author: ARuñdell:

text:
    Appeal of HERALD-DESPATCH COMPANY.
    Docket No. 4556.
    Decided September 27, 1926.
    1. Tbe Board has no jurisdiction to entertain an appeal from a determination by the Commissioner of deficiencies in excise taxes for the years 1909, 1910, 1911, and 1912, levied under the Corporation Excise Tax Act of August 5, 1909, or an appeal from a determination by the Commissioner of deficiencies in income taxes for the years 1913, 1914, and 1915, levied under the provisions of the Income Tax Act approved October 3, 1913.
    2. Upon the evidence, held, that the actual cash value, at the date of acquisition, of the circulation of the Decatur Despatch, acquired by the petitioner for capital stock in 1906, was $4,500, and the invested capital, as determined by the Commissioner, should be increased by this amount. The evidence is insufficient to establish the value of the archives and good will acquired from the Despatch at the same time.
    3. The circulation and good will of the Decatur Evening Republican, having, at the time, an actual cash value of $18,237.01, of which $15,000 was the actual cash value of the circulation, was paid in to the petitioner by its stockholders in 1899, without any consideration therefor. Meld, that the circulation structure of a newspaper so acquired is intangible property within the purview of section 207 of the Revenue Act of 1917 and section 325 of the Revenue Act of 1918.
    4. Intangible property paid to a corporation, without any consideration therefor, may not be included in invested capital, under the provisions of section 207 (a)(3) of the Revenue Act of 1917 and section 326(a) (3) of the Revenue Act of 1918, as paid-in surplus.
    5. The Commissioner’s reduction of petitioner’s invested capital for the year 1919, on account of income and profits taxes for the years 1917 and 1918, is in conformity with the provisions of the regulations in force in respect of the year 1919, and, therefore, correct under the provisions of section 1207 of the Revenue Act of 1926.
    6. Since the Commissioner has not asserted a deficiency for the year 1917, because of the running of the statute of limitations, this Board is without jurisdiction to consider the issues raised by this appeal in respect of that year.
    7. The archives of a corporation engaged in the publication of a newspaper are tangible property, and their March 1, 1913, value is not susceptible of ascertainment' By the formulse usually employed for the valuation of intangibles. Petitioner’s archives had a fair market value at March 1, 1913, of $12,000.
    8. Upon the evidence, held, that the fair market value, at March 1, 1913, of petitioner’s intangible assets was not in excess of the value of $102,548.86 placed thereon by the Commissioner, for the purpose of determining the gain or loss resulting from the sale thereof in 1920.

      Arnold I. Guesmer, Esq., for the petitioner.

      Arthur J. Seaton, Esq., for the Commissioner.
    The Commissioner has determined a deficiency in income and profits taxes for the taxable years 1909 to 1920, inclusive, in the net amount of $9,857.05, made up as follows:

      Five questions are presented for our consideration, as follows:
    (1) The inclusion in invested capital of $4,800 alleged to be the value of archive^, circulation, and good will acquired for capital stock.
    (2) The inclusion in invested capital of $18,237.01 as paid-in surplus, representing the value- of certain assets paid in by the stockholders.
    (3) The reduction of invested capital for the taxable year 1919 by the amount of income and profits-tax liability for the years 1917 and 1918, respectively, prorated from the dates such taxes, or any installments thereof, became due and payable.
    (4) Whether the petitioner deducted 1916 income taxes in the amount of $628.73 in computing its taxable net income for 1917.
    (5) The amount of profits realized by the petitioner upon the sale of its assets and business in 1920.
    FINDINGS OF FACT.
    The petitioner, an Illinois corporation with its principal office at Decatur, was, during the taxable years and period in question, engaged in the publication of a morning newspaper.
    Petitioner was organized in 1890 and immediately acquired two newspapers, known as the Herald and the Despatch, which were being published by two separate organizations in Decatur, a town having then a population of approximately 16,000. The two papers were consolidated and thereafter published as a single publication under the name of the Morning Herald-Despatch, until about the year 1906, when the name was changed to the Decatur Herald. For the archives, circulation, and good will of the Despatch, the petitioner issued its capital stock of a par value of $4,800. The Despatch had been published for less than a year as a daily paper, and at the time it was taken over had a circulation of approximately 1,000, of which number about 100 were subscribers to the Herald. The facilities of the Despatch had also been used for job printing. The Commissioner held that the petitioner had failed to establish satisfactorily the actual cash value at the date of acquisition of the archives, circulation and good will acquired from the Despatch, and in the computation of petitioner’s invested capital allowed no values in respect of those assets. The actual cash value, at the date of acquisition, of the circulation acquired from the Despatch was $4,500.
    Until 1899 the petitioner had as a competitor in the morning field a daily newspaper known as the Decatur Daily Review. There was also being published in Decatur an evening newspaper known as the Decatur Evening Republican. The publication of the Decatur Evening Republican was discontinued on or about August 23, 1899, and its circulation and good will, having a then actual cash value of $18,237.01, of which $15,000 represented the actual cash value of the circulation, were, by the then owners of that publication, who were also stockholders of the petitioner, paid in to petitioner without any consideration therefor. The Commissioner disallowed the said sum of $18,237.01 as a paid-in surplus, on the ground that the assets which it represents, viz, circulation and good will, are of an intangible nature, and consequently can not be included in invested capital as a paid-in surplus.
    On August 23, 1899, the petitioner entered into an agreement with the Review Publishing Co., owners and publishers of the Decatur Daily Review, the purpose of which was to eliminate that publication as a competitior of the Decatur Herald in the morning field, to establish the former as an evening newspaper, and to discontinue the publication of the Decatur Evening Republican, leaving the afternoon field entirely open to the Review without competition. Under the terms of this agreement the petitioner agreed to sell, transfer and convey to the Review Publishing Co. the subscription lists, good will and daily subscription accounts of the Decatur Evening Republican; to abandon the publication of an evening paper in the County of Macon, State of Illinois, for a period of 15 years from August 26, 1899; to abandon and cease to print, for a like period, a Sunday edition, for circulation in Macon County, under any name or style; and to refrain for a like period from leasing, renting or granting to any person, type or machinery for the printing of a Sunday edition, for circulation in Macon County. In consideration of the foregoing covenants on the part of the petitioner, the Review Publishing Co. agreed to abandon the publishing of the Review as a morning paper, for a period of at least one year, saving and reserving to itself the right to publish such paper as a Sunday morning edition; and to refrain, for a period of 15 years, from leasing, renting, or granting to any person any type or machinery for the printing or circulation in Macon County of a morning paper, except a Sunday morning edition. Both parties agreed that in the event of the sale or lease by either of its plant, presses, type, good will, or newspaper, such sale or lease would be conditioned upon a full and strict compliance, by the purchaser or lessee, with the terms of this agreement.
    In the computation of the petitioner’s invested capital for the taxable years 1918 and 1919, the Commissioner deducted the amount of its liability for income and profits taxes for the years 1917 and 1918, respectively, as finally determined by him, prorated from the date such taxes, or any installment thereof, became due and payable.
    The Commissioner increased the net income, as reported by the petitioner in its return for the taxable year 1917, by the amount of $628.73, representing the income tax for the taxable year 1916, alleged by him to have been deducted by the petitioner, as an expense, in computing taxable net income. The petitioner did not make such a deduction in computing its taxable net income for the year 1917.
    Under date of February 16, 1920, the petitioner entered into an agreement with the Decatur Herald Co., whereby it agreed to sell, transfer, and set over to the latter company all of its “ goods, chattels, leases, moneys, credits, accounts, bills, notes, good will, choses in action, bonds, securities, contracts, agreements, franchises, and ail other assets ” of whatever nature and kind. In consideration for the assets to be transferred to it, the Decatur Herald Co. agreed “ to pay, discharge, perform and fulfill all the debts, liabilities, contracts, engagements, and obligations ” of the petitioner; to pay to the latter, in cash, the sum of $111,663.33; and to issue and deliver to it “ Collateral Trust Serial seven per cent bonds of the par value of * * * $93,000, the same to be secured and issued in accordance with a certain collateral Trust Agreement.” The contract was' actually carried out and the sale consummated on or about March 1, 1920. The Commissioner held that upon this transaction the petitioner realized a taxable profit,of $28,398.13, which he computed in the following manner:
    Average earnings for five-year period prior to 1913---$21, 970. 89
    Less 8% on the average tangibles- 6, 588.56
    Balance of earnings attributable to intangibles- 15,382.33
    Capitalized at 15%_ 102, 548. 86
    March 1, 1913, value of intangibles — .- 102, 548. 86
    Subsequent additions to circulation structure- 9. 614.86
    Total value to be used in computing profit_112.163. 72
    Amount included in balance sheet 2/29/20- 157, 586.17
    Amount not allowable- 45, 422. 45
    Total assets shown on books 2/29/20- 324,135. 71
    Less: Depreciation reserve as adjusted- $36, 435. 68
    Excessive appreciation on intangibles- 45,422. 45
    - 81, 858.13
    242, 277. 58
    Less: Federal tax reserve included in accounts receivable_ 3, 482. 40
    Value of assets sold_ 238, 795.18
    Consideration received:
    Cash_‘_$111,663.33
    Bonds_ 93, 000. 00
    Accounts payable, assumed_ 16,105. 44
    ' Prepaid subscriptions assumed_ 18, 202. 50 •
    Federal income tax, 1919, assumed- 15, 422. 62
    254, 393. 89
    Less: Overassessment of tax for prior years- 888. 75
    - — —— 253, 505.14
    14, 709. 96
    Plus: Liability for 1920 tax_ 13, 688.17
    Profit_ 28,398.13

      In the foregoing computation the Commissioner has treated the circulation structure and archives as intangible property, and the March 1,1913, value of intangibles, therein shown, is intended by the Commissioner to include the value of the circulation structure and archives at that date. The cost to the petitioner of the circulation structure to March 1, 1913, was $16,218.95, and the cost of subsequent additions to the date of the sale was $13,852.56 rather than $9,614.86, as shown by the foregoing computation.
    At March 1,1913, the petitioner possessed such archives, commonly referred to in newspaper parlance as the “morgue,” as are usually maintained in a newspaper establishment. The archives consisted of a library, plates, cuts, classified newspaper clippings, and bound volumes of newspaper editions, which had been collected over a long period of years, and which were in constant use as reference works in the publication of the newspaper. The archives were in charge of a librarian who devoted her entire time thereto. They were a part of the assets sold and transferred to the Decatur Herald Oo. in 1920.
    At March 1, 1913, W. H. Calhoun, one of petitioner’s principal stockholders, was a member of the Associated Press, an incorporated association, under the laws of the State of New York, of certain persons, who, owning or representing certain newspapers, are united in a mutual and cooperative organization for the collection and interchange of information and intelligence for publication in the newspapers owned or represented by them. The petitioner, being a corporation, was not eligible to membership in the Associated Press, the charter and by-laws of the latter limiting membership to the sole or part owner of a newspaper, or an executive officer of a corporation, limited liability company, or joint-stock or other association which is the owner of a newspaper. Under the provisions of section 5, article YII of the by-laws of the Associated Press, Calhoun was required to “ publish the news of the Associated Press only in the newspaper, the language, and the place specified in his certificate of membership.” Said certificate of membership specified the “Decatur Herald, a morning newspaper published in the English language at Decatur, Illinois,” as the paper, language and place for publication of the news furnished by the Associated Press. Prior to, at, and subsequent to March 1, 1913, the service obtained through Calhoun’s membership consisted of receiving, over a leased wire, about 13,000 words a night of markets, sports, domestic and foreign news. The news received through such service was published by the petitioner in the Decatur Herald. The service furnished by the Associated Press, at March 1, 1913, was extremely valuable to petitioner in the publication of a morning newspaper. No other satisfactory service was available at that date. Without such a service the news available for publication would have been more or less limited to local matters. The membership in the Associated Press was obtained by Calhoun without any cost to petitioner.
    The by-laws of the Associated Press provide, among many things, that in ease any member shall cease to be the owner, or part owner, of the newspaper specified in his certificate of membership, or shall cease to be an executive officer of a corporation, limited liability company, or joint-stock company or other association which is the owner of the newspaper specified in his certificate of membership, he shall if so facto cease to be a member; that in case of the termination of his membership, bj7 virtue of the cause above stated, a member, not then under process of discipline for violation of the rules or by-laws, may assign his membership to any other owner or part owner or executive officer of the corporation, limited liability company or joint-stock or other association which is the owner of such newspaper, who shall become a member upon signing the roll of members, and assenting to the by-laws, and, even without such assignment, such other executive officer, owner or part owner, thereupon shall become a member; that when a change is made in the ownership of any newspaper for which a member is entitled to receive a news service, the member may transfer his certificate of membership with his newspaper, and the new owner shall be constituted a member by virtue of such assignment; that the board of directors shall have no power to elect a new member until it shall have received a waiver in writing of the right of protest from all members entitled thereto, but no right of protest shall prevent such board from electing to membership the owner, part owner or executive officer of any corporation, limited liability company, joint-stock or other association, which is the owner of any newspaper which was entitled to a service of news under an existing contract with the Associated Press at September 13, 1900; that when any person shall have ceased to be a member and his successor shall have become entitled to membership, the board of directors, at the next meeting held thereafter, shall formally elect such successor and ratify his admission as a member; and that every member shall be eligible to election and to enjoy the privileges of membership, solely by virtue of his relation to the newspaper named in his certificate of membership.
   OPINION.

ARuñdell:

Since we have no jurisdiction over deficiencies asserted under revenue acts enacted prior to the Revenue Act of 1916, we can not consider the deficiencies proposed to be assessed for the years 1909 to 1913, inclusive. Appeal of David B. Mills, 1 B. T. A. 199. Nor have we been shown any basis for taking jurisdiction over the years 1916 and 1918, in which years petitioner has been advised of overassessments. Our determination will therefore be limited to the deficiencies asserted for the years 1919 and the first two months of 1920.

By stipulation of the parties the right of the petitioner to include in invested capital the actual cash value of archives, circulation, and good will acquired for stock, at the date of acquisition, is admitted. This leaves solely the question as to their value at the date of acquisition. In our findings of fact we have found that the circulation of the Despatch had a value when acquired of $4,i00. This is predicated upon a subscription list of 900 names, and the evidence convinces us that the value thereof at the date of acquisition was not less than $5 per name. As to the value of the archives and good will, the evidence is insufficient to support a finding as to what that value may have been. The invested capital as computed by the Commissioner, in the deficiency letter, should be increased by the amount of $4,500.

The second question is whether the petitioner is entitled to include in invested capital as paid-in surplus the sum of $18,237.01, representing the value of the circulation and good will of the Decatur Evening Republican, which assets were paid in by petitioner’s stockholders without any consideration therefor. Of the value agreed ivpon $15,000 was assigned to the circulation. It was further stipulated by the parties that said sum of $18,237.01 should be added to the invested capital, as shown by the deficiency letter, if the Revenue Acts of 1917 and 1918 authorize the inclusion in invested capital, as paid-in surplus, of the actual cash value of intangibles paid in to a corporation without any consideration therefor.

Section 207 of the Revenue Act of 1917, in so far as it is pertinent to the present inquiry, defines invested capital as:

(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: Provided, That (a) the actual cash value of patents and copyrights paid in' for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (b) the good will, trademarks, trade brands, the franchise of a corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock.

Section 826 of the Revenue Act' of 1918 defines invested capital as follows:

(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: Provided, That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257;
(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year;
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest;
(5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no ease shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year; * * *

In neither of the sections of the two Acts quoted above is any reference made specifically to intangible property paid in to a corporation- without any consideration therefor. Both Acts specifically include within the definition of invested capital, intangible property bona fide paid in for stock or shares, subject to certain limitations. Unless intangibles acquired without cost can be included as a paid-in surplus they can not be included at all. Subdivision (a) (3) of section 207 of the Revenue Act of 1917 and subdivision (a) (3) of section 326 of the Revenue Act of 1918, taken by themselves, might conceivably be construed to permit the inclusion in invested capital of a paid-in surplus in respect of intangible property acquired by way of gift. It seems clear to us, however, that in providing for the inclusion in invested capital of intangibles paid in for stock or shares, subject to very specific and arbitrary limitations, Congress intended to exclude intangibles paid in as a gift. It would be absurd construction indeed which would permit the inclusion in invested capital, under very arbitrary limitations, of intangibles paid in for a consideration, and at the same time permit the inclusion of intangibles paid in as a gift to the full extent of their actual cash value. It will be noted that under the provisions of both Acts intangibles paid in for stock or shares can not be included in invested capital to the full extent of their actual cash value, if that value exceeds the par value of the stock issued therefor or a fixed percentage of the outstanding capital stock at March 3, 1917, or the beginning of the taxable year, whichever is lower. This we believe lends strength to the construction which we have placed upon the statutes. Reading together subdivisions (a) (3) and (a) (4) of the sections above quoted, we feel constrained to hold that the petitioner is not entitled under the Revenue Acts of 1917 and 1918, to include in invested capital, as paid-in surplus, intangibles acquired by way of gift.

By stipulation of the parties it is agreed that if the petitioner’s contention, that intangibles paid in as a gift should be included in invested capital as paid-in surplus, is rejected by the Board, then the invested capital shown in the deficiency letter should be increased by the sum of $15,000, representing the actual cash value of the circulation paid in by the stockholders without consideration, provided the Board finds that newspaper circulation is tangible property.

The term circulation, as used in newspaper publishing businesses, comprehends something much broader than what may be characterized as mere subscription lists. As a practical matter it appears to be rather difficult to distinguish it from good will. It possesses many of the attribútes of good will, and yet comprises other elements not common to the latter. It comprehends, on. the one hand, a body of subscribers whom experience has demonstrated may be relied upon with some degree of certainty to continue to take and renew their subscriptions to the paper in the future. On the other hand, it includes within its scope an established advertising clientele who use the paper as a medium by which to reach the purchasing public. The paper assembles the individuals constituting the public in such a way that the advertiser can reach them by one announcement. Hence, what the advertiser buys is the privilege of addressing the people assembled by the paper. Quantity and quality of the circulation are the determinative factors in establishing the advertising rates of a newspaper. Quantity as expressed in units; quality as denoting not only the character of the readers whom it attracts, but also the editorial and advertising policies of the paper, and the extent to which the subscribers are concentrated within the retail trading radius. By editorial policy is meant not only the political bias of the paper, but the broad treatment of news, whether sensational, moderate or conservative; the scope of the paper’s appeal, whether to the masses or a class; and similar policies which go to make up a paper’s individuality. The rate the advertiser pays is not based, fundamentally, upon the space he uses, but upon the circulation back of that space.

Circulation, in reality, is the very foundation upon which a newspaper publishing business is built. It is always a matter of first importance in the purchase and sale of a newspaper publication. It is often the subject of barter and sale, and may be transferred separately from the remainder of the business. It is now the subject of a systemized audit conducted by an audit bureau, whose membership is made up of owners of newspaper publications. We think that in its important characteristics it is so closely related to good will that it must be included as “ other like property ” within the definition of intangible property as laid down in section 325(a) of the Revenue Act of 1918. Accordingly, we must approve the Commissioner’s action in refusing to allow a paid-in surplus, for invested capital purposes, in respect of the circulation and good will, formerly the property of the Decatur Evening Republican, paid in to the petitioner by its stockholders without consideration therefor.

The third question is whether the Commissioner is correct in reducing the invested capital for the taxable year 1919 by the amount of the income and profits-tax liability for the years 1917 and 1918. Since the adjustment of invested capital as made by the Commissioner is in conformity with the provisions of the regulations in force in respect of the year 1919, the appeal, so far as it pertains to this proposition, must be denied in accordance with the provisions of section 1207 of the Revenue Act of 1926.

The fourth question is whether the petitioner took a deduction, in computing its net income for the taxable year 1917, of $628.73, representing the income-tax liability in respect of the year 1916. It is noted from the deficiency letter that while the Commissioner has found a deficiency in respect of the year 1917, he does not propose to assert the same, as the statute of limitations has run and now bars its assessment. Therefore, this Board is without jurisdiction to consider and decide the question here raised. However, it should be pointed out that the Commissioner has stipulated that the petitioner did not make such a deduction in computing its net income for the taxable year 1917.

The remaining question for decision is whether the petitioner realized a taxable profit upon the sale of its assets and business in 1920. The Commissioner, in the deficiency letter, computed a taxable profit upon the transaction of $28,398.13. The Commissioner’s computation is set out in our findings of fact. It will be noted from that computation that the Commissioner has determined the March 1, 1913, value of the intangibles plus the cost of subsequent additions to be $112,163.72, and that the book value of the assets classified by the Commissioner as intangibles was, at the date of sale, $157,586.17. Throughout the computation the Commissioner has treated circulation structure and archives as intangible property. The March 1,1913, value of intangibles was determined by the Commissioner by deducting from the average earnings of the five years next preceding 1913 an amount equivalent to 8 per cent of the average tangibles for the same period, and capitalizing the remainder at the rate of 15 per cent. The Commissioner stipulated that the cost of additions to circulation structure which were made subsequent to March 1, 1913, was $13,852.56 rather than $9,614.86, as shown in his computation, and that proper adjustment should be made to correct this error. The Commissioner stipulated further that the cost to petitioner of its circulation structure to March 1, 1913, was $76,218.95. Both parties agree that the basis for the determination of any gain or loss from this transaction should include the amount of any overpayments by the petitioner of income and profits taxes for the years 1917 to 1919, inclusive, and that the consideration or selling price will be affected by any change in the Commissioner’s determination of the income and profits-tax liability of the petitioner for the year 1919 and the two-month period ended February 29, 1920.

The first contention of the petitioner is that in the determination of the March 1, 1913, value of its intangibles the Commissioner should not have resorted to an arbitrary formula when other and better evidence of such value was available. Several witnesses testified during the hearing as to the character of the intangible properties owned by this petitioner at March 1, 1913, their relation to the petitioner’s business and their importance and great value in the conduct thereof. Only one expressed an opinion as to the fair market value of these properties at March 1, 1913. This witness had been connected with the petitioner, in some capacity not disclosed to us, from 1912 to 1920, when the business was sold. He estimated the March 1, 1913, values of the petitioner’s intangible properties to be as follows: Circulation structure, $76,000 to $100,000; Associated Press membership, more than $10,000; good will, $25,000 or more; and contract with Review Publishing Co., ■ dated August 23, 1899, $18,000 to $20,000. He also expressed an opinion that the March 1, 1913, value of the petitioner’s archives (morgue) was about $15,000. Another former employee of the petitioner testified that in his opinion $12,000 would represent a conservative value for the archives at March 1, 1913.

The next contention of the petitioner is that, if the formula used by the Commissioner for computing the March 1, 1913, value of intangibles is approved and adopted by the Board, the rate of 15 per cent used by the Commissioner for capitalizing the earnings, in excess of a return of 8 per cent on the net tangibles, is too high. However, the petitioner produced no evidence in support of this contention. During the oral argument counsel for petitioner asked us to adopt a rate of 12.42 per cent in lieu of the 15 per cent rate used by the Commissioner. Said rate of 12.42 per cent was computed by the petitioner in the following manner:

Net tangible assets at date of sale, as computed by tbe Com-missioner_$126, 631.46
Average earnings for five-year period preceding date of sale- 27, 609.94
Less: 8% on net tangibles_ 10,130. 52
Earnings attributable to intangibles_ 17, 479.42
Total consideration received for assets, as determined by Com-missioner_ 267,193. 31
Less: Net tangibles as shown above_ 126, 631. 46
Consideration received for intangibles- 140, 561. 85
Percentage that $17,479.42 bears to $140,561.85_ 12.42

The computation is based upon an assumption that the tangible assets were purchased :n 1920 by the vendee at their book value; while the intangibles were purchased at a value based upon a capitalization of excess earnings on the basis of an eight-year purchase. These are assumptions which the petitioner has not established, by any competent evidence, to have been the actual facts. Further, we have no reason to believe that a willing purchaser would have purchased these intangibles at March 1, 1913, upon the same basis on which they were sold in 1920.

Speaking now in respect of the petitioner’s contract with the Review Publishing Co., dated August 23, 1899, upon which one of the petitioner’s witnesses placed a value at March 1, 1913, of $18,000 to $20,000, we are of the opinion that that contract had no value at that date which should be included in the basis for the determination of the gain or loss realized by the petitioner upon the sale of its assets in 1920. The Review Publishing Co. was bound by its covenants for a period of but one year; hence, the life of the contract, so far as it conferred any benefits upon the petitioner, did not extend beyond that period. At any rate the contract had expired six years before the petitioner sold its business in 1920; hence, this contract could not have been one of the assets conveyed to the purchaser in 1920, and no part of the purchase price received for the business can be deemed to have been consideration for the contract.

We think from the evidence before us that the value which the Commissioner has placed upon the intangibles at March 1, 1913, to wit, $102,548.86, represents the fair value of the circulation, good will, and Associated Press franchise at that date, and that such value was properly used by the Commissioner in the determination of the gain or loss on this transaction.

From the evidence before us we find that the value of - the archives at March 1, 1913, was not less than $12,000. The archives' are tangible property and the Commissioner erred in treating them as intangible property for the purpose of the computation.

Order of rede,termination in accordance with the foregoing findings of fact and opinion will be entered on 15 days' notice, under Rule 50.

Geeen, Smith, and Trttssell dissent.


source: Caselaw Access Project

author: Artjndell:

license: Public Domain

text:
    LEON SALOMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3725.
    Decided September 27, 1926.
    Community property.--Petitioner and bis wife in 1922 were residents of California. For that year they tiled separate returns, the wife reporting as income the salary paid her by the petitioner for services rendered him in his business, which salary she had invested. The household expenses were paid by the petitioner. Held, that the Commissioner erred in including the salary of the wife in the income of the petitioner.

      Jerome H. Bayer, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax in the amount of $407.10 for the calendar year 1922. The question involved is whether under the laws of California and the Revenue Act of 1921 the Commissioner erred in including in the income of the petitioner an amount claimed to represent the separate income of the wife of the petitioner.
    FINDINGS OF FACT.
    The petitioner is an optician engaged in business in San Francisco, Calif. During the year 1922 he was married and living with his wife in the State of California. During the past ten years the petitioner’s wife, Della B. Salomon, has assisted him in his business by acting as bookkeeper, keeping records, sending out notices, and performing other clerical duties in the office. The duties of the wife in the office of the petitioner occupied the greater part of her time. For the year 1922 the petitioner paid his wife a salary of $300 per month or $3,600 for the year, which she invested in certain bonds. The petitioner paid the household expenses of himself and of his wife.
    In March, 1923, the petitioner and his wife filed separate income-tax returns for the year 1922. The petitioner in his return claimed, among other deductions, one for salaries and wages in the amount of $6,615.80. The petitioner’s wife in her return reported, among other items of income, the amount of $3,600 as salary received from the petitioner.
    Later in the year 1923 an investigation of the records of the petitioner was made by an internal revenue agent. On November 1, 1923, Mrs. Salomon executed an amended individual return for the year 1922 from which the item of $3,600 was omitted. The other items of income reported in this return were the same as those listed in her original return. On the same date, November 1, 1923, the examining officer, apparently acting under authority of section 3176 of the Revised Statutes, executed an amended joint return on behalf of the petitioner and his wife for the year 1922. This return bears the signature “Leon Salomon, 3176 Sect.” It is not the signature of the petitioner. In this return there was added to the income the amount of $3,600, the salary of Mrs. Salomon. In other respects the income reported and the deductions and exemptions claimed are the same as in the original return of the petitioner.
    The Commissioner computed the deficiency here involved on the basis of the so-called amended joint return. The greater part of the deficiency arises from the inclusion in income, as shown by the amended return, of the item of $3,600.
   opinion.

Artjndell:

In adding to the income of the husband the salary reported by the wife as her separate earnings, the Commissioner proceeded on the theory that the services of the wife are a part of the earning power of the community and the earnings received from her services constitute community property as much as do the earnings received from the services of the husband. This theory finds support in some California cases. See Martin v. Southern Pacific Co., 130 Cal. 285; 62 Pac. 515; Smith v. Furnish, 70 Cal. 424; 12 Pac. 392. There are also in support of the Commissioner’s position the presumptions that all property acquired after marriage is community property, Jordan v. Fay, 98 Cal. 264; 33 Pac. 95, 96; In re Rolls’ Estate, 226 Pac. 608; and that all property in the possession of either spouse during marriage is community property until the contrary is shown. In re Jolly's Estate, 238 Pac. 353. These presumptions arise under sections 164 and 68T of the Civil Code of California. That they are rebuttable presumptions has been repeatedly held by the courts of California and follows from sections 158, 159 and 160 of the Civil Code giving a husband and wife the right to alter their legal relations as to property.. In Wren v. Wren, 100 Cal. 276; 34 Pac. 775, it is said:

Under these sections [158, 159 and 160], there can be no doubt that a husband and wife may agree between themselves, without any other consideration than their mutual consent, that money earned by the wife in performing any work or service which does not devolve upon her by reason of the marriage relation shall belong to her as her own, and, when money has been earned by the wife under such an understanding or agreement with the husband, it is her separate property.

This decision has been cited with approval in a long line of California cases. See Kaltschmidt v. Weber, 145 Cal. 596; 79 Pac. 272; Perkins v. Sunset Tel. & Tel. Co., 103 Pac. 190; Smith v. Smith, 47 Cal. App. 650; 191 Pac. 60; Gray v. Perlis, 245 Pac. 221.

The case of Moore v. Crandall, 124 C. C. A. 11; 205 Fed. 689, a California case, involved a claim by the wife against the estate of her husband in bankruptcy for wages due to her for services as clerk in the store of the husband, which, according to the proof in support of the claim, were due under an agreement entered into between the husband and wife at the time of opening the business whereby she was to receive a weekly wage for her services, the wages to be her own separate property. After quoting at some length from Wren v. Wren, supra, including the part we have quoted above, it is held:

This being the law in California, we can perceive no reason why the wife may not perform services for the husband under a contract for money, provided such service is for work outside of the family relation. Nuding et al. v. Urich, 169 Pa. 289, 32 Atl. 409; Roche v. Union Trust Co. (Ind. App.) 52 N. E. 612.

This case seems to us to be decisive of the question here involved. See also Appeal of Estate of George W. Randall, 4 B. T. A. 679. We are accordingly of the opinion that the Commissioner erred in including in the income of the petitoner the salary of the petitioner’s wife in the amount of $3,600 for the year 1922.

Order of redetermination will be entered on 15 days’ notice, wider Rule 50.


author: Trussell :

text:
    Appeal of EDWARD MALLINCKRODT, Sr.
    Docket No. 1750.
    Decided September 27, 1926.
    1. Gain from disposition of corporate stock. — Prior to June, 1919, petitioner had acquired and then owned 300 shares of stock of Mechanics American National Bank of St. Louis. During that month he participated with other stockholders in an increase of the bank’s capital stock by subscribing for his proportionate number, 75 shares, at $150 per share, and then his 375 shares had cost $110,282.88. On or about July 5 this bank was merged or consolidated with two other banks resulting in the First National Bank in St. Louis, and thereupon the petitioner surrendered his 375 shares of the Mechanics American National Bank and received 500 shares of the new First National Bank in St. Louis. The par value of all these shares was $100. The market value of the First National Bank shares on the day of issue was $210 per share. Held, that this transaction resulted in the realization of no gain to the petitioner.
    2. Loss from sale of assets. — In the year 1918 the petitioner by deed of trust created a trust estate to which he granted and conveyed certain properties and securities described in the deed and to which he thereafter at divers times granted and conveyed other properties, securities, and money. On a day near the close of the year 1920 he gave and • granted to this trust a sum of money. At or about the same time he placed in the hands of his broker certain corporate stocks and other securities for sale. The trust purchased these corporate stocks and securities from the brokers. Held, that the petitioner is entitled to a deduction from gross income for the year 1920 of the loss sustained upon the sale of such stocks and securities.

      Daniel N. Kirby, Esq., for the petitioner.

      E. G. Lake, Esq., for the Commissioner.
    This proceeding was brought for a redetermination of deficiencies for the year 1919 in the amount of $2,588.80 and for the year 1920 in the amount of $61,171.93, totaling $63,760.73. The issues presented for consideration are:
    1. Whether the petitioner realized during the year 1919 a taxable gain growing out of his ownership of shares of stock in a national bank and Ms participation in the merger or consolidation oí said bank with other national banks.
    2. Whether he is entitled to claim a deduction for the year 1920 of a loss alleged to have been sustained as a result of the disposition of certain corporate stocks and securities under the conditions set forth in the findings of fact.
    BINDINGS OP FACT.
    1. In June, 1919, the petitioner was the owner of 300 shares of stock of the Mechanics American National Bank of St. Louis, hereinafter referred to as the Mechanics Bank. These 300 shares had cost the petitioner $99,032.88.
    During this month of June there was pending a proposal to bring about a merger or consolidation of this Mechanics Bank with the Third National Bank of St. Louis and the St. Louis Union National Bank, and thus to form the First National Bank in St. Louis. The consolidation proposal required that each of the three existing banks contribute to the consolidated institution acceptable assets in the amount of $5,250,000, together with sufficient additional assets to cover all state, city, and Federal taxes, chargeable against the constituent banks up to and including May 31, 1919. The book value of the assets of the Mechanics Bank at this time was approximately $4,966,598.12. It was, therefore, necessary for the Mechanics Bank to increase its assets before it could participate in the consolidation. At this time the capital stock of the Mechanics Bank consisted of 20,000 shares of the par value of $100 each and its directors proposed to its shareholders that they each and all join in the purchase pro rata of 5,000 additional shares of the par value of $100 and that they pay for such additional shares $150 per share, which would result in increasing the assets of the Mechanics Bank in the amount of $750,000 and result in a total book value of such increased assets in the amount of $5,716,598.12. In connection with this proposal the directors of the-Mechanics Bank issued to their stockholders a statement containing, among others, the following paragraphs:
    Each stockholder of this bank will receive 1% shares of stock in the new or consolidated bank, for each share he owns in the Mechanics-American National Bank at the close of business on July 7, 1919, or on the day such consolidation becomes effective.
    It is believed that between six and twelve months after the consolidation the stockholders of the Mechanics-American National Bank, or their legal representatives, will receive from its assets beyond the $5,250,000.00 contributed by it to the consolidated or new bank, liquidation dividends on their stock holdings at the time of the consolidation. No attempt will now be made to estimate these dividends; but we wish our stockholders to know that they are expected. Such dividends will be paid out of assets of this bank which are not necessary to meet its contribution of $5,250,000.00 to the capital surplus and undivided profits of the new bank.
    The proposed increase of the capital stock of the Mechanics Bank was carried out and the petitioner subscribed and paid for his proportionate share of the increase of such capital stock and there was issued to him an interim certificate evidencing his payment for 75 of the additional shares at the rate of $150 per share, or a total amount of $11,250.
    On June 26, 1919, at a meeting of the board of directors of the Mechanics Bank, the agreement of consolidation with the other two banks was presented and a resolution accepting and authorizing the execution of said contract was adopted. The said agreement of consolidation contained, among other things, the following provisions:
    The name of the consolidated association shall be “ First National Bank in St. Louis."
    The amount of capital stock of the consolidated association shall be Ten Million Dollars ($10,000,000.00) divided into one hundred thousand (100,000) «hares of One Hundred Dollars ($100.00) each, subject to the right to change the amount of said capital hereafter as is now or shall hereafter be authorized by law. On the date of consolidation its surplus shall be Five Million Dollars ($5,000,000.00) and its undivided profits shall be Five Hundred Thousand Dollars ($500,000.00). Said capital, surplus and undivided profits at the date of consolidation shall then aggregate Fifteen Million Five Hundred Thousand Dollars ($15,500,000.00). Of this capital stock thirty-three thousand three hundred thirty-three and one-third (33,333%) shares shall be allotted to the then shareholders of each of said banks, being one and one-third (1%) shares for each share now held by them.
    In the event that the committee finds assets belonging to any of the three consolidating banks in excess of the said amount to be contributed by each of them, then such excess assets, if any, shall be by such bank transferred and delivered to the consolidated bank, to be held by said bank in a special trust account for liquidation and distribution among the stockholders, as of the date of consolidation, of the respective banks contributing the same. The directors of the consolidated bank shall have full and absolute discretion in the liquidation and distribution of the same, and neither they nor the bank shall be in any wise liable for any act of theirs in relation thereto, except for their wilful misconduct. Such excess assets may be held for a period of six (6) months after the consolidation by the consolidated bank as a guarantee against any undisclosed liabilities of the contributing banks, and if any such liabilities are asserted within six (6) months after the consolidation, said excess assets, or such part thereof as the directors of the consolidated bank shall deem advisable shall be held by the consolidated bank until such liabilities are discharged, and said assets may be used in the absolute discretion of the directors of the consolidated bank to liquidate and discharge any such liabilities. [Italics ours.]
    On July 3, 1919, at a special meeting of the stockholders of the Mechanics Bank a resolution was adopted ratifying and approving said contract of consolidation. Between May 15, 1919, and June 21, 1919, various blocks of stock of the Mechanics Bank were 'sold on the St. Louis stock exchange at prices ranging from $308 to $320 per share. On June 26, 10 shares sold at $282.50 per share and the subscription rights sold at $32.50 per share. On June 27, 50 shares sold at $282.50 and subscription rights at $33.25.
    As soon as the consolidation of said three banks was approved by the Comptroller of the Currency, the petitioner surrendered all of his then holdings of stock in said Mechanics Bank consisting of said 300 shares which he had purchased in 1905, plus 75 shares acquired in June, 1919, and he received through his participation in said consolidation and by the conversion of his 375 shares of stock in the Mechanics Bank, stock certificates of the First National Bank in St. Louis for 500 shares of stock, par value $100 each.
    The fair market value of each of these shares in the First National Bank when received was $210 per share, or a total market value of 500 shares of $105,000.
    All of the transactions relating to said consolidation of said three banks and the conversion of the shares of the petitioner in said Mechanics Bank into shares in said First National Bank in St. Louis were pursuant to the provisions of the National Banking Act, and were further pursuant thereunder, to the provisions of the contract of consolidation, and to the above-stated corporate actions of said Mechanics Bank.
    2. In April, 1918, the petitioner, as grantor, made a voluntary trust settlement or conveyance of certain property thereby conveyed to the St. Louis Union Trust Company and Edward Mallinckrodt, Jr., as joint trustees of the trust estate created by said instrument. The said trust instrument contains, among other things, the following provisions:
    This Indenture of Trust, Made and entered into this 17th day of April, 1918, by and between Edward Mallinckrodt, of the City of St. Louis, State of Missouri, hereinafter referred to as the “Trustor,” party of the first part, and Edward Mallinckrodt, Jr., and the St. Louis Union Trust Company, a Missouri corporation, hereinafter referred to as “ Trustees,” parties of the second part, Witnesseth:
    First: That in consideration of the trust hereinafter mentioned, the Trustor does hereby grant, bargain, transfer, sell, convey and confirm unto the Trustees, parties of the second part:
    1. Five Hundred shares of the capital stock of the “ Jane Holding Corporation,” being a corporation organized and existing under and by virtue of the laws of the State of Missouri, which said shares of stock so conveyed are represented by Certificates No. 11 for 498 shares, No. 12 for one share, and No. 13 for one share.
    2. First Mortgage Bonds of the Finance & Mortgage Bonds of the Finance & Mortgage Corporation aggregating $370.C00 in par value; Second Mortgage Bonds of the Finance & Mortgage Corporation aggregating $252,000 in par value.

      3. 411 the right, title and interest of the Trustor in and under any agreement for the purchase of bonds of said Finance & Mortgage Corporation, and in and under any contract or agreement relating to the “ Arcade Building Enterprise ” hereinafter described;
    Together with any other property which may hereafter be transferred or conveyed to or deposited with the Trustees under the terms of this trust, or which they may acquire as Trustees hereunder, together with any increment to any of the said property.
    This conveyance is in trust nevertheless for the uses and purposes, upon the terms and conditions, subject to the limitations, with the duties and powers in the Trustees, and for the benefit of the persons as “ beneficiaries,” hereinafter stated, as follows:
    The Trustor hereby directs the Trustees to take possession of all the property hereby conveyed to them, or which they may hereafter acquire in trust under the terms hereof, together with all increment thereto, and to hold, manage, control and dispose of the principal and income of the trust estate, and in respect of the same and every part thereof, to exercise the powers and perform the duties, all as is hereinafter set out.
    Then follow subdivisions 2 to 9, inclusive, which contain in great detail the conditions of the trustor’s grant respecting the handling of the properties conveyed to the trust, the use of the principal and of the income of the same and the distribution of the income and final division of the principal making provisions for the benefit of the business designated as the Arcade Building Enterprise and distribution of income to the beneficiaries Edward Mallinckrodt, Jr., his wife, Elizabeth E. Mallinckrodt, and for the children and grandchildren of said Edward Mallinckrodt, Jr. These are followed by subdivision 10, the first paragraph of which is as follows:
    This trust agreement and settlement is absolute, and is irrevocable by the Trustor, and the Trustor shall hereafter possess no beneficial right or title in the trust estate hereby conveyed.
    Then follow six subdivisions devoted to the matters of the final distribution and winding up of the said trust estate.
    When the above trust was created the grantor (this petitioner) was engaged in the construction of a large store and office building in the City of St. Louis, Mo., known as the Arcade Building. The completion of this building required large additional amounts of money which were furnished by the grantor through additional donations made by him to the trust estate from time to time. In addition to donations made by the petitioner to this trust estate intended for use in relation to said Arcade Building, he also made other donations of moneys and securities having no special relation to said building. All of the donations to this trust estate made by the donor subsequent to the creation of the trust estate were made pursuant to the provisions of the above trust instrument, by which he reserved the right to increase said trust estate by later donations thereto.

      He had made a number of such additional donations to the trust estate before the transaction involved in this case.
    Toward the close of 1920, the petitioner wished to dispose of certain securities and to establish his loss upon them. He disposed of the following securities through G. H. Walker & Co., an established brokerage house in St. Louis:
    $81,000 face amount of Hudson & Manhattan, Series A, 5% First Mortgage bonds, due Feb. 1, 1957.
    100 shares Commonwealth Trust Company, on which 30% had been paid in liquidation.
    168 shares New England Equitable Insurance Company.
    500 shares Hargadine-McKittrick Dry Goods Company, first preferred.
    23S-2/21 shares Hargadine-McKittrick Dry Goods Company, second preferred.
    375-100/375 shares Hargadine-McKittrick Dry Goods Company, common.
    G. H. Walker & Co., as brokers and for the account of the petitioner, negotiated the sale of and sold these securities to the trustees of the above trust at the following prices:
    For the Hudson & Manhattan bonds at $57.50, total price_$46,873.42
    Less commission and tax- 122.28
    Net price for principal_ 46,751.14
    Plus interest, 143 days_ 1, 619.06
    Total_J_ 4-8,370. 20
    For the Commonwealth Trust stock_ 6,000. 00
    Less commission and tax- 27. 00
    Net proceeds--- 5,973. 00
    For the New England Equitable Insurance Company stock at $1.00_ 168. 00
    Less commission and tax_ 24. 36
    Net proceeds_ 143. 64
    For the Hargadine-McKittrick first preferred at $1.00- 500. 00
    Less commission and tax_ 72. 50
    Net proceeds_^- 427. 50
    For the Hargadine-McKittrick second preferred at $1.00- 238. 09
    Less commission and tax- 34.66
    Net proceeds_1— 203.43
    For said Hargadine-McKittrick common stock at $1.00_ 375.27
    Less commission and tax_ 54. 52
    Net proceeds. 320, 75

      These prices were in each instance the fair market values of the respective items at the time.
    The cost to the petitioner as confirmed by his books, and the fair market value on March 1, 1913, of each of these items of securities, was as follows:

    The prices at which these securities were disposed of to the trustees were negotiated by said brokers with said trustees, who desired to acquire said securities at the prices thus negotiated and agreed upon.
    At the time the trustees of the trust negotiated this purchase and wished to conclude same, the trustees were short of funds, and as had been done frequently theretofore when the trustees needed or desired money for transactions that they wished to enter into, they informed the grantor of their need of cash, and the grantor voluntarily made an additional donation to the trust estate of the amount of cash then needed by the trustees. This donation of cash was made to the trustees as an additional donation to the corpus of the trust estate held by them.
    The trustees thereupon concluded their proposed acquisition of said securities from said brokers and paid cash for them out of the trust estate.
    The petitioner received as the result of the disposal, the said purchase price at which the brokers had negotiated the disposal, less said above items of commissions and taxes.
    In the petitioner’s income-tax return for 1920 he deducted as a loss the difference ($135,995.23) between what the securities had originally cost him, or if acquired before March 1, 1913, their fair market value on that date, and the amount received for them as the proceeds of said sale.
    The Commissioner disallowed this deduction upon the finding and theory that the sale of the securities did not constitute a bona -fide sale, but must be treated as a gift of the securities to the trust, because the amount of money that the grantor gave to the trust was identical with the purchase price at which the securities were sold to the trustees, and because “ the payment by the trust of $55,-773.84 for the securities resulted m no diminution of the trust, for it merely expended for the securities what the trustor had given it on the very day of the purchase of the securities,” so that the transaction “ resolves itself into Edward Mallinckrodt, Sr., giving to the trust securities alleged to have been sold to it on December 24, 1920.”
    Based upon this conclusion, the Commissioner found an additional tax liability and deficiency of $61,171.93, all of which is contested by the petitioner.
   OPINION.'

Trussell :

1. In arriving at his determination in this case the Commissioner has taken the position that the petitioner, when he turned in his stock in the Mechanics Bank and received stock in the First National Bank, was a party to an exchange of securities, and that there were two separate blocks of securities, one block of 300 shares which had cost the petitioner $99,032.88, and another block of 75 shares which had cost the petitioner $11,250, and that the petitioner realized a gain on the exchange of the latter block. We are unable to follow the Commissioner in his view of this matter. The petitioner acquired the 75 shares of the Mechanics Bank stock by the exercise of a stockholder’s right to purchase same at a given price less than their true value. For the purpose of ascertaining whether a gain or loss results from the future disposition of such stock all the shares held, including the 300 formerly held and the 75 shares acquired, must be treated as one property and the rule laid down in the case of Miles v. Safe Deposit & Trust Co., 259 U. S. 247, 252, 253, is controlling in respect of this phase of this case.

When the petitioner had paid for his additional shares of Mechanics Bank stock he was then the owner of 375 shares of such stock which had cost $110,282.88. The stock of the First National Bank which he received by virtue of consolidation had a market value of $105,000. If this transaction is considered merely as an exchange of stock of one bank for the stock of another bank, the market value of the latter being less than the cost of the former, there could be no gain derived from such transaction. Goodrich v. Edwards, 255 U. S. 527, 535.

When the Mechanics Bank, together with two other banks, brought about a consolidation and the formation of the First National Bank, the Mechanics Bank, acting in its corporate capacity, transferred to the First National Bank acceptable assets of an agreed value of $5,250,000, together with all its other assets which .had a book value of $5,716,598.12, $5,250,000 of which was a contribution to the capital of the new bank and $466,598.12 of which was to be held by the new bank, and out of this fund taxes accrued against the Mechanics Bank and anjr undisclosed liabilities were to be paid and the balance converted into cash and distributed to the stockholders of the Mechanics Bank and it was expected that there would result a considerable sum thus distributable to this petitioner and the other stockholders of the Mechanics Bank. The First National Bank thus became in effect the liquidation agent of the Mechanics Bank, and when the First National Bank delivered to this petitioner his pro rata number of the shares of the First National Bank it did so as such liquidating agent, and the market value of the shares of the First National Bank delivered to the petitioner having been less than the cost of the shares of the Mechanics Bank owned by the petitioner there could be no gain realized at that time. Whether when the assets of the Mechanics Bank shall have been finally liquidated this petitioner shall realize a gain or a loss from the transaction is not here in issue.

2. When in 1918 this petitioner created the trust estate described in the findings of fact he conveyed and granted to it certain properties and securities and all interest therein forever; likewise when at other times he made further grants or gifts to this trust estate he also parted with all title and interest in such grants or gifts forever. And, when during the latter days of 1920, he made a gift of a sum of money to this trust estate, he made such gift under the terms of the trust deed, and upon delivery of the money so granted its title vested instanter in the trust estate and this petitioner then parted with all title and interest in and to such moneys absolutely and forever. The fact that at or about the same time the trust estate used such money for the purpose of purchasing securities which this petitioner had placed in the hands of a recognized broker for sale can not be interpreted as placing any restrictions or qualifications upon the grant of the moneys. This petitioner then had no more control over the use of such moneys in the hands of the trust estate than he had over the use of securities and properties previously granted to such trust estate. We are thus held to the conclusion that, when this petitioner placed the securities described in the findings of fact in the hands of his brokers for sale and received from such brokers the selling price thereof, less commissions, it being agreed that the amount so received represented the true market value of such securities at that time, this petitioner realized a loss from the sale of such stocks and is entitled to deduct such loss from his gross income for the year in which the transaction occurred.

Order of redetermination will ~be entered ■ on 15 days’ notice, under Rule 50.


author: Littleton:

text:
    Appeal of NAZARETH CEMENT COMPANY.
    Docket No. 2446.
    Decided September 27, 1926.
    A corporation purchased tangible property for $2,500,000 cash, derived from bonds and preferred stock issued at its organization, and, during the following six-year period, it was obliged to borrow $400,000 to meet interest charges on its bonds. A reorganization being necessary, the property was bought in at an agreed foreclosure sale by representatives of creditors and preferred stockholders at a nominal price and thereafter was transferred to the petitioner corporation, which issued to creditors, bondholders and preferred stockholders of the old corporation $2,500,000 of preferred and common stock. SeM, that the petitioner was a new corporation and acquired the property of the old corporation in exchange for stock, that the property so acquired had an actual cash value at the time paid in, in February, 1906, of $1,650,000, and that in computing the invested capital for the years involved this amount should be included therein.

      Luther F. Speer, Esq., and Fred A. Woodis, Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1917, 1918, and 1919, in the amount of $89,113.25. The deficiencies asserted for the respective years are: 1917, $25,244.21; 1918, $31,947.33; 1919, $31,921.71.
    FINDINGS OF FACT.
    The petitioner is a Pennsylvania corporation with principal office at Easton. It is successor to a corporation of the same name organized under the laws of Pennsylvania in 1900. At or about the date of the organization of the predecessor company, there was paid in $2,500,000 cash, for which $1,250,000 of preferred stock and $1,250,000 of bonds were issued by the predecessor company, with which bonds and stock there was also issued, without further consideration, $1,250,000 par value of common stock. With the $2,500,-000 of actual cash paid in to the predecessor company, that company purchased 156 acres of cement-bearing shale rock and erected a plant thereon for the conversion into cement of the rock taken from the quarries on the land. The total cost to the predecessor company of the land, quarries and plant erected exceeded $2,500,000. Shortly after the organization of the predecessor corporation in 1900, it was discovered that cement could be produced from the constituent materials of different formations, with the result that many cement mills began operations in different sections of the country. The Nazareth Cement Co. was the first company in the Lehigh region to embark upon the industry on a large scale. A few years after its organization a number of other large mills began operations in that immediate vicinity. The petitioner’s operations were not profitable. No common or preferred stock dividends were ever paid and the accumulated interest on its bonded indebtedness was large in amount. In order to carry on its business the company was compelled from time to time to borrow from outside sources amounts aggregating $400,000. In 1906 the predecessor company found itself unable to meet its fixed charges of interest upon its bonds and other indebtedness, and under the circumstances the interested parties concluded that a reorganization of the company was necessary. Due to the fact, however, that certain of the bondholders were not in a position to consent to the reorganization, it was decided that the creditors should foreclose upon their mortgage and that the property should be sold and a new corporation organized to take over the business and properties. This plan was carried out by an agreed foreclosure sale wherein the property of the predecessor company was bought in by the representatives of the creditors at a nominal amount of $9,000.
    Upon the conclusion of the judicial sale and the transfer of the property of the predecessor corporation into the hands of the trustee, and after 30 days’ notice, as required by the Pennslvania laws, as hereinafter referred to, a meeting was held and the officers and directors of the former corporation were elected officers and directors of the new corporation, the petitioner herein. The new corporation issued $2,500,000 preferred and common stock to the creditors and preferred stockholders of the former corporation. The preferred stock was issued to the creditors holding $400,000 of obligations of the company and to the holders of $1,250,000 par value of bonds, par for par, including accrued interest upon the obligations. To the preferred stockholders of the predecessor company who were also the holders of all its common stock, there was issued common stock of the petitioner in an amount equal to 50 cents on the dollar of their preferred stock. No stock, in the new corporation was issued for the common stock of the predecessor.
    Due to a disagreement between the principal officers of the corporation, the corporate books and records were removed from the company’s office. They were lost, with the result that the information contained therein concerning the company’s property is not now available.
    Under date of November 12, 1920, the Commissioner notified the petitioner of an additional tax based upon an audit of its returns for the years here in question, in which he computed its invested capital by including in full the capital stock mentioned above. At that time the Commissioner, using the invested capital computation set forth above, computed a deficiency in tax for the years here in question amounting to $32,498.97, which was paid. Thereafter, on January 1, 1921, the same Commissioner determined that he had erred in computing the invested capital, and he reopened the case. While the case was pending further consideration, the present Commissioner assumed office, on May 27,1921, and he thereafter held that he could not determine the invested capital and computed a further tax upon the basis of representative concerns under the provisions of section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918. Under this computation there was found the further deficiency as ultimately set forth in the notice of the deficiency mailed to the petitioner and constituting the basis of this appeal.
   OPINION.

Littleton:

The petitioner advances two contentions: First, that the Commissioner, having once determined the tax, could not reverse such determination and compute a tax upon a different basis resulting in a greater deficiency, and, secondly, that it was permissible and proper, in computing the invested capital, to look through the reorganization of 1906 and compute the invested capital upon the basis of that of the predecessor company.

As to the first issue, the contention of the petitioner is not well taken. Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856; Appeal of Warner Sugar Refining Co., 4 B. T. A. 5.

As to the second claim advanced, we are of opinion that the petitioner was an entirely new corporation and that it acquired the property of the predecessor corporation for stock from the creditors who had purchased it at a foreclosure sale. Petitioner’s invested capital was the actual cash value of the property paid in.

The petitioner was organized pursuant to the laws of Pennsylvania, Pa. Stat. 1920, sections 5805, 5806, and 5807. Section 5805 (Act of June 20, 1911; P. L. 1092, section 1) provides as follows:

Purchasers of franchises and property to be a body politic; powers — Whenever material, rolling-stock or property, whether located wholly or partly within this State, and franchises, or all or any part of such material rolling-stock, property and franchises, of any gas, water, coal, iron, steel, lumber, oil, or mining or manufacturing, transportation or telegraph company, or any railroad, canal, turnpike, bridge, or plank road, or of any corporation created by or under any law of this State, or of this State and any other State or States, shall be sold and conveyed, under and by virtue of any process or decree of any court of this State or of the United States, or under or by virtue of a power of sale contained in any mortgage or deed of trust, without any process or decree of a court in the premises, the person or persons for or on whose account such material, rolling-stock, property, and franchises of any gas, water, coal, iron, steel, lumber, oil, or mining, or manufacturing, trans"portation or telegraph company, or any railroad, canal, turnpike, bridge, or plank road, or of any corporation created by or under any law of this State or of this State and any other State or States, so sold and conveyed, may be purchased, shall be and they are hereby constituted a body politic and • corporate, and shall be vested with all the right, title, interest, property, possession, claims, and demand, in law and equity, of, in and to stick material rolling-stock, property, or franchise, so sold and conveyed, of any gas, water, coal. Iron, steel, lumber, oil or mining, or manufacturing, transportation, or telegraph company, or any railroad, canal, turnpike, bridge or plank road, or of any corporation created by or under any law of this State, or of this State and any other State or States, with the appurtenances, and with all the rights, powers, immunities, privileges, and franchises of the corporations as whose the same may have been sold, and which may have been granted to or conferred thereupon by any act or acts of Assembly whatsoever, in force at the time of such sale and conveyance, and subject to all the restrictions imposed upon such corporations by any such act or acts, except so far as the same are modified hereby, or have been by any amendments or supplements thereto or modifications thereof; and with all the rights, powers, immunities, privileges, and franchises granted to or conferred by acts now existing upon corporations of a similar kind, and subject to all restrictions imposed by statute, except as •■subsequently modified, or modified hereby; and the person or- persons purchasing, for or on whose account any such material, rolling-stock, property and franchises of any gas, water, iron, steel, lumber, oil, or mining, or manufacturing, transportation or telegraph, company, or any railroad, canal, turnpike, bridge, or plank road or of any corporations created by or under any law of this State, or of this State and other State or States, so sold and conveyed, may have been purchased, shall meet, within thirty days after the conveyance thereof shall be delivered, — public notice of the time and place of such meeting having been given, at least once a week for two weeks, in at least one newspaper published in the city or county in which such sale may have been held,— and organize said new corporation by electing a board of directors consisting of not less than five nor more than fifteen (to continue in office until the first Monday succeeding such meeting, when, and annually thereafter on the said day, a like election for directors shall be held, the directors so elected to serve for one year and until their successors are elected, unless the directors shall he divided into not more than four classes, in which case the term of office of ■one class shall expire on each first Monday of May thereafter), and shall adopt a corporate name and common seal, determine the amount of the capital stock thereof, without being restricted to the amount theretofore issued by the corporation whose property and franchise had been sold. Not in excess, however, of the aggregate amount of the capital stock authorized to be issued by the corporation whose property and franchises had been sold, together with the amount of the bonded indebtedness of such corporation outstanding at the time of the sale, and of any receiver’s certificate or other receiver’s indebtedness necessary to be paid, and the amount that will represent all further moneys contributed to such new, or reorganized corporation. The said stock thus issued by the said new corporation may consist wholly of common stock, or partly of common stock and partly of preferred stock; and the whole, or any part thereof, may be issued as fully paid stock, in payment or part payment for the property so purchased. Said new corporation shall have power and authority to make and issue certificates therefor, in shares of not more than one hundred dollars each; and may at any time thereafter create and issue preferred stock to such an amount and on such terms as such corporation may deem necessary; and, from time to time, may issue bonds to any amount, and may secure the saíne by one or more mortgages upon the real and personal property and corporate rights and franchises, or either, or any part or parts thereof: Provided, That no coal, iron, steel, lumber, or oil, or mining, manufacturing, transportation or telegraph company, shall have the benefit of this act, unless it shall have previously filed with the Secretary of State its acceptance of all the provisions of the Constitution as provided by law.

Section 5806 (Act of May 23, 1919; P. L. 240, section 1) validates ownership of purchasers from corporations prior thereto.

Section 5807 (Act of May 25, 1878; P. L. 145, section 2, provides as follows:

New corporation to file certificate with secretary of state — It shall be the duty of such new corporation, within one calendar month after its organization, to make a certificate thereof, under its common seal, attested by the signature of its president, specifying the date of such organization, the name so adopted, the amount of cápital stock, and the names of its president and directors, and transmit the said certificate to the secretary of state, at Harrisburg, to be filed in his ofiice and there remain of record; and a certified copy of such certificate, so filed, shall be evidence of the corporate existence of said new corporation.

Under these statutes the petitioner upon its organization became a new corporation separate and distinct from the former corporation to the same extent as if it had been organized under an original charter to take over the property and assets of the predecessor company. Its invested capital for the years involved was therefore the actual cash, the actual cash value of property paid in for stock, and paid-in or earned surplus and undivided profits. In these circumstances, petitioner’s invested capital, in so far as the property formerly owned by the old corporation was concerned, was its actual cash value at the time paid in for stock in 1906. The evidence before the Board relative to that value is that the creditors, holding claims in the amount of $1,650,000, consented to the organization of a new company and agreed that, in lieu of being paid the amount of their indebtedness and accrued interest, they would purchase the property at a foreclosure sale at a nominal price and pay the same in to the new corporation for $1,650,000 par value of the preferred stock in exchange for the entire property representing an investment by the old company of $2,500,000. Upon the transfer of the properties of the old corporation, $1,650,000 par value of preferred stock was issued to the creditors holding claims in that amount, and $900,-000 par value of common stock was issued to the holders of all of the preferred stock of the predecessor corporation upon the basis of 50 cents on the dollar, together with accumulated dividends. . The petitioner had the same officers and directors as its predecessor who had been connected with the enterprise since its inception in 1900, They, as well as the creditors, were thoroughly familiar with the properties and their probable value. The creditors were willing to surrender their claims for preferred stock of the petitioner.

The conditions which necessitated the organization of the petitioner were occasioned by the increased production of cement as a result of several other large companies beginning operations in the Lehigh region prior to 1906. Petitioner’s operations have been profitable, although it produced no more cement than did its predecessor.

Upon the entire record we are of opinion that the property paid in to the petitioner for stock had an actual cash value at the time of $1,650,000. Invested capital for the years involved should therefore be computed by including this amount therein.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


author: Yan Fossan:

text:
    Appeal of COLUMBUS BREAD COMPANY.
    Docket No. 5823.
    Decided September 27, 1926.
    1. An amount paid by a taxpayer on account of a fine, penalty and court costs for violating tbe anti-trust law of a state, and attorneys’ fees incident to the defense of taxpayer against an indictment for such violation, held not to be deductible as an ordinary and necessary expense of taxpayer’s business.
    2. Rates of depreciation of property determined.

      Robert W. Anderson, Esq., for the petitioner.

      Ellis W. Manning, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $2,703-30 in income and profits taxes for the calendar year 1919. The taxpayer assigns the following errors:
    (1) The disallowance of a deduction from gross income of $4,782 representing attorneys’ fees, penalty, fine, and court costs.
    (2) The disallowance of depreciation as claimed by the taxpayer.
    An amended petition alleged error by the Commissioner in deducting from taxpayer’s invested capital, as computed by the Commissioner, the sum of $23,081.44, representing the income and profits taxes for the year 1918 in the amount of $54,617.34, prorated.
    , FINDINGS OF FACT.
    The Columbus Bread Co. was an Ohio corporation which on July 1, 1920, was succeeded by the Holland Bread Co. of Toledo, which in turn was succeeded by Ward Brothers, Inc. The taxpayer was engaged in the wholesale baking business during the period in question.
    The taxpayer filed its income and profits-tax return for the calendar year 1919, reporting a net income of $21,562.88, and paid the income and profits taxes computed on that basis.
    On August 26, 1924, an internal revenue agent investigated the taxpayer’s books and records and added to the net income as reported by the taxpayer the following items: Machinery additions disallowed as an expense, $936.91; excessive depreciation, $4,187.33; fines, court costs, etc., paid for profiteering, $4,782, making an alleged income of $31,473.12, on which basis the Commissioner computed the additional tax.
    On August 22, 1919, an indictment under the provisions of the so-called Valentine Anti-Trust Law of Ohio was returned against the taxpayer and others in the Court of Common Pleas, Franklin County, Ohio. The indictment charged that the company had entered into a combination to increase the price of bread.
    The taxpayer pleaded guilty and on September 30,1919, Robert P. Duncan, Judge, imposed a fine of $1,000 against the Columbus Bread Co. and ordered it to pay the costs of the prosecution in the sum of $11.13. The fine and costs were paid on October 3, 1919, and on the same date the taxpayer paid to the State of Ohio $1,550, representing a penalty of $50 pei day for 31 days, imposed by section 6395 of the General Code of Ohio. On October 16, 1919, the taxpayer paid attorneys’ fees in the sum of $2,220.87 for services in connection with the defense of petitioner. The three items, fines and costs, $1,011.13; penalty, $1,550; and attorneys’ fees, $2,220.87, represent the item of $4,782 added by the Commissioner to the company’s net income as reported by it.
    The cost of the taxpayer’s depreciable assets on December 31, 1919, the rates of depreciation allowed by the Commissioner for the year 1919, and the rates of depreciation claimed by the taxpayer for the year 1919, are shown in the following schedule as stipulated by the parties:

      The taxpayer charged off its books for the year 1919 the sum of $16,658.79, representing its computation of the amount of the exhaustion, wear and tear and obsolescence of its depreciable assets. The Commissioner allowed $12,471.46 and the difference, to wit, $4,187.33, represented the item in the same amount added by the Commissioner to the taxpayer’s net income as reported by it. The amount computed by the taxpayer is based on the cost of the depreciable assets and their estimated useful life. The useful life of the ovens, machinery, tools and equipment, horses, wagons and harness, bread cases and autos depended upon the usage to which they were put during each year. The taxpayer’s officers could not use a straight percentage basis to determine the amount of depreciation, for some assets had a very short useful life while others had a longer useful life. However, the officers, through years of experience in the baking business, determined the life of each particular asset at the end of each year and then took an approximate percentage of depreciation of the assets as a whole. The practice has been followed from the time the business was started in 1912.
    The Commissioner deducted from the taxpayer’s invested capital income and profits taxes for the year 1918. ■
   OPINION.

Yan Fossan:

The first assignment of error raises the question of whether or not a fine and penalty, court costs, and attorneys’ fees incurred in connection with the indictment of petitioner for violating the anti-trust law of Ohio, to which indictment petitioner pleaded guilty, may be deducted as ordinary and necessary expenses of petitioner’s business of manufacturing and selling bread. We are/ unable to agree with petitioner’s contention on this point. To be deductible under the law the expenditure must be both an ordinary and a necessary expense of taxpayer’s business.' Petitioner has failed to prove either of these essential conditions. The ruling of the Commissioner must be affirmed. Appeal of Sarah Backer, 1 B. T. A. 214; Appeal of John Stephens, 2 B. T. A. 724.

The second assignment of error presents the question of the proper rates of depreciation on the taxpayer’s depreciable assets. The Board is satisfied that the rates claimed by the taxpayer are reasonable and should be used in computing the amount of the depreciation, except the rate on buildings, which should be 2y2 per cent, and the rate on office furniture and fixtures, which should be 10 per cent.

The Commissioner’s adjustment of invested capital in respect to income and profits taxes for prior years appears to have been made in accordance with the regulations in force as to the year 1918, and in view of the provisions of section 1207 of the Revenue Act of 1926. such adjustment may not now be modified.

Order of redetermination will be entered on 15 days' notice, under Rule 50.


author: Marquette :

text:
    Appeal of HENRY I. BROWN.
    Docket No. 3675.
    Decided September 27, 1926.

      Henry I. Brown pro se.

      George G. Witter, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income tax for the year 1918 in the amount of $4,766.44.
    FINDINGS OF FACT.
    The taxpayer is a resident of Philadelphia, Pa.
    During 1918 the taxpayer was a member of the partnerships of (1) Wilcox, Peck, Brown & Crosby, (2) Henry W. Brown & Co., (3) Brown, Crosby, Story & Co., and (4) the Independence Bureau. Everett U. Crosby also owned interests in each of these firms and ■various other persons were interested in one or more of them.
    During 1918 the taxpayer received from the Independence Bureau $3,000 as salary and $1,314.12 as his distributive share of the partnership profits. He reported his total income from this partnership as $4,314.12. The Commissioner increased this amount by $3,000 on the theory that the salary payment had not been reported.
    The Commissioner determined that the books of the Independence Bureau were kept on the accrual basis during the year 1918 and in computing the taxpayer’s income from that source increased the amount reported by the taxpayer in his return.
    Because of disagreements among the partners as to the conduct of its affairs and in order to. facilitate the retirement of one of the partners, it was decided during 1918 to dissolve the firm of Henry W. Brown & Co. Distribution of the assets was commenced, and, in an attempt to solve the problem of distributing accounts receivable they were arbitrarily charged off as bad debts. The Commissioner has disallowed the taxpayer’s claim for a deduction from income of an amount equal to his share of these alleged bad debts.
    During 1918 Henry W. Brown & Co. spent $2,248.23 for office furniture and equipment, and in accordance with its usual practice charged the expenditure to expense. The furniture and equipment bought has a useful life of at least ten years. The Commissioner restored the amount mentioned to income of the partnership and increased the taxpayer’s income accordingly.
    The taxpayer owned a 39.54 per cent interest in a building at 435 Walnut Street, which was occupied under a lease by Henry W. Brown & Co., one of the partnerships of which the taxpayer was a member. The lease, which was for a five-year term ending December 31, 1918, provided that repairs and improvements were to be at the lessee’s expense. The lease contained no “renewal clause” and there was no specific agreement that it would be renewed, yet the taxpayer understood that a renewal would be granted unless unforeseen developments occurred, and on expiration the lease was in fact renewed for a five-year period.
    During 1918 Henry W. Brown & Co. found it necessary to lease three floors of an adjoining building at 437 Walnut Street. The new leasehold was unheated and the company therefore installed a new furnace at 435 Walnut Street, with a capacity sufficient to heat that building and the new leasehold.
    The Commissioner determined that the cost of installation of the new furnace was income in the form of additional rent to the owners of 435 Walnut Street and accordingly increased the taxpayer’s income by $1,846.72 representing his share of such alleged income.
    The Commissioner admits error in the inclusion in the taxpayer’s income of $9, representing tax paid at the source on interest received from tax-free covenant bonds.
   OPINION.

Marquette :

The Commissioner erred in adding to the taxpayer’s income, as reported by him for the year 1918, the amount of $3,000 representing salary paid him by the Independence Bureau, and in adding thereto the amount of $9 representing tax paid at the source on tax-free covenant bonds. In all other respects the determination of the Commissioner is approved.

Order of redetermination will he entered on 15 days’ notice, under Rule 50.

Phillips and Smith dissent in so far as the decision includes the cost to the tenant of installing a furnace as income to the landlord.


author: Smith:

text:
    WEYMAN & CONNORS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7110.
    Decided September 27, 1926.

      A. W. Clapp, Esq., for the petitioner.

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

This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1921 in the amount of $1,410.49 arising from the denial of personal service classification to the petitioner for such year.

FINDINGS OF FACT.

The petitioner is a Georgia corporation organized in November, 1919. It is a successor to the individual business of S. T. Weyman, who succeeded the partnership of Weyman & Connors, which was established in 1890. In 1921 it had a capital stock of $50,000, divided into 500 shares held as follows:

Shares.
S. T. Weyman-400
A. E. Chapman_ 60
W. B. Gibson_ 60

At the date of organization assets of a value of $306,805.99 were turned over to the corporation for its capital stock of $50,000 and liabilities were assumed by the corporation of $256,805.97. The real estate acquired by the corporation had a value at the time paid in of $184,931.20; cash paid in amounted to $2,487; notes receivable $55,-799.20; Liberty bonds $1,831.71; office furniture and fixtures $794.75. The liabilities assumed were an overdraft on the Fourth National Bank of $6,669.84; notes payable $210,050.84; accounts payable $40,086.15.

The business of the petitioner during the year 1921 consisted principally of placing loans for investors on a commission basis. Its principal client was the Penn Mutual Life Insurance Co. Its special method of placing loans for this company was as follows:

When an application for a loan was received it was presented to the lender, the Penn Mutual Life Insurance Co. That company required that a building be constructed and completed before it would place a loan upon it. Often the applicant for the loan had not constructed the building and in such case the petitioner would advance the money to the borrower or endorse the borrower’s note and obtain the money from a bank in Atlanta. When the building was completed and the insurance company advanced the loan the petitioner was reimbursed or the loan at the bank was taken up. The petitioner received a commission of 5 per cent upon such loans, which commission ordinarily covered the cost of searching the title and miscellaneous charges. The loans and notes payable of the petitioner at the beginning of the taxable year were $304,665.18 and at the end of the taxable year $278,017. The petitioner employed in its business during the year 1921, $300,000 or $400,000 of borrowed money.

The petitioner was not engaged as a business in the buying and selling of real estate. It had, however, acquired at organization two apartment houses, each containing 14 apartments, and a number of rental properties which it operated during the year 1921 and from which it received an income. Its income-tax return for the year 1921 shows income from—

Commissions, etc_ $76, 234. 77
Interest _ 4, 544. 35
Rents_ 22, 817. 25
Total income. 103, 596.37

The return shows as deductions from gross income—

Expenses-$35,170.01
Compensation of partners or stockholders_:_ 34, 999.96
Repairs- 541. 52
Interest- 13,124.78
Taxes- 3, 548.43
Bad debts_ 67. 01
Exhaustion, wear and tear_ 2, 569.69
Total- 90, 021.40
Profit from operations_ 13, 574. 97
Less loss on sale of capital assets_ 1, 515. 53
12, 059.44

During the year 1921 the petitioner obtained an insurance agency and conducted an insurance business -in connection with its loan business.

The petitioner’s balance sheets at the beginning and close of 1921 show as follows:

Assets.
¡ - can. .i, xyzj. Dec. 81, 1921
Cash-$24, 889.25 $19, 940. 08
Premium accounts, insurance_ 6, 531.88
Notes receivable from clients_ 108, 461. 50 37, 380. 95
Loans and advances to officers, employees and others- 92, 008.24 112, 927. 01
Fixed assets, including furniture and fixtures_ 172, 982.97 173, 895. 05
Miscellaneous_:_ 287.74
Total_ 398, 341. 96 350,962. 71
LIABILITIES.
Loans and notes payable_ 304, 665.18 273, 017.00
Due home offices for insurance_ 6,443 .75
Accounts payable, officers_ 4, 660.20
Reserve for depreciation_ 2, 535. 83 5,105. 52
Capital stock_ 50, 000. 00 50, 000. 00
Surplus-,-,__41,140. 95 11, 736.24
Total_ 398,341.96 350, 962. 71

Judgment for the Commissioner.