock outstanding consisted of 515 shares of the par value of $100 each, which were held and owned by the following persons:

„, .... Number of Stockholder: shares
W. M. Longmire_130
Mrs. W. M. Longmire_ 45
W. M. Longmire as guardian for Aileen Longmire_ 10
W. O. Cliismn, Jr_ 75
J. IT. Harbour_100
Rose Harbour Hocker_ 35
Jerry Harbour_ 10
Lee Y. Sneed_ 50
John S. Sneed_ 50
A. G. Hollis_ 10
Total_ 515

Myrtie Longmire was the wife of W. M. Longmire, Aileen Long-mire was his daughter, and W. C. Chisum, Jr., was a brother of Myrtie Longmire. Eose Hocker was a sister of J. F. Harbour, Jerry Harbour was his son, and Lee V. Sneed and John S. Sneed were his stepsons. A. G. Hollis was an employee of the corporation and held the office of secretary, J. F. Harbour was president, and W. M. Longmire, vice president of the corporation.

In the year 1920, J. F. Harbour and W. M. Longmire organized the Harbour-Longmire Co. of Enid, under the laws of Oklahoma, for the purpose of putting Eose Harbour Hocker and her husband, J. P. Hocker, and E. C. Longmire, brother of W. M. Longmire, in business at that place. The corporation at the beginning of the year 1921 had outstanding 300 shares of capital stock of the par value of $100 each, which stood in the names of the following persons:

Shares.
W. M. Longmire_ 75
E. O. Longmire_ 50
J. F. Harbour_ 75
Rose Harbour Hocker_ 25
J. P. Hocker_ 25
Austin Miller_ 25
Prentiss Price_ 25

W. M. Longmire was president, J. P. Hocker, vice president, and E. C. Longmire, secretary of the corporation. Austin Miller was a director in the corporation. He was also manager of the Oklahoma Furniture Manufacturing Co. All the money that went into the corporation except $5,000 paid for stock by Austin Miller and Prentiss Price, was furnished by W. M. Longmire and J. F. Harbour. The stock standing in the name of E. C. Longmire was paid for by W. M. Longmire and the certificate therefor was assigned to him in May, 1922. J. F. Harbour paid for the stock standing in the name of J. P. Hocker and actually held the certificate therefor.

On February 26, 1921, J. F. Harbour transferred 30 shares of the capital stock of the Harbour-Longmire Co. of Enid, Okla., standing in his name, to his sister, Eose Harbour Hocker. On November 17, 1921, 150 additional shares of stock were issued, of which 100 shares were issued to the Harbour-Longmire Co. of Oklahoma City, and 50 shares were issued to the Oklahoma Furniture Manufacturing Co. in settlement of a debt due that company.

The capital stock of the two corporations was on January 1, 1921, held as follows:

The only change in the stockholdings in the two corporations between January 1, 1911, and November 27, 1921, was that on February 26, 1921, J. F. Flarbour transferred 30 shares of his stock in the Harbour-Longmire Co. of Enid to his sister, Rose Harbour Hooker. During the period November 17, 1921, to December 31, 1921, inclusive, the capital stock of the two corporations was held as follows:

The operations of the two corporations were controlled and managed by W. M. Longmire and J. F. Harbour. One of them visited Enid, Okla., at least once a month. Practically all of the buying for the Enid company was done by them. A part of the goods so bought was shipped direct to the Enid company and part to the Oklahoma City company, which in turn shipped it to Enid. All of the expense of such buying and supervision was borne by the Oklahoma City company. The Enid company was also furnished a part of its merchandise by the Oklahoma City company, which billed it to the Enid company at cost regardless of the market. This practice resulted in an arbitrary shifting of profits for the reason that if the market was rising the Enid company was getting its goods at less than market, and if the market was falling, it was paying more than market price for the goods.

During the latter part of the year 1921, the market was generally declining. Because of the intercompany transactions the Enid company was, by November, 1921, indebted to the Oklahoma City company in a substantial amount, and it was in partial satisfaction of that indebtedness that 100 shares of the capital stock of the Enid company were issued to the Oklahoma City company on November 17, 1921.

The shares of stock of the Oklahoma City company held by the members of W. M. Longmire’s family were voted by him and the shares of stock of that company held by the members of J. F. Harbour’s family were voted by him. W. M. Longmire and J. F. Harbour, with A. G. Hollis, secretary, conducted the stockholders’ meetings and controlled and directed the business of the corporation.

The meetings of the stockholders of the Enid company were held in the office of the Oklahoma City company. At these meetings E. C. Longmire and J. P. Hocker were usually present and voted the stock standing in their names, although as hereinbefore stated, the certificates representing the stock of J. P. Hocker were in the possession of J. F. Harbour. The other stock belonging to members of the Longmire and Harbour families was voted by W. M. Longmire and J. F. Harbour. The record does not show that the minority stockholders of the corporation attended the stockholders’ meetings, or were represented therein. Subsequent to the year 1921 the Enid company proved to be a losing venture and its liabilities were paid and its assets taken over by the Oklahoma City company. The respondent refused to permit the two corporations to file a consolidated return of income and invested capital for the year 1921.

The petitioner and the Harbour-Longmire Co. of Enid, Okla., were affiliated during the year 1921.

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


author: Love:

text:
    William W. Parshall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6452.
    Promulgated June 14, 1927.
    1. Under tlie statutes of Pennsylvania a transfer by a member of a partnership of bis interest in the partnership is not rendered invalid by reason of the fact that the other members were not consulted or informed in regard to such transfer.
    2. A partner’s interest in a partnership is personal property and a transfer thereof is not required to be in writing.
    3. Failure to file certificate of personnel of a partnership as required by statute, does not affect the status of the partnership as such.

      William W. Parshall, Esq., and James B. Gray, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for the years 1918, 1919, and 1920, in the total amount of $30,476.09, as evidenced by the deficiency notice, but as alleged and complained of in the petition, in the following several amounts:
    1918_$2, 720. 95
    1919_ 3,169. 55
    1920_ 6, 634. 22
    12,524.72
    The only question at issue is whether the profits from a partnership business known as the Puritan Supply Co., for the years in question, belonged to and were income to petitioner or belonged to and were income to petitioner’s wife, Amelia B. Parshall.
    FINDINGS OF FACT.
    The petitioner is an individual who resides in Uniontown, Pa., and is a lawyer of many years experience in Pennsylvania. In 1901 or 1902, he, with James R.. Cray and G. S. Harah (with a fourth party for a brief period) formed a partnership and engaged in the general retail mercantile business, primarily as a commissary for the Puritan Coke Co. The fourth member, soon after the organization, withdrew, and after that each of the other three persons named owned a one-third interest.
    In 1905, petitioner, being indebted to his wife for borrowed money, in an amount between $800 and $1,000, offered her in settlement of that indebtedness his one-third interest in the Puritan Supply Co. in which he had invested about the same amount. She accepted the offer, and thereafter claimed as her own that interest, and petitioner recognized the same. There was no written transfer; neither was there any record made on the books of the company of such transfer, nor was there any published notice given. The other members of the partnership were not consulted about the change, nor any formal notice given them of the change. Incidentally, they did learn of the change soon after it was consummated, and offered no protest or objection. The three families were close friends, and associated in other lines of business.
    The active operation of the store was under the control of a manager, an employee. Harah was secretary and treasurer and signed all checks issued by the company. Neither Parshall, Cray nor Mrs. Parshall took any active part in the management or conduct of the business, and they knew nothing of its operation other than information imparted to them in an informal manner by Harah.
    George S. Harah, William W. Parshall, and James E. Cray, carrying on or conducting business under the assumed or fictitious name, style or designation of Puritan Supply Co., German Township, Fayette County, Pennsylvania, filed in the office of prothonotary the certificate provided for in the act of the Assembly of the Commonwealth of Pennsylvania.
    After 1905, the checks for the Parshall one-third interest in the partnership profits were generally made payable to Mrs. Parshall, though some of them may have been made payable to W. W. Parshall. They were either mailed to Mrs. Parshall, or delivered to W. W. Parshall. The canceled checks made in 1918 and 1919 have been misplaced or lost. Checks made in 1920 and 1921 were as follows:
    Check dated March 10, 1920, payable to Mrs. W. W. Parshall_$1, 669.55
    Cheek dated April 12, 1920, payable to M. B. Parshall (which constituted the full one-third of profits for the year 1919, and the checks were endorsed as made payable)_ 1,500.00
    Check dated March 14, 1921, payable to A. B. Parshall_ 3, 356.56
    Check dated July 1, 1921, payable to A. B. Parshall_ 2,000. 00
    Check dated December 1, 1921, payable to Amelia B. Parshall (which constituted the full one-third of profits for the year 1920, and the checks were endorsed as made payable, except the last, which showed a deposit to Amelia B. Parshall by the Citizens Title & Trust Co.)- 1,000.00
    In her income-tax returns for the years in question, Amelia B. Parshall included the amounts so received by her from the Puritan Supply Co. as a part of her gross income. There was no real estate owned by the partnership.
   OPINION.

Love:

The problem for solution in this case is a mixed question of law and fact. The question of fact first to be determined is whether or not there was a transfer or attempted transfer by petitioner to his wife in 1905, of his one-third interest in the Puritan Supply Co. Submitted from another angle, the question is, Do the circumstantial facts, admitted, or fully substantiated, so strongly tend or point to a contrary conclusion as to challenge and outweigh the positive testimony of petitioner corroborated to some extent by his witnesses, that there was, at least, an attempted transfer in good faith, and for a good consideration?

The question of law is, accepting petitioner’s testimony at face value, Do the facts of the case constitute a legal transfer of that partnership interest?

When one takes into consideration the fact that petitioner is, and has been for many years, a lawyer, with knowledge of the laws governing partnerships as well as general laws of business dealings, it seems strange to find a course of dealings in which such lawyer was the principal actor, so much at variance with recognized methods of conducting such business.

As clearly indicated in the findings of fact, we have resolved the question of fact in favor of petitioner, that is, we find that there was a tona fide attempt on the part of petitioner to transfer to his wife, Amelia B. Parshall, his one-third interest in the Puritan Supply Co.

The question now is whether or not there was a legal transfer. The Uniform Partnership Act of Pennsylvania (Act of March 26, 1915, P. L. 18, part 5, sec. 26), provides in part:

A partner’s interest in the partnership is his share of the profits and surplus, and the same is personal property.
IMA. Sec. 27(1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract, the profits to which the assigning partner would otherwise be entitled.
(Act of April 14, 1851, P. L. 612, sec. 13.) Prom and after the tenth day of August next, all persons who are now doing business in a partnership capacity in this commonwealth shall file or cause to be filed in the office of the pro-thonotary, in the county or counties where the said partnership is carried on, the names and location of the members of such partnership, with the style and name of the same and as often as any change of members in said partnership shall take place, the same shall be certified by the members of such new partnership as aforesaid; and in default or neglect of such partnership so to do, they shall not be permitted, in any suits or actions against them in any court, or before any justice of the peace or alderman in this commonwealth, to plead any misnomer or the omission of the name of any member of the partnership, or the inclusion of the names of persons not members of said partnership.

Section 18 quoted last above was in 1918 and still is in force. From an analysis of the foregoing statutes, the following conclusions of law are deduced:

1. A transfer of a partner’s interest to a stranger without the knowledge or consent of his partners does not dissolve the partnership nor render the transfer invalid.

2. A partner’s interest in a partnership is personal property and may be transferred otherwise than by an instrument in writing.

3. A transfer by a partner of his interest in the partnership entitles the transferee to receive as his own, the share of the profits to which the transferor would have been entitled.

4. Failure to file the certificate as required by the Act of April 14, 1851, P. L. 612, sec. 18, does not affect the legal status of the partnership, nor render invalid any transfer of interest. It only estops the members to deny partnership when sued in the courts of Pennsylvania.

Under the laws of Pennsylvania the transfer by W. W. Parshall to his wife, Amelia B. Parshall, of his interest in the Puritan Supply Co. was valid, and vested in her all the property rights therein formerly held by the petitioner; and therefore the one-third of the profits realized by that company in 1918, 1919, and 1920 received by her were her income and not the income of W. W. Parshall.

The respondent urges that the decision in the case of Ormsby McKnight Mitchel, 1 B. T. A. 143, controls the instant case. After the decision of the board in that case, it was carried into the courts, finally to the United States Circuit Court of Appeals, and the courts rendered judgment in harmony with the decision rendered by the board, Mitchel v. Bowers, 15 Fed. (2d) 287.

The question involved in that case was very substantially different from the question at issue in the instant case. In the Mitchel case the husband was a partner in a firm. He made a contract with his wife by which he agreed for a valuable consideration to transfer and assign to her, until future notice, one-half of his share of the profits of that partnership. There was no attempt on his part to convey to his wife his interest in the partnership or any part thereof. She received no vested right or interest in the partnership as such. All she received was a right to demand from him one-half of the profits he received from that business.

The question in the instant case is essentially different. Here, the husband conveyed to the wife his interest in the partnership business. That business no longer belonged to him, and under the laws of Pennsylvania the profits, which prior to the conveyance belonged to the transferor, after that conveyance belonged to the transferee, and she had the legal right to demand payment, by the firm, of these profits to her. That right was a vested right and irrevocable-

At the close of the hearing a stipulation was read into the record with reference to a matter not put in issue by the pleadings and in no way connected with the issues involved in the question in issue, but which does affect the tax liability of petitioner for the years in question. That stipulation is as follows:

This income in the Bureau’s letter from which Mr. Parshall took his appeal was stated to be $429,189.03. That sum was found to be the result of a clerical error in the assessment letter in the sum of $4,444.44, was written by the typist $444.44, and a correction of this error reduces the income from the partnership, the Puritan Coke Company, by four thousand dollars; of that amount the distributive share of each of the three partners is, of course, $1,333.33. The income from the Puritan Coke Company attributed to William W. Parshall in this ease should therefore be reduced by that amount. That process of deducting $1,333.33 from $429,189.03 formerly claimed, shows the corrected amount to be $427,855.70, and it has been agreed and is here stipulated between counsel for the Commissioner and for William W. Parshall, appellant, that the corrected amount of income which accrued to him in the year 1920 from the Puritan Coke Company was $427,855.00.

We assume that the error pointed out in the foregoing stipulation will be corrected.

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


text:
    James R. Cray, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6364.
    Promulgated June 14, 1927.
    Under the statutes of Pennsylvania, a transferee of the beneficial interests of a member of a partnership is legally the owner of the profits that, but for such transfer, would have belonged to the transferor.

      James R. Gray, Esq., and William W. Parshall, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax, as follows:
    1918-$3, 002.42
    1919-12,194. 38
    1920- 30, 395.33
    45, 592.13
    There is only a part of the deficiencies involved in the issues in this case. A large part of the deficiencies arose by reason of the Commissioner’s action in asserting a larger income, for the years in question to the Puritan Coke Co., a partnership, than it had returned, and thereby augmenting petitioner’s distributive share. The controversy in regard to that matter not yet being settled, no evidence was submitted in regard to it.
    The only part of the deficiency involved in this case arose by the action of the Commissioner in attributing to petitioner certain profits from the Puritan Supply Co. and the Simpson Supply Co. for the year 1920, the same being attributed to him as being a partner, whereas he contends that his wife and not he was the partner and that she was entitled to receive and did receive and return as her income, those profits, to wit:
    From the Puritan Supply Co_$6,634.22
    From the Simpson Supply Co_ 1,580.55
    There is only one issue in this case, that is, whether or not the petitioner, or his wife, in 1920, was the legal owner of the beneficial partnership interest in the two firms last mentioned.
    BINDINGS OB BACT.
    The petitioner is an individual who resides in Uniontown, Pa. The Puritan Supply Co. is a partnership, which was organized in 1905 with four members, one of whom soon withdrew from the firm, and thereafter the firm consisted of three members, one of whom was the petitioner, who owned a one-third interest. There never were any written articles of partnership, only an oral agreement among the members of the firm. Until recent years, there were no records made or kept on the books of the company as to the membership of the firm or other like data. Its business was retail merchandising, conducted by a manager employed for that purpose. One of the partners, George S. Harah, acted as secretary and treasurer, and signed all checks of the company.
    In the early part of the year 1920, petitioner transferred to his wife, Catherine L. Cray, his one-third interest in the Puritan Supply Co. and his one-fourth interest in the Simpson Supply Co. He thereafter received no part of the profits of those two companies. In 1921, the following checks were issued and signed by the Puritan Supply Co., by G. S. Harah, treasurer:
    Check dated March 14, to C. L. Cray for_$3,356.56
    Check dated July 1, to C. L. Cray for (with notation “ return for 1920 profit ”)- 2,000. 00
    Check dated Dec. 1, to Catherine L. Cray (with notation “ Balance of 1920 ”)_ 1,000.00
    There were no checks offered in evidence from the Simpson Supply Co. The one-third profits from the Puritan Supply Co. and the one-fourth profits from the Simpson Supply Co. were paid by those respective companies to Catherine L. Cray in 1920 and were not received by the petitioner.
   OPINION.

Love:

This is a companion case to that of William W. Parshall, 7 B. T. A. 318. The Pennsylvania statutes quoted in the opinion in the Par shall case, are applicable to the issues in this case and the same are here referred to and will not be again quoted.

The petitioner appeared at the hearing and testified positively and unequivocally that at the beginning of 1920 he transferred his entire interests in the Puritan Supply Co. and the Simpson Supply Co. to his wife, Catherine L. Cray. He was subjected to a searching cross-examination without effect. He was corroborated by his former associates, Harah'and Parshall. In view of all the evidence in the case, we are convinced that the petitioner, in the early days of 1920, in good faith transferred his interests in the two companies herein named to Catherine L. Cray, and under the laws of Pennsylvania the transferee was entitled to demand and receive from those companies the profits that, in the absence of such transfer, the trans-feror would have been entitled to receive.

It was agreed by and between the petitioner and counsel for the Commissioner that the stipulation read into the record in the Pasrshall case, with reference to a typographical error in the computation of income to the Puritan Coke Co., applies to this petitioner also.

We assume that the error there pointed out will be duly corrected.

Judgment will he entered on 15 days1 notice, under Rule 50.


author: Tettssell : Phillips,

text:
    Charles F. Ayer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6442.
    Promulgated June 14, 1927.
    1. Dividend Income. — A corporation during the year 1920 was a going concern and had some income. It ordered and paid regular quarterly dividends upon-preferred stock and quarterly dividends upon common stock. In the absence of proof to the contrary, Jteld, that all-of these dividends constitute taxable dividend income to the stockholders receiving the same.
    2. Loss on Sale oe Ooepoeath Stocks. — Under the circumstances of this case the buying price of seven shares of corporate stock held to represent the market value of such shares rather than the selling price of one fractional share of the same stock.
    3. Losses. — The amount of a deduction for losses sustained in respect of corporate funding notes determined.

      J. G. Peacock, Esq., John W. Townsend, Esq., and Wheaton Kittredge, Esq., for the petitioner.'

      J. Arthur Adams, Esq., for the respondent.

      The Commissioner’s deficiency letter of June 25, 1925, asserted a deficiency in income tax for the calendar year 1920, in the amount of $16,238.64.
    The issues involved in this proceeding are (1) the inclusion in gross income of $3,571.86 dividends received from the Clinchfield Coal Corporation, of which sum the petitioner contends that $2,692.39 was in fact a return of capital; (2) whether the basis for the computation of gain or loss on the sale of shares of stock of the Carolina, Clinchfield & Ohio By. Co. should be on a cost basis of $64.50 per share instead of $63 per share used by the Commissioner; and (3) whether the petitioner was entitled, in the year 1920, to a deduction on account of bad debts in the amount of $32,683.24, or a lesser amount, or in any amount.
    At the trial of this action the Commissioner’s counsel moved to amend his answer to the effect that the restoration to an asset account of an amount treated as the March 1,1913, value of the funding notes of the Atlantic & Birmingham Construction Co. in the sum of $5,267.64 was erroneous and that the consequent deduction of a bad debt in' the amount of $3,957.31 should be disallowed, and that a liquidating dividend of $1,310.33 should be treated as income for 1920 and the deficiency thereby increased. Motion to amend was granted at the trial.
    On the day before the trial of this action, petitioner’s counsel procured a subpoena duces tecum, requiring the Commissioner, or some person representing him, to appear at the trial and produce “ a true copy of the Commissioner’s final determination of income and profits taxes of the Clinchfield Coal Corporation, Dante, Va., for the calendar year 1920, as embodied in the 60-day deficiency letter of April 10, 1926, bearing symbols IT: CB,: G-1-60D TAD (a purported copy of which has been filed by said corporation as a part of its appeal now pending before this Board under Docket No. 16594) or in any more recent deficiency letter to that company.”
    At the trial the Commissioner’s counsel stated for the purposes of the record that the Commissioner felt that he could not comply with the Board’s subpoena; that it would be impracticable to furnish that information on such short notice, but, waiving the short notice, the Commissioner feels that he is prohibited under the provisions of section 3167 of the Bevised Statutes from making known any information in a return of a taxpayer who is not a party to the proceeding-before the Board. Thereupon, petitioner’s counsel moved that the Board find that so much of the alleged deficiency as is the result of the inclusion in income of $3,571.86 of dividends of the Clinchfield Coal Corporation be disallowed. Later, in the course of the trial, petitioner’s counsel moved in effect that the Board take judicial notice of the contents of the pleadings and record in an action pending before it in Docket No. 16594.
    These two motions of the petitioner’s counsel were made a part of the record to be disposed of in the final disposition of the proceeding.
    FINDINGS OF FACT.
    During the year 1920, the petitioner was the owner of both preferred and common shares of the Clinchfield Coal Corporation. During the months of February to August, inclusive, of said year he received from said corporation dividends upon both classes of stock aggregating $2,692.39, and during the month of November he received further dividends upon both classes of stock aggregating $879.47. The petitioner’s preferred stock was 7 per cent cumulative, and the company had paid this preferred dividend regularly in quarterly payments during each of the years 1914 to 1924, inclusive. The petitioner received regular quarterly dividends upon his common stock in this corporation during the years 1918, 1920, and 1921.
    Prior to May 8, 1916, all the stock of the Carolina, Clinchfield & Ohio Ry. Co. was held by the Cumberland Corporation. The petitioner on that day owned 290 shares of preferred stock of the Cumberland Corporation which he acquired prior to 1913 at a cost of $20,000. On May 8, 1916, that corporation determined to dissolve and distribute its assets among its stockholders, and on or about July 3, 1916, the petitioner exchanged his 290 shares of Cumberland Corporation preferred stock for 193% shares of Carolina, Clinch-field & Ohio Ry. Co. preferred stock. On July 3, petitioner sold his fractional one-third share for $21, and on July 5 he purchased seven shares at $64.50 per share. During the year 1920, the petitioner sold the said 200 shares of Carolina, Clinchfield & Ohio Ry. preferred stock at a loss, and the Commissioner computed the loss on the basis of a cost of $63 per share.
    During the year 1908 and prior years, the petitioner acquired 800 shares of stock of the Atlantic & Birmingham Construction Co. at a cost of $80,385.20. At this time the company had outstanding indebtedness in the form of several issues of collateral trust notes on which it was unable to pay the interest which was falling due from time to time. In order to protect their investments by giving the company time to complete its construction and develop its properties some of the principal stockholders, including the petitioner, agreed to advance to the company from time to time funds sufficient to take care of the interest payments and thus prevent a foreclosure and sale of the entire assets of the company. During the period between October 27, 1908, and April 29, 1912, the petitioner made advances under said agreement in the aggregate amount of $26,038.22. These advances were first made upon open account; $300 of interest was credited to this account and, on and prior to May 1,1912, the account was adjusted by the issue to and the receipt by the petitioner of the company’s so-called funding notes of 1912 for the amount of $26,-338.22.- These notes were due on May 1, 1913. On October 31,1912, the petitioner made a further advance to the same company for the same purpose of $1,553.32, and, during the period from April 28, 1913, to April 30,1915, made further advances aggregating $6,402.05. These advances were also made upon open account and later adjusted by the issue and receipt by the petitioner of the company’s so-called funding notes of 1915, which were due ón May 1, 1915. The principal enterprise in which the Atlantic & Birmingham Construction Co. was interested was the construction and development of the Atlanta, Birmingham & Atlantic B. B. Co., a large part of the stock of which was held by the construction company. In 1915, the railroad company’s properties were sold at a foreclosure sale, and both its stock and the stock of the construction company became worthless in that year, and the petitioner charged off his loss on the Atlantic & Birmingham Construction Co.’s stock when he closed his books for the calendar year 1915.
    On December 30, 1916, the bookkeeper and accountant employed by the petitioner charged the then accumulated total of funding-notes, $34,293.57, to profit and loss. In making his income-tax return for the calendar year 1916, the petitioner did not claim a deduction from gross income ón account of the foregoing book entries and has never claimed any deduction on account of said funding notes except during the year 1920.
    At this time, December, 1916, the Atlantic & Birmingham Construction Co. had outstanding funding notes of the issue of 1912 in the amount of $1,963,610.32, and of similar funding notes of the issue of 1915 in the amount of $644,259.84. The said notes of 1912 were secured by a pledge of collateral security and real estate with a further provision in said pledge that any excess over the amount of the notes of the issue of 1912 realized from said security should be held to be security for the funding notes of the issue of 1915. It was known at the end of 1916 that a large part of the collateral security so pledged was worthless but that some comparatively small portion thereof, together with the real estate, had a substantial value. A committee representing the note holders was formed in 1917 to liquidate the securities back of the notes. The petitioner was a member of this committee. The liquidation of these securities was completed in the year 1920 and there was realized, after payment of liquidation expenses, the sum of $97,728.66. This amount was distributed to the note holders as a first and final dividend equivalent to 4.975 per cent of the indebtedness. The petitioner’s share of this liquidation was $1,310.83, which he received on or about July 29, 1920. On December 10, 1920, the petitioner’s bookkeeper restored the face value of the Atlantic & Birmingham Construction Co. notes to an asset account on the petitioner’s books; credited the same with the liquidating dividend of $1,310.33, and on December 31, 1920, charged to profit and loss the remaining balance of $32,683.24, which latter amount petitioner claimed as a bad debt deduction in his income-tax return for the year 1920.
    In computing the deficiency asserted ,in the deficiency letter the Commissioner found that file part of the so-called funding notes issued prior to March 1, 1913, had a value on that date of 20 per cent of their face value and restored to petitioner’s' asset account $5,267.64, the same being 20 per cent of $26,338.22, and allowed a deduction on account of this debt of the difference between the amount so restored and the liquidating dividend received, such deduction being $3,957.31.
   OPINION.

Tettssell :

1. Respecting the two motions made on behalf of the petitioner at the trial and made a part of the record for consideration with the final disposition of this case, it must be observed that during the year 1920 the Clinchfield Coal Corporation was an existing and apparently going concern. It seems to be admitted that during that year this company had some income’and profit, although the petitioner contends that such income and profit were in amount much less than the volume of dividends paid. No evidence was introduced or offered at the trial respecting the amount of income and profits enjoyed by the corporation or the total amount of dividends paid, although petitioner’s counsel argued that such evidence could be found in an alleged deficiency letter sent by the respondent to the Clinchfield Coal Corporation, a copy of which was claimed to be attached to pleadings in an action pending before the Board under Docket No. 16594. Even though such a deficiency letter may exist, and a copy thereof be in the files of the action mentioned, we are of the opinion that such letter could not be taken as proof of anything contained in said letter. It only sets forth what the respondent may or may not have done. The answer may or may not deny all allegations of fact which petitioner sets up based upon said letter and at any event is only evidence of a determination of a deficiency and the basis used in such determination but is not proof in itself of facts in controversy. The two motions made on behalf of the petitioner, as hereinabove described, are, therefore, denied.

The record shows that the Clinchfield Coal Corporation was, during 1920, a going concern; that it paid dividends in the ordinary course of business, and, in the absence of convincing evidence to the contrary, it must be found, and we so hold, that the dividends received by this petitioner from the said corporation during 1920 constitute taxable dividend income.

2. The record herein shows that 193 shares of stock of the Carolina, Clinchfield & Ohio Ky. Co., which petitioner sold at a loss in the year 1920, were acquired in July, 1916, together with an additional one-third fractional share in exchange for stock of the Cumberland Corporation, which he had acquired prior to March 1, 1913, at a cost of $20,000; that the remaining seven shares of the stock sold in 1920 were acquired on July 5, 1916, at a cost of $452.38, the equivalent of $64.50 per share. The fractional one-third share received in the exchange was sold on July 3, 1916, for $21, the equivalent of $63 per share. The Cumberland Corporation stock, which figures in this exchange, had been acquired a long time prior to 1913. From the record we are of the opinion that the basis for determining the loss sustained by the petitioner in 1920 from the sale of the railway stock may properly be its market value on the date that such stock was acquired. The only evidence of such market value is the sale of the one-third fractional share at the rate of $63 per share and the purchase of seven shares at the rate of $64.50 per share. We are of the opinion that the buying price of the seven shares is a truer index of market value than the selling price of the fractional share, and that the loss sustained by the petitioner from this transaction should be the difference between the amount of 200 shares at $64.50 per share and the selling price in 1920.

3. The funding notes of the Atlantic & Birmingham Construction Co. were acquired by this petitioner in exchange for money advanced by him, in association with other interested parties, for the purpose of protecting their prior investments in the stock and notes and indentures previously issued by said company. To our mind these funding notes, therefore, stand more in the nature of additional investments than in the nature of debts. Begarding the book entry of December 30,1916, we are of the opinion that the said entry may be disregarded so far as the issues of this action are concerned. The notes were not worthless on that date as there stood back of them, or part of them, collateral securities from which approximately $97,000 of cash was later realized.

The respondent found that the portion of these funding notes which was issued and acquired by the petitioner prior to 1913 had a value on March 1, 1913, equivalent to 20 per cent of par. And, we are of the opinion that the record supports that finding of value. It therefore follows that on March 1, 1913, the petitioner owned Atlantic & Birmingham Construction Co. funding notes of a then value of $5,267.64; that he thereafter acquired the same company’s funding notes of 1915 at a cost of $7,955.35; and that he ultimately realized in the year 1920, upon these investments, the amount of $1,310.33. We are, therefore, of the opinion, and so hold, that the petitioner’s net income for the year 1920 as determined by the respondent should be further reduced by the deduction of a loss on account of the so-called funding notes of 1915 in the amount of $7,955.35.

The deficiency may be redetermined for the year 19W in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Bule 50, and judgment will be entered in due course.

Phillips,

dissenting: The liability of the Atlantic & Birmingham Construction Co. to the petitioner arose from money advanced and constituted an indebtedness to it. We have heretofore pointed out in our decisions that the provision of the statute permitting the deduction of debts ascertained to be worthless is a specific provision removing losses from such a source from the provisions of statute providing generally for the deduction of losses. I am of the opinion that the deduction to which the petitioner is entitled is upon account of a worthless debt and that he is therefore not limited to the March- 1, 1913, value but may deduct the entire amount of the indebtedness. So far as the decision holds that the petitioner is an investor, rather than a creditor, and is limited to a deduction of the March 1, 1913, value of the bonds of the construction company, I can not agree that the result reached is correct.

Marquette and Trammell concur in the dissent.


author: Trammell :

text:
    Continental Accounting and Audit Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1243.
    Promulgated June 15, 1927.
    Personal service classification denied upon the ground that the earnings of petitioner are not to be ascribed primarily to the activities of the principal stockholders.

      Samuel B. Pack, Esq., and Harry J. Gerrity, Esq., for the petitioner.

      G. H. Ourl, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes of $4,064.59, $3,104.34, and $2,747.24 for the fiscal years ended June 30, 1920, and June 30, 1921, and for the period ended December 31, 1921, respectively. The deficiencies result from the refusal of the Commissioner to classify petitioner as a personal service corporation in determining its tax liability for the periods above mentioned.
    FINDINGS OF FACT.
    In March, 1918, the petitioner was incorporated under the laws of Illinois as the Bankers Service Co. In August, 1919, the name was changed to that now borne by the petitioner.
    During the years involved in this proceeding, the petitioner was engaged exclusively in public accounting work, which consisted of the auditing of books, making special accounting and tax investigations and rendering other related services of a public accounting-nature. The operations of the business were supervised by the officers, and a certain number of accountants, called “ staff men,” were employed to look after and perform the various assignments, including the work in the field. The .president, vice president, and secretary assisted the accountants in preparing the reports made of the work.
    The gross income of the company was as follows:
    Year ended June 30, 1920_$97,295.89
    Year ended June 30, 1921_’ 98, 077.13
    Year ended June 30, 1922_ 107, 701. 07
    Petitioner’s balance sheets for the years involved in this proceeding were as follows:

      Balance sheet as at June SO, 19W.

    ASSETS.
    Current assets:
    Cash in bank- $2, 835.93
    Petty cash fund- 50.00
    - $2, 885.93
    Accounts receivable_ 25,761. 21
    Investments — Commercial paper_ 7, 500. 00
    Total current assets_ 36,147.14
    Other assets:
    Work in process_ $107.50
    Traveling funds- 310.00
    Furniture and fixtures- 3,963. 32
    Library- 238.05
    - 4,618.87
    Total assets_ 40,766.01

      LIABILITIES AND NET "WORTH,
    Current liabilities:
    Accounts payable- $1,416. 55
    Accrued salaries_ 2, 089. 66
    Dividends payable- 9,600.00
    Total current liabilities_$13,106. 21
    Reserve for depreciation- 333.95
    Net worth:
    Capital stock_$24, 000.00
    Surplus___ 3,325.85
    - 27, 325. 85
    40,766. 01

      Balance sheet as at June 30, 1921.

    ASSETS.
    Current assets:
    Cash in banks_ $4,786.15
    Petty cask fund_ 50.00
    - $4,836.15
    Accounts receivable_ 18,977.47
    Investments — Commercial paper_ 12, 500. 00
    Total current assets-36, 313. 62
    Other assets:
    Work in process_ $113.27
    Furniture and fixtures — .- 4, 658.60
    Library_ 381.42
    - 5,153. 29
    Total assets_ 41, 466.91
    LIABILITIES AND NET WOKTH.
    Current liabilities:
    Accounts payable_ $3,864.10
    Dividends payable_ 2,100.00
    Total current liabilities- 5,964.10
    Reserves for:
    Depreciation--- $997. 08
    Contingent losses_ 4, 500. 00
    - 5,497.08
    Net worth:
    Capital stock_$30,000.00
    Surplus- 5. 73
    -■- 30, 005. 73
    Total liabilities and net worth. 41,466.91

      Balance sheet as at June SO, 1922.

    ASSETS.
    Current assets:
    Cash in bants_ $6,398.66
    Petty cash fund_ 76. 00
    - $6, 473. 66
    Accounts receivable_ 26,603.26
    Investments — Liberty bonds, 414% (par $4,250.00)- 3,917.66
    Total current assets_ 35, 994.57
    Other assets:
    Work in process_ $65. 79
    Traveling funds_ 138.91
    Miscellaneous accounts_ 12. 92
    Furniture and fixtures_ 4,956. 23
    Library_ 457.62
    - 5,631.47
    Total assets_ 41, 626. 04
    LIABILITIES AND NET WOETH.
    Current liabilities:
    Accounts payable_ $56. 50
    Accrued salaries_ 575.91
    Dividends payable_ 1, 800. 00
    Accrued Federal taxes_ 1,211. 20
    Total current liabilities_ 3, 643.61
    Reserves for:
    Depreciation_ $1, 703.10
    Contingent losses_ 6, 250. 00
    - 7,953.10
    Net worth:
    Capital stock_$30, 000.00
    Surplus_ 29. 33
    - 30, 029.33
    Total liabilities and net worth_ 41, 626.04
    The amounts shown above as investments in commercial paper represented investments made temporarily of funds which were not needed in the operation of the business during the slack periods, but which would be required during December and later months for pay rolls and traveling expenses when the business was heaviest. The Liberty bonds were acquired in connection with an abatement claim filed by the petitioner, and were held in escrow.
    The petitioner was originally capitalized at $15,000, but when its name was changed, additional stock amounting to $9,000 was issued and between June 30, 1920, and June 30, 1921, a further amount of $6,000 was issued in the form of a stock dividend. The following is a statement of petitioner’s officers and stockholders, together with the amount of stock held by each for the years ended June 30, 1920, 1921, and 1922:

    The stockholders of petitioner corporation consisted of lawyers, bankers, manufacturers, merchants, sales, and credit managers, a chemist, and a member of an advertising agency. It was thought that the stockholders who were engaged in various lines of activity would turn business to the petitioner. With the exception of a few members the stockholders turned little business to the company.
    Arnold, who was president and treasurer, supervised petitioner’s finances, spent considerable time soliciting business and was in charge of the audits of banks and special financial investigations. He devoted his entire time to the business.
    Morin had the duties of vice president and general manager. He was in charge of the general accounting work, supervised the assignments of staff men, supervised handling the work in the field and the preparation of audit reports and solicited business. He had general charge of the auditing and accounting work being done for industrial and manufacturing organizations. He devoted all of his time to petitioner’s business.
    Payne, who was secretary during the year ended June 30, 1920, devoted his entire time to the business in that year, giving his special attention to public utility investigations. Part of his work consisted of soliciting business.
    Himmelblau, who was secretary during the years ended in 1921 and 1922, devoted his entire time to taking care of the business procured by the other officers.
    Grawols, who was a stockholder during the year ended June 30, 1921, was in the petitioner’s employment as an accountant. Schmaus, who was a stockholder during the year ended June . 30, 1922, was employed by the petitioner as an accountant. With the exception of these two stockholders and the officers, none of the stockholders had any connection with the business except that arising from their stock ownership.
    Otte, who was chairman of the board and who organized the petitioner corporation, during the years involved herein was engaged in the banking business, being president of a bank. During the first year involved in this proceeding, Otte and Arnold would have lunch together practically every day, using about an hour and a half discussing the various phases of the business, prospective customers, and plans for extending the business. Quite frequently in the afternoons, after he had finished his day’s work in the bank, he would go to the office of the petitioner and there spend a couple of hours. Frequently during banking hours Arnold and Himmelblau would come to the bank and discuss with Otte various matters pertaining to bank audits and accounting work. On an average he devoted about two or three hours per day to the business of the petitioner. Most of the petitioner’s business came through Otte’s relationship with people who were doing business with his bank and banking-friends.
    During the year ended June 30, 1920, the salaries of the officers were as follows:
    W. E. Arnold, president and treasurer-$6, 000
    A. J. Morin, vice president_ 4, 000
    R. E. Payne, secretary- 4, 000
    H. E. Otte, chairman of the board_ 3, 000
    For the subsequent years the salaries of all the officers except Otte consisted of stated sums plus a percentage of the earnings based on 15 per cent of the profits after providing for dividends of 20 per cent on the stock. Otte’s salary for subsequent years remained $3,000.
    Petitioner employed throughout these years an average of from 10 to 15 accountants, to whom it paid salaries running from $25 to $75 per week. The accountants, after receiving instructions as to the scope of the work, made the necessary examinations of the books of petitioner’s clients, reporting their findings to the office and assisted in the preparation of the reports made by petitioner to its clients. Petitioner also employed an average of four typists to whom it paid from $35 to $45 per week. It also employed a bookkeeper who received a salary of about $30 a week, a switchboard operator who received about $25 per week, and a stenographer. Excluding officers’ salaries, petitioner’s weekly pay roll ranged from $400 to $450 during the summer months to about $1,000 during the busy season.

      Petitioner was not a personal service corporation during the fiscal years ended June 30, 1920, and 1921 and the period ended December 81, 1921.
   OPINION.

Trammell :

The issue involved in this proceeding is whether the petitioner is entitled to exemption from the corporation income and profits taxes as a personal service corporation. Section 200 of the Revenue Acts of 1918 and 1921 defines such a corporation to be one—

* * * Whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include * * * any corporation 50 per centum or more of whose gross income consists * * * of gains, profits, or income derived from trading as a principal * * *.

The first requirement of the law is that the income of a corporation be ascribable primarily to the activities of the principal owners or stockholders.

We have found that during the years involved herein the services rendered by the petitioner consisted of the performance of public accounting work. The officers solicited business and supervised the operations of the corporation, while an average of from 10 to 15 accountants employed by the petitioner did the field work and assisted in the preparation of the reports rendered by petitioner to its clients. These accountants were paid salaries ranging from $25 to $75 per week. During the year ended June 30, 1920, there were only four stockholders taking any part in conducting the affairs of the corporation, while in the subsequent years there were five. This shows that during the first year involved in this proceeding there were from two to four times as many accountants employed in the business as there were stockholders, while in subsequent periods there were from two to three times as many.

The work performed by the accountants was an important element of the service rendered by the petitioner to its clients. Petitioner relied to a substantial extent upon the services of others who were nonstockholders.

We think that what was said in the Appeal of Patterson-Andress Co., 6 B. T. A. 392, is applicable and controlling here. There we said:

In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon non-stockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. Just as another clause excludes from personal service classification those corporations where capital contributes materially to the'income, so does this clause exclude corporations where the services of employees so contribute.

The work done by the stockholders was supervisory and directory. While such work was doubtless of importance and was an income-producing feature, we can not find from the evidence that work of the accountants who were employed was not a material income-producing factor.

In Hubbard-Ragsdale Co. v. Dean, 16 Fed. (2d) 410, the court said:

The plaintiff claims the benefit of an exception to the general method and extent of taxing corporations. The burden is upon the plaintiff to show that it clearly comes within the terms of such exception. “ In such cases, a reasonable doubt is fatal to the claim. Prima facie every presumption is against it. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.” West Wisconsin R. R. Co. v. Supervisors, 93 U. S. 595, 598 (23 L. Ed. 814). See, also, Lee v. Sturges, 46 Ohio St. 153, 159, 19 N. E. 560, 2 L. R. A. 556.

The burden is upon the petitioner to show that it clearly meets all the requirements of the statute. Being an exception to the general provision under which corporations are ordinarily taxed, the provision should be strictly construed.

The petitioner, having failed to bring itself clearly within the provision of the statute, is not entitled to classification as a personal service corporation.

One of the tests not having been met, it is not necessary to discuss whether any other test is met.

Judgment will be entered for the respondent.

Phillips concurs in the result.