author: TRAmmell:

text:
    Appeal of C. U. CONNELLEE.
    Docket No. 3363.
    Decided July 24, 1926.
    1. On tlie evidence, held, tliat the taxpayer is entitled to a deductible loss on account of the abandonment of plans to build a hotel in 1919.
    2. The March 1, 1913, value of real estate determined.
    3. The amount of deductible loss sustained on account of . abandoning plans to build a railroad is based on the cost of the stock of the railroad.

      George Roscoe Damis, Esq., and Jos. Bailey, Esq., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.

      Before Graupner  and Trammell.
    This is an appeal from the determination of a deficiency in income tax for 1919 amounting to $55,589.97. The deficiency arises from the disallowance by the Commissioner, as a deduction from gross income, of an amount claimed as a loss on business ventures in 1919 and the increase of profits returned by the taxpayer from the sale of certain lots.
    FINDINGS OP PACT.
    The taxpayer is a resident of Eastland, Tex. In June, 1919, he began the construction of a seven-story hotel at Eastland, which, according to estimates, would cost, when completed, approximately $268,000. The work proceeded until the latter part of October, 1919. Due to a change in business conditions in that vicinity, the taxpayer deemed it advisable to abandon the construction of the hotel, and about November 1, 1919, the project was wholly abandoned. During the year 1919, $37,335.73 was paid out on account of work performed and material furnished in connection with the work, and a liability to the extent of $7,922.17 was incurred during that year in connection with the building, which amount was not actually paid out until after the end of the year. When the work was abandoned the foundation was nearly completed. The citizens of the town desired to have the hotel completed and a citizens’ committee was organized in the spring of 1920 to interview the taxpayer. He informed the committee that if arrangements could be made to complete the building he would donate what he had invested in the enterprise up to that time. The committee, in order to get information as to the cost of a three or four-story building, requested the taxpayer to have his architect, who had prepared the plans and supervised the work, furnish estimates as to the probable cost. In pursuance of such request, taxpayer sent, on April 1, 1920, the following letter to the architect:
    I shall take up with you in a very short time the matter of the construction of my hotel and perhaps you will want to make another visit here instead of my going to Chicago.
    On April 20th he sent the following telegram to the same party:
    Am ready to finish construction of Connellee hotel. Can you meet me here Monday April twenty-sixth. Answer.
    C. IF. Connellee.
    The taxpayer in sending the communication did so for the citizens’ committee and was acting for them. He did not himself have any intention of resuming the building operations after they were abandoned in 1919. The lot was no more valuable as the result of the excavation and foundation work than it was before, as the foundation was unsuited for any other kind of building, and the taxpayer reached . the conclusion that any more money invested would have been a loss. On account of the developments in the oil industry, and the discovery of oil in other territory, there appeared no need for the hotel in Eastland.
    During the month of December, 1918, the taxpayer and others organized a corporation known as the Eastland, Wichita Falls & Gulf Railroad Co., which was to build and operate a steam standard gauge railroad from the towns of Mangum, Eastland and Breckenridge to New Castle in Young County. The purpose of the construction of this railroad was to improve transportation facilities to meet the demands of the newly developed oil fields in and about Eastland. The taxpayer subscribed for $10,000 par value of capital stock in said railroad corporation, and during the year 1919 paid for his subscription and also took over one-half of the stock subscriptions of D. S. Walker and Fred Frost, paying in to the railroad corporation an additional $16,500. He also incurred a liability of $1,794.26 for sundry items for the railroad corporation which was not paid until 1920. On March 4,1920, he paid $5,000 additional cash for which he had obligated himself during the year 1919. In addition to the cash paid out, he obligated himself to turn over to the railroad corporation, and did turn over during the year 1919, 29 acres of land to be used for right of way, depot and terminal purposes, which had a value at that time of $29,000. All of the above payments were made as the cost of the acquisition of stock of the railroad company.
    During the latter part of 1919 large railroad companies extended branch lines into the field which it was originally contemplated would be served by the Eastland, Wichita Falls & Gulf Railroad Co., and on account of such ventures by other railroad companies the Eastland, Wichita Falls & Gulf Railroad Co. was unable to raise sufficient funds to complete the construction of the railroad, and the officers of said railroad company decided to abandon the project. In view of certain obligations which the corporation had assumed,
    . however, they were unable to actually abandon the work and about the month of October, 1919, entered into an oral agreement with John Ringling to complete the project, which oral agreement was during the month of December, 1919, reduced to writing, a copy of which is as follows:
    The State of Texas,
    County of Eastland.
    Whereas this contract and agreement between C. U. Gonnellee, Cyrus B. Frost, Earl Conner, Tom Harrell, and H. P. Brelsford, individually and as directors of the Eastland, Wichita Falls & Gulf Railroad, a corporation, incorporated under the laws of- Texas, with its principal office and place of business in the City of Eastland, in Eastland County, Texas, hereinafter called party of the first part, and John Singling of the city of New York, hereinafter called party of the second part:
    1. Parties of the First Part bind and obligate themselves, jointly and severally, to procure and deliver to Second Party, free of all lien, claim or incum-brance, the majority and controlling stock of said railroad corporation within ten (10)-days from the date hereof,-and the entire capital stock of said railway company within twelve (12) months from the date hereof, provided only that in the event said parties of the First Part are unable to procure any minority stock in said railroad company at the par value thereof, that they may satisfy this obligation by paying to said John Ringling the par value of said stock.
    2. Parties of the First Part further bind and obligate themselves to procure by proper action of the directors and stockholders of said railroad company, a valid and legal conveyance of all the property rights and franchises of the Eastland, Wichita Falls & Gulf Railway Company, including specifically the charter rights-of-way, Terminal grounds and any and all real estate owned by said railway company, or by any trustee holding same for said railway company, together with all rights of said railway company in any and all crossing contracts or interchange contracts with the Missouri, Kansas & Texas Railway Company of Texas, and the Texas .and Pacific Railway Company, and Receivers and Federal Managers in present control of said roads.
    It is understood that Parties of the First Part are at their own proper charge and expense to deliver to said Party of the Second Part good and sufficient deed to all the right of way of said railroad company from a connection with the Missouri, Kansas & Texas Railway Company of Texas in the town of Mangum, Eastland County, Texas; to the townsite of Wayland, including said townsite as surveyed and platted by C. H. Chamberlain, Chief Engineer, in the County of Stephens, including a completed grade from said town of Mangum, Eastland County, Texas, to and including said town of AVayland, Stephens County Texas, free of any and all liens and incumbrances of whatever character.
    Parties of the First Part further bind and obligate themselves at their own proper charge and expense to procure additional right of way from the track extending from the M. K. & T. Railway Company of Texas to the grade of the Eastland, Wichita Falls & Gulf Railway Company at Mangum, Texas, at such points of intersection as may be required by the Chief Engineer of said Railway Company.
    Parties of the First Part are also to pay for the townsite of Wayland, in Stephens County, Texas, and all expenses incident to surveying, platting and grading of same, and they are to be reimbursed for such expense out of the first sales made by Party of the Second Part, or his assigns, of lots or property in « said townsite of Wayland.
    Parties of the First Part further bind and obligate themselves to procure the purchase of One Hundred Fifty Thousand ($150,000) Dollars worth of six per cent (6%) First Mortgage Bonds, secured by the properties and franchises of said line of railroad, which are to be the first lien upon said property and are to be issued under the authority of the Railroad Commission of Texas and the amount paid to the credit of Party of the Second Part not later than ninety (90) days from the date hereof, the maturity of said bonds to be mutually agreed upon by Parties of the First and Second Parts.
    3. Party of the Second Part on his part, binds and obligates himself to immediately eguip said roadbed from the town of Mangum, Eastland County, Texas, to tlie town of .Wayland, Stephens County, Texas, aforesaid with the necessary steel, ties and bridging material, and to furnish rolling stock and any other equipment or material required for the proper and reasonable operation of a standard gauge line of railway from the town of Mangum in Eastland County, Texas, to the town of Wayland in Stephens' County, Texas, aforesaid. The said road to be completed and equipped and in operation within ninety days from the date hereof, unless prevented by unavoidable accidents or delays or any causes for which Party of the Second Part is not responsible and Party of the Second Part further binds and obligates himself that he will continue the operation of said road for a period of five (5) years from date hereof, and that operation shall not be suspended until the operations shall prove to be unprofitable and operations may be suspended only upon the order and consent of the Railroad Commission of Texas. It is further understood and agreed as a part of the consideration of this contract that the Party of the Second Part and his assigns, bind and obligate himself and themselves in any event not to sell said railroad to any parallel line of railway.
    An additional consideration for this contract is that Party of the Second Part binds and obligates himself or his assigns to extend said line of railway from the town of Wayland in Stephens County, Texas, to such other points in Stephens County as may be necessary to intersect any line of railroad built from the main line of the T. & P. Railway Company to Breckenridge, Texas, or north boundary line of the south half of Stephens County, Texas, but that the matter of any other extension in any direction shall be at the option of Party of the Second Part.
    It is further understood and agreed that in the event Party of the Second Part or his assigns fail to comply with the terms of this contract within the period mentioned that they shall reconvey to the present directors of said railroad as Trustees all the property rights, interests and franchises contracted by Party of the First Part to be transferred and conveyed to Party of the Second Part, and that said directors, as trustees, aforesaid, shall have the right ■ to purchase the rolling stock, steel and improvements made on said property by Party of the Second Part, or his assigns, at the fair market value of same to be determined by the Railroad Commissioner of Texas, in the event that Parties of the First Part and Party of the Second Part cannot agree as to its value.
    It is further understood that Party of the Second Part shall proceed immediately in good faith to the performance of this contract but that he shall not be held liable for any unavoidable accidents, failure to receive material, strikes, or any other causes which he is unable to avoid by the exercise of ordinary care and reasonable diligence.
    Party of the Second Part and his assigns bind and obligate themselves and himself to construct and maintain the general offices and headquarters of said railroad company in the City of Eastland, Eastland County, Texas.
    Immediately after making the oral agreement to transfer the property to Singling, all the railroad property, right of way, terminal and depot grounds were turned over to Singling’s representatives, who immediately proceeded to complete the railroad according to the terms of the agreement. The transfer to Singling amounted to a sale or other disposition of the stock, and the consideration received was the relieving of the taxpayer and others of the additional burdens and obligations involved in their contract to complete the railroad.

      The cash and property which the taxpayer invested in the stock of the Eastland, Wichita Falls & Gulf Railroad was a complete loss to him. The loss resulting from this transaction in 1919 was $62,294.26. The taxpayer kept his books and returned his income on the cash receipts and disbursements basis.
    During the taxable year 1919, the taxpayer sold certain pieces of real estate which he acquired in 1904 at $350, upon which he reported a taxable profit. The cost was less than March 1, 1913, value and he computed his profit on the March 1, 1913, value. The real estate sold by taxpayer during the year 1919 was not subdivided into lots on March 1, 1913, but was divided into city blocks. Such subdivision was located in the residential district and was known as the Connellee Place Addition. In 1917 or the early part of 1918 he subdivided this property and sold lots from it during the year 1919 to the following named persons at the following prices. The following schedule also gives the March 1, 1913, value as claimed by taxpayer and the March 1, 1913, value allowed by the Commissioner.

      The fair market value on March 1, 1913, of the lots sold by taxpayer during the year 1919 was $22,100. The selling price was $39,310.

       This decision was prepared during Mr. Graupner’s term oí office.

   OPINION.

TRAmmell:

The issues involved in this appeal are: (a) The . amount of loss, if any, sustained in the year 1919 on account of taxpayer’s investment in the hotel project which was begun during that year and abandoned the same year, (b) The amount of loss sustained by the taxpayer on account of his investment in the stock of the Eastland, Wichita Falls & Gulf Railroad Co. (c) The amount of gain realized by the taxpayer on the sale of lots in 1919, the question in dispute being the March 1,1913, value of the lots.

In June, 1919, the taxpayer began the construction of a seven-story hotel building at Eastland, Tex. By the latter part of October of the same year the basement was almost completed when the-taxpayer caused the work to be discontinued by the contractor. No work was done on the building after November 1,. 1919. The taxpayer claims that he definitely abandoned the plan for the completion of the hotel in October, 1919, due to a change in business conditions in that vicinity, and sustained a loss on the project of $45,257.90. Expenses to the extent of $7,922.17 were incurred in connection with this project which were not paid until some time after the work was abandoned. The Commissioner contends that the hotel project was not abandoned, if at all, until 1920, as the taxpayer, on April 1, 1920, sent messages, which are set out in the findings of fact, to the architect who had prepared the plans and specifications and who was to supervise the construction of the building, and that the messages indicated that the taxpayer had not abandoned the project but had in mind continuing it. We are of the opinion from the evidence that the project was actually abandoned by the taxpayer in 1919.

The further question then arises whether, since the foundation of the building became a part of the realty, the taxpayer is entitled to deduct any loss under the decision of this Board in Appeal of A. J. Schwarzler Co., 3 B. T. A. 535. We are of the opinion that the decision in that appeal has no application to the facts presented in this. In that case it appeared that the taxpayer owned certain real estate, the cost of which he sought to deduct as a loss on the ground that it was without value and had been abandoned. It appeared that title was still in the taxpayer and the loss was not allowed. While the foundation of the proposed hotel involved in this appeal became, technically, a part of the real estate, the taxpayer does not claim a loss based on the abandonment of real estate, but upon the abandonment of a business venture. The project was abandoned in 1919, it was never renewed, and no additional value to the real estate resulted.

In our opinion there is a distinct and very real difference between an attempt to abandon real estate or beneficial improvements placed thereon and the abandonment of an independent business undertaking in which an addition to real estate has been made as a part of that undertaking, but has never reached the stage where it increases the value of the real property. Amounts invested in a business enterprise are allowable as deductions for losses in the year in which the enterprise is finally wound up or abandoned, and it seems that under the circumstances of this appeal the taxpayer should be allowed to deduct in 19Í9 the amount expended in connection with the hotel venture.

The second issue involved in this appeal is the amount of the loss sustained by the taxpayer on account of his participation in the railroad project referred to in the findings of fact. In 1918 the taxpayer and several others undertook to construct a railroad to improve transportation facilities to meet the demands of the newly developed oil fields in and about Eastland. The taxpayer subscribed for a large amount of capital stock in said railroad corporation and turned over to it during the year 1919 land for right of way, depot and terminal purposes. The taxpayer was to receive stock in said railroad corporation for the cash subscribed and the value of the land. The amount of money subscribed was all paid over to the railroad company during the year 1919, except the sum of $6,194.26, which was not paid by the taxpayer until 1920, although a liability to pay such amount was incurred during 1919. In the latter part of 1919, it became apparent, by reason of competing interests, that the taxpayer and his associates would be unable to complete the undertaking successfully. They then decided to discontinue the project, but owing to certain obligations which the corporation had assumed they were unable to abandon the work. They succeeded in interesting Ri'ngling in the undertaking and entered into an oral contract with him during the latter part of October, 1919, to complete the project, which agreement was later reduced to writing and is set out in the findings. The taxpayer was not reimbursed for the amount of money expended on the railroad project or for the land which was used for right of way, depot and terminal purposes. The transaction taken as a whole amounted to a purchase and sale of stock. The consideration received was the release from further performance of the contract, and did not return to the taxpayer the cost of the stock, which became a total loss to him. The cost of the stock was the cash paid in 1919 and 1920 and the value of the land at the time paid in, which value we find to be $29,000.

The other issue involved in this appeal is the gain realized by taxpayer on account of the sale of lots during 1919. The taxpayer had acquired certain lots prior to March 1, 1913, which included a subdivision in the residential district of Eastland, known as the Connellee Place Addition. The cost of this land was less than the March 1, 1913, value. There is no dispute about the amount received by the taxpayer for the lots sold during the year 1919 as set out in the findings. The question involved is the fair market value of the lots on March 1, 1913.

The taxpayer has been engaged in the real estate business in East-land for over forty years and is recognized as authority on real estate values. According to his testimony, the fair market value of the lots in question on March 1, 1913, was $22,100. This value is based on his experience in buying and selling lots and other real estate in that vicinity. The lots in question were not sold or offered for sale in 1913, but other lots in the vicinity were sold during that year at prices which support the values claimed by the taxpayer on the lots here involved. This value is supported by the testimony of several other witnesses who had lived in that town for a number of years and who were familiar with the location of the property and the values in 1913.

The Commissioner has placed a value as of March 1, 1913, on the lots sold at $12,356.39. Two witnesses testified on behalf of the Commissioner as to the acreage value on March 1, 1913, of the land here involved. One of these witnesses testified that the land in question was, on March 1, 1913, worth $40 per acre, and the other testified that it was worth $400 per acre on the same date. This evidence is so varying and indefinite as to be of little value in arriving at a fair market value on March 1, 1913. The lots in question were sold by the taxpayer at $39,360. The evidence submitted is sufficient to support, the claim .made by the taxpayer that the fair market value on March 1, 1913, was $22,100.

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

Marquette and Sternhagen dissent.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    MR. and MRS. EDWARD WALSDORF, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2410.
    Decided July 24, 1926.
    Books of account of the taxpayers held to reflect gross profits from sales of merchandise.

      Isom J. Guillory, Esq., and E. Barrett Preityman, Esq., for the petitioners.

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

      Before Smith.
    This is a proceeding for the redetermination of deficiencies in income tax for the years 1918 to 1922, inclusive, in the amount of $1,590.45. The principal point in issue is whether the books of account of the taxpayer reflect the gross profits from sales of merchandise.
    FINDINGS OP PACT.
    The taxpayers are citizens and residents of New Orleans, La. E. H. Walsdorf owned and conducted one or more drug stores in the City of New Orleans during the taxable years in question. He made income-tax returns for each of the years 1918 to 1922, inclusive, and for the years 1920, 1921, and 1922 his wife also made income-tax returns reporting a portion of the income received from the community. In each of the returns filed the taxpayers set out in detail the gross sales and purchases of merchandise and inventories at the beginning and close of each year. E. H. Walsdorf was actively engaged in the sale of war savings stamps during the years 1918 and 1919, was secretary-treasurer of the local pharmacists board and, in his capacity as an officer of this boar'd and of other organizations with which he was connected, he received considerable amounts of money, which he deposited with his other funds and checked out in payment of his obligations in connection therewith.
    A deputy collector examined the taxpayer’s returns for the years 1918 to 1922, inclusive, discovered that Walsdorf’s bank deposits were much in excess of his sales, and, owing to his inability to check the tax returns with the single entry set of books kept by the taxpayer, and acting upon the statement of Walsdorf that, if his sales exceeded a certain amount, 83 per cent of the gross sales represented gross profits, and, if less than that amount, 84 per cent of gross sales represented gross profits, the deputy collector ignored the books of account for the purpose of determining gross profits on the sales of merchandise, excluded from the bank deposits certain deposits ascertained not to represent income, and determined gross profits by applying to what he determined the gross sales the percentage indicated by the taxpayer. Business expenses claimed as deductions by the taxpayer were generally undisturbed, except that amounts claimed as bad debts ascertained to be worthless and charged off during the year were disallowed as deductions. This was upon the ground that the deputy collector could not discover that these bad debts had been charged off as worthless upon the taxpayer’s books.
    In Walsdorf’s tax return for 1918, the deputy collector excluded from the gross income $15.60 shown on the original return to have been income, increased the amount claimed as a deduction for repairs and depreciation in the amount of $104, and disallowed a deduction for bad debts in the amount of $291.22. For the year 1919 the deputy collector increased the depreciation allowance by the amount of $14 and disallowed the deduction for bad debts in the amount of $481.29. For the year 1920 the deputy collector reduced the repairs and depreciation deduction claimed in the amount of $225.55, and disallowed the deduction for bad debts of $150. For 1921 he disallowed a deduction for taxes in the amount of 50 cents and for bad debts in the amount of $283.68, increased income from rents in the amount of $150, and increased the allowance for repairs and depreciation in the amount of $160. For 1922 he disallowed a deduction for bad debts in the amount of $508.22 and increased the deduction for repairs and depreciation in the amount of $233.60.
    The deputy collector prepared amended returns for the taxpayers for the years 1918 to 1922, inclusive, which amended returns were accepted by the Commissioner as reflecting the true net income of the taxpayers for the years in question. The deficiency determined by the Commissioner is predicated solely upon the amended returns prepared.
    The original returns filed by the taxpayer and his wife for the years 1918 to 1922, inclusive, accurately reflect the taxpayers’ net income for the years in question.
   opinion-.

Smith:

The question in issue in this appeal is whether the . original returns of the taxpayers or the amended returns made by a deputy collector and accepted by the Commissioner represent the correct net income. As indicated in the findings of fact, the deputy collector was unable to check the taxpayers’ returns from the taxpayers’ books of account and, upon the statement alleged to have been made to him by Walsdorf, determined the gross profits from the sale of merchandise by taking a certain percentage of the gross sales. The gross sales determined by the deputy collector were determined, not from the taxpayers’ books of account showing sales, but by excluding from the taxpayer’s bank deposits certain amounts which he determined were not income from his business. He determined that the total deposits for 1918 were $45,415.42, and that deposits from other than sales of merchandise amounted to $14,-479.43. The taxpayers have introduced evidence, however, that satisfies the Board that of the total of deposits $18,127.88 represented deposits of moneys which were not from sales of merchandise.

From the evidence of record the Board is satisfied that the books of account of the taxpayers accurately reflect sales of merchandise and gross profits from such sales. It is true that the inventory sheets are not of record at this time, but the taxpayers took physical inventories at the close of each year, and the Board is convinced that the amounts of the inventories shown upon the taxpayers’ returns represent the true inventories.

The taxpayers have introduced evidence which shows that bad debts in the amount claimed for the years 1919 and 1921 were actually charged off during those years. Other changes in the taxpayers’ returns are of a minor character, some favoring the taxpayer and some not. From a consideration of the- entire record the Board is of the opinion that the original returns reflect the true net income and that there is no deficiency in tax for any of the years involved.

Judgment for the petitioners.


text:
    Appeal of A. L. HUEY.
    Docket No. 6132.
    Decided July 24, 1926.
    Amounts invested in oil. leases in “ wildcat ” territory, which became worthless during the taxable year as the result of the sinking of dry wells, are deductible as losses from gross income.

      Robert Ash., Esq., for the petitioner.

      John W. Fisher, Esq., for the Commissioner.
    Before Smith, Littleton, and Trttssell.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $1,054.40. The taxpayer alleges error on the part of the Commissioner in refusing to allow the deduction from gross income of alleged losses on leases in Clay County, Tex.,. and Tillman County, Okla., which were determined to be worthless in 1920.
    FINDINGS OF FACT.
    In 1920 the taxpayer and A. R. Cotton were partners in the oil business. On January 22, 1920, the partnership through Huey, but without Cotton’s knowledge, bought a lease to a 10-acre tract in Tillman County from one James R. Robinson, the consideration therefor being $6,000. The taxpayer had a one-half interest in the lease. The lease was in wildcat territory. Huey got an assignment of the lease but never had it recorded. At the time of the purchase a well was being drilled about iy2 miles from the 10-acre tract. This well came in dry within 48 hours after the lease had been purchased. Other wells were drilled within the vicinity of the lease during the early part of 1920. They were all completed dry holes by the middle of 1920. In the summer of 1920 a well was being drilled to the east of the tract embraced in the lease. The proposition was made to the taxpayer that if he would go in with the driller they would drill the well to a depth of 2,500 feet, which was deeper than any other well in that vicinity. The taxpayer refused to put any more money into prospecting in the immediate neighborhood. He told the person trying to interest him that rather than put up any more money he would turn his lease over to him, as he considered it worthless; that he had no confidence in that territory; and he then and there delivered the lease, but without endorsement, to the prospector. To the date of the hearing no productive oil well has ever been drilled in Tillman County.
    On February 4, 1920, the taxpayer acquired an interest in a 700-acre oil and gas lease in Clay County, Tex., the consideration for the taxpayer’s interest being $3,000 cash. Shortly thereafter the taxpayer acquired an interest in a 200-acre lease adjoining holdings he then held for $2,040 cash. These leases were in wildcat territory. They were acquired from one Kube Scott, who was at the time drilling an offset well. The well was completed dry in June, 1920. Other dry wells were drilled within from one to five miles of the property during the year 1920. During said year Scott paid certain rentals upon the lease making them good until after the close of the year 1920. Scott charged the taxpayer for a portion of the rental and the taxpayer paid the amount charged against him, although at the time he considered the leases worthless.
    In his income tax return for 1920 the taxpayer claimed a deduction from gross income of $8,040 as losses sustained during that year, representing his investment in the three leases above described. The Commissioner has disallowed this deduction and such disallowance is the basis of this appeal.
   OPINION.

Smith:

The Kevenue Act of 1918 permits a taxpayer to deduct from gross income in an individual tax return “losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.” Section 214(a)(4). The taxpayer claims the right to deduct from gross income certain investments in oil leases in wildcat territory, upon the ground that the leases became worthless during the year 1920, such worthlessness being proven by the fact of wells being drilled during the year coming in “ dry.”

The Commissioner has disallowed the deduction upon the ground that the evidence shows that the leases ran beyond the year 1920; that for some years the leases ran from three to five years and that there is no evidence that the leases upon which the taxpayer claims the deduction of losses for the year 1920 had terminated or been canceled during the year 1920. The Commissioner furthermore contends that the wells which were drilled were at least a half-mile away from the Tillman County lease and that in some instances a dry well a half-mile from a leased tract does not prove that a well driven upon the tract might not be productive; that the fact that the wells came in dry was no indication that there was no oil in the tract covered by the lease; furthermore, that the leases had not been canceled by December 31, 1920, and that the Tillman County lease was given away by the taxpayer -in 1920 and that no loss can be claimed in respect of a gift.

Taking up first the Tillman County lease, it is to be noted that Cotton had information at the time Huey purchased the lease that the Sheegog well, which was being driven at the time, had reached water sand and not oil-bearing sand. As soon as he learned of the investment made by Huey, in the lease, he advised him that the lease was worthless, and within 48 hours after the purchase both parties came to the conclusion that it was worthless. On the ground that it was worthless, Huey delivered it to an individual who wished to drive a well in another locality not far distant from the leased tract. The Commissioner takes the position that no loss can be predicated upon this lease for the reason that it was given away. We are of the opinion, however, that the taxpayer did not intend to and did not give away a thing of value. In our opinion the lease was proven to be worthless at the time that the taxpayer delivered it to the driller of the wel] to the east. We can not doubt that the lease had been proven to be worthless at that time. The investment by the taxpayer in the lease was undoubtedly a loss sustained during the year 1920.

With respect to the taxpayer’s investment in the two leases in Clay County, Tex., it is to be noted that they continued as valid and subsisting leases at December 31, 1920. These leases were upon a tract of land containing approximately 900 acres. One well had been driven-upon the property within from 1 to 5 miles of the property. Scott, however, appears to have had some hope during the year 1920 that oil and gas would be found upon the leased premises and that the leases might become valuable. At any rate, he saAV fit to pay minimum royalties upon the land and to charge the taxpayer with his pro rata share of those royalties. In view of this fact we are not satisfied that the taxpayer sustained a loss deductible from gross income in respect of the leases during the year 1920.

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


text:
    ROSENFIELD DRY GOODS COMPANY, LTD., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 10248.
    Decided July 26, 1926.
    Amount spent for improvements and repair of leased premises . in accordance with provisions of lease, held to constitute a capital expenditure, the cost of which should be depreciated over the life of the lease.

      I. E. Rubenstein for tbe petitioner.

      Henry Ravenel, Esq., for tbe respondent.
    Before Smith, Littleton, and TRussell.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1920, in an amount less than $10,000.
    FINDINGS OF FACT.
    The taxpayer is a Louisiana corporation with its place of business at Baton Rouge. Effective October 1, 1919, the taxpayer leased for a period of five years, for the conduct of its business, a .building at the corner of Main and Third Streets, in the City of Baton Rouge, which building was then occupied by the taxpayer. The lease provided in part:
    This lease is made and accepted for and in consideration of a monthly rental of FOUR HUNDRED DOLLARS, ($400.00), per month, payable as follows: The sum of Three Hundred Dollars in cash, and one Hundred Dollars in a credit on the amount to be expended by the lessee in mailing, repairs and alterations to said leased premises, as hereinafter specified.
    The said lessee hereby obligates itself to make the following repairs and alterations to the said leased premises, to-wit: The front of said store building on Main Street shall be so changed as to make the show windows on Main Street correspond with the show windows on Third Street; remove the brick pillars on Main Street and put in iron columns; lower the shed on Third and Main Streets; put in new flooring on entire ground floor, and re-paint the inside of the building, All said work to be done in a first class workmanlike manner by J. D. Brown, contractor and builder, and to the satisfaction of W. B. Burke.
    It being understood and agreed that the said lessee shall expend in making the said repairs not less than Six Thousand Dollars, which amount shall be reimbursed without interest, as hereinabove provided, by monthly reduction of One Hundred Dollars on the rent herein stipulated.
    It is agreed between the parties hereto that the existing lease between the said lessors and lessee shall be terminated and annulled from and after the first day of October next, when this lease shall go into effect and remain in full force for five years thereafter.
    At the time of commencing the improvements, an account styled “Improvement Account” was opened on the taxpayer’s books and the amounts expended charged to that account. The contractor was not able to obtain delivery on certain iron gratings and windows as soon as he had expected. Inasmuch as the holiday season was coming on, the taxpayer was under the necessity of purchasing lumber and other materials in order to utilize the space which was to be improved. This temporary work was done by others than the contractor. When the wrought iron work, windows and certain columns required for the improvements were received, the temporary improvements were pulled out and then it was discovered that two of the columns were not in accordance with the specifications and the temporary structure was replaced by another temporary structure until finally the improvements were completed. All vouchers for materials for the work and all amounts paid for labor, totaling $7,155.20, were charged to the “ Improvement Account.” When the president of the taxpayer company learned at the close of the year that the total amount had been charged to the “ Improvement Account,” he informed the bookkeeper that certain amounts had been erroneously charged to that account and that they should have been charged to expense. He then went over the vouchers and determined that certain of the vouchers which he had ordered to be charged to the “Improvement Account” should have been charged to expense. The total ainount of these vouchers was $2,535.11. He determined that the amount properly chargeable to improvements was $4,620.09. At the close of the year 1920 the $2,535.11 in question was transferred out of the “ Improvement Account ” to expense. This amount, claimed as a deduction from gross income in the tax return for 1920, was disallowed as a deduction by the Commissioner.
   OPINION.

Smith:

In its petition the taxpayer alleges that of the $7,155.20 charged to the “ Improvement Account ” prior to December 31, 1920, $2,535.11 constituted an expense and as such was deductible from gross income in the income-tax return of the taxpayer. The taxpayer alleges that the improvements agreed upon in the contract - of lease were far from being completed at December 31, 1920, and were not continued for the reason that it was foreseen that the improvements originally contemplated would be inadequate to care for the increasing business; that the management of the corporation felt that it would be best to try to cancel the lease and to secure a lease for a flat monthty rental; that the lease was finally canceled and a new one made, effective July 1, 1923, for a period of 75 months.

The taxpayer has offered no evidence to the effect that the improvements contemplated by the lease effective October 1, 1919, were not completed as originally contemplated. The lease provided for improvements to cost $6,000. More than that amount was charged to the Improvement Account.” We think that the action of the Commissioner in holding that the entire amount charged to the Improvement Account ” was a capital item and that depreciation upon the same should be taken over the life of the lease was correct. Appeal of National City Bank of Seattle, 1 B. T. A. 139.

The taxpayer also alleged error on the part of the Commissioner in computing the invested capital for the year 1920 in accordance with the provisions of article 845 of Begulations 45 and not in accordance with the rule laid down in Appeal of Guarantee Construction Co., 2 B. T. A. 1145. The effect of this decision has, however, been nullified by section 1207 of the Revenue Act of 1926. Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

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

Steünhagen concurs in the result only.


author: Littleton

text:
    Appeal of THE MAINE DAIRY CO.
    Docket No. 4675.
    Decided July 26, 1926.
    The Commissioner’s computation of petitioner’s income upon the accrual basis approved.

      J. A. Councillor, G. P. A., and Chester M. Foss, O. P. A., for the petitioner.

      John W. Fisher, Esq., for the Commissioner.
    Before Littleton-, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919, in the amount of $1,126.15, and overassessments for the year 1920 and the fiscal period January 1, to April 30, 1921, in the respective amounts of $33.86 and $92.10, a net deficiency of $1,000.19.
    FINDINGS OF FACT.
    The petitioner, a Maine corporation with principal office at Portland, was, during the taxable years in question, engaged in a retail dairy business. It was dissolved in June, 1922.
    From the time of its inception, and through the taxable years in question, it has been the accounting practice of the petitioner to maintain a record of individual accounts receivable and payable on loose filing cards. In the general ledger there were maintained an accounts receivable and an accounts payable account to whieh there was charged and credited, respectively, usually at the beginning of each year, the aggregate of customers’ unpaid accounts and unpaid accounts with creditors. At the close of each year these two general ledger accounts were balanced by credit and debit entries, re-' spectively, in amounts equal to the total sums respectively charged and credited thereto during the year.
    Though petitioner’s accounting records were otherwise maintained according to the double entry system of bookkeeping, when debit or credit entries were made to the accounts receivable and accounts payable'accounts they were made in single entry form; and, since the petitioner computed its net income according to the manner in which it kept its books, and without regard for any outstanding accounts receivable • and accounts payable, the increase or decrease during the year in those accounts was not included in the taxable net income reported by the petitioner in its several returns.
    On January 1, 1919, the accounts receivable account in the general ledger was charged with the sum of $6,000, representing the total of outstanding accounts receivable at that date, less the aggregate of accounts deemed to have been uncollectible. On December 31, 1919, the account was credited with a similar amount, thereby balancing the account. On January 1, 1920, the account was charged with the sum of $9,979.02, representing the total outstanding accounts receivable at that date without deduction for any uncollectible accounts, and with a further sum of $100.19 on December 31, 1920.
    On December 31, 1918, and December 31, 1920, profit and loss account was charged with the respective amounts of $1,110.95 and $2,530, on account of bad debts. Deductions for bad debts were taken by the petitioner in its income and profits-tax returns as follows: 1918 — $1,110.95, 1919 — $1,979.02, 1920 — $2,530.
    Inventories were carried on petitioner’s books of account as follows :
    January 1, 1919-$180. 36
    January 1, 1920-"_'_ 276. 80
    January 1, 1921_-_' 510.00
    Inventories were used by the petitioner in computing the taxable net income reported in the return for the year 1919.
    Insurance premiums were paid in advance and were charged to expense on the books of account in equal annual installments over the period of years for which the payments were made. Other expenses were charged to profit and loss at the time of payment without regard to the fact that they may have been incurred in a year other than that in which payment was actually made.

      The net income reported by the petitioner in its return for the year 1919 was computed on the basis of a gross income which included only actual cash receipts. To the net. income as< thus shown in the return the Commissioner has added the sum of $3,979.02, representing the increase in the accounts receivable during the year as indicated by the entries made to the general ledger account- under dates of January 1, 1919, and January 1, 1920. Further, the Commissioner has reduced the net income shown by the return by the amount of $2,458.24, representing the increase in the accounts payable during the year.
    Real estate was entered on petitioner’s books of .account under date of January 1, 1914, in the amount of $10,439.16, and there were no other charges nor any credits to this account until December 31, 1919, when, upon the advice of an accountant that the cost of the building foundation should not be carried in a capital account, a credit entry was made thereto in the sum of $2,324.39, thereby reducing the book value of the real estate to $8,114.77. The Commissioner has included real estate in the invested capital, for the years under consideration, at the book value of $8,114.77.
   OPINION.

Littleton

: Under the provisions of section 212 (b) of the Revenue Act of 1918, the petitioner was required to compute its net-income in accordance with the method employed in keeping its books of account; but if the method employed does not clearly reflect the net income the computation must be made upon such basis and in such manner as in the opinion of the Commissioner will clearly reflect the net income. We have found that the petitioner’s books of account were maintained upon a somewhat hybrid basis — partly on the receipts and disbursements basis and partly on the so-called accrual basis. The method employed can not and does not clearly reflect the petitioner’s net income for the years in question. The Commissioner has exercised the discretionary power conferred upon him by statute and has made the computation of net income upon the accrual basis. In so doing he has treated, so far as we have been able to ascertain, all items of income and expense consistently. In adopting the accrual method as the basis for the computation of net income, the Commissioner has resorted to the method which, in our opinion, most closely approaches that predominating in the petitioner’s system of keeping its accounts.

Petitioner raises the further question as to the correctness of the Commissioner’s action in adding to net income, as reported in the return, the sum of $3,979.02, representing the increase in the accounts receivable during the year 1919, as indicated by the general ledger entries to the accounts receivable account of January 1, 1919, and January 1, 1920. As pointed out in our findings of fact, the entry of $6,000 dated January 1, 1919, represented the total outstanding customers’, accounts at .that date, less the total of accounts which were deemed to be uncollectible, while the entry of $9,979.02, dated Janu•ary 1, 1920, represented the total outstanding accounts at that date without deduction for any accounts which may have been deemed worthless and uncollectible. The only witness who testified estimated that the total of worthless and uncollectible accounts included in the entry of January 1, 1920, was $3,979.02. If this were true, then a comparison of accounts receivable, after elimination of worthless accounts, at the beginning and close of 1919 would show no increase. But her testimony was not at all convincing that the general ledger entry of January 1, 1920, included any accounts which had actually been ascertained to be worthless and uncollectible during the year, or that it. included any accounts antedating the year 1919 which were not included in the entry of January 1,1919, with which the Commissioner compared the later entry to ascertain the increase in accounts receivable for the year 1919. The record evidence indicates an increase in the accounts receivable for the year 1919 of $3,979.02. Hence, the Commissioner, for the purpose of making the computation of net income upon the accrual basis, was justified in treating this increase as income for that year.

Beal estate should be included in petitioner’s invested capital at a value of $10,439,16.

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


author: Littleton:

text:
    Appeal of JAMES BUTLER GROCERY CO. ET AL.

    Docket No. 5978.
    Decided July 26, 1926.
    James Butler Grocery Oo. owned directly 90 per cent of the voting stock of James Butler, Inc., and the remaining 10 per cent of the stock of the latter was owned by the majority stockholders of the James Butler Grocery Oo., who also owned all, or substantially all, of'the voting- stock of the other four corporations who are also parties to this proceeding. Held, that the first two corporations mentioned were affiliated under clause (1) and that the last four corporations mentioned were affiliated under clause (2) of subdivisions (b) and (c), respectively, of section 240 of the Revenue Acts of 1918 and 1921.

      George E. Hamilton, Jr., Esq., and John F. McCarron, Esq., for the petitioners.

      Percy 8. Grewe, Esq., for the Commissioner.

      Before LittletoN, Smith, and Trussemu
    The petitioners challenge the correctness of the Commissioner’s determination of deficiencies in income and profits tax and over-assessments for the fiscal years ending October 31, 1917 to 1921, inclusive, upon the basis of consolidated net income and invested capital of James Butler Grocery Co. and James Butler, Inc., in one group, and the Seminole Condensed Milk Co., the Empire City Racing Association, the Peerless Construction & Repair Co. and the Direct Realty Co. in another group, as follows:

    The petitioners contend that the tax liability of the six corporations should have been computed upon the basis of a consolidated return of net income and invested capital for the fiscal years ending October 31,1917, to October 31,1921, inclusive.
    BINDINGS OE EACT.
    The James Butler Grocery Co. is a New Jersey corporation with principal office at Jersey City. James Butler, Inc., Empire City Racing Association, Peerless Construction & Repair Co., and the Direct Realty Company are New York corporations with principal offices in New York City. The Seminole Condensed Milk Co. is also a New York corporation with principal office at Holland Patent.
    During the fiscal years ending October 31, 1917 to 1921, inclusive, the voting stock of the corporations Avas OAvned in the percentages following:

    Many years ago James Butler began business as a wholesale and retail dealer in groceries. In 1890 he owned and operated, in addition to his wholesale business, twelve retail stores. About this time he adopted the policy of paying to the managers of each of the retail stores in lieu of compensation the profits of the store after five years of faithful service. The business increased rapidly and in 1907 Butler was operating in connection with his Avholesale grocery business 171 retail stores. On April 24, 1907, his entire business was incorporated under the laAvs of New Jersey under the name of James Butler Grocery Co. A corporation known as James Butler, Inc., was organized under the laivs of New York to carry on the grocery business in that State by renting the good will and grocery business of the James Butler Grocery Co. in the State of Ne\v York. Upon incorporation the capital stock of the James Butler Grocery Co., consisting of 50,000 shares of common and 50,000 shares of preferred stock of the par value of $100 each, was issued to James Butler. The capital stock of James Butler, Inc., consisted of 500 shares of common stock of the par value of $100 each; 450 shares were issued to the James Butler Grocery Co. and 50 shares to James Butler. Twenty shares of the common stock of James Butler Grocery Co. were placed in the names of certain persons in order to qualify them as directors.
    On August 2, 1907, James Butler transferred 1,055 shares of the common stock of James Butler Grocery Co. to a number of his relatives on the basis of $10 a share for each share of preferred and one share of common stock. At the same time he transferred 12,160 shares of common stock of this company to certain employees in payment of certain credits to their accounts upon the books of certain stores, representing the profits to which they were entitled un der the arrangement previously entered into between those employees and Butler. This left James Butler the owner of 36,785 shares of the common stock of James Butler Grocery Co., or 73yg. per cent of the total outstanding common stock, which' remained in that amount throughout the years here in question.
    Prior to the fiscal year ending October 31, 1917, and during the period from 1917 to 1921, certain of the employees to whom stock in the J ames Butler Grocery Co. had been issued discontinued their employment with the company, retaining, however, the stock which they owned. Certain shares of the common stock were sold by those to whom James Butler had transferred it, with the result that during the years here in question the 50,000 shares of common stock were owned as follows:

    Certain stock in varying amounts was voted from time to time by proxies. Certain of the stockholders did not vote their stock either in person or by proxy. At meetings of the stockholders of the James Butler Grocery Co. the number of shares of stock voted in person or by proxies in accordance with the desires of James Butler was as follows:
    1917. 42, 301 1920. 42, 837
    191S. 41, 615 1921. 41, 285
    1919. 40, 420 1922. 42, 855
    In 1919 and 1920, 3,060 shares were voted against the majority and in 1922, 2,310 shares were so voted. The largest stockholder, with the exception of James Butler, was one Martin E. Boache, formerly vice president and a director of James Butler Grocery Co., who owned 1,250 shares. Boache was one of the stockholders who opposed the policies of James Butler.
    Since incorporation James Butler has been president and a director of all of the companies. With one exception, the James Butler Grocery Co. and James Butler, Inc., were governed by the same officers and directors. No objection was interposed at any of the directors’ meetings during the- period 1917 to-1921, inclusive, to the policies advocated by James Butler.

      The following corporations are also parties to this appeal: James Butler, Xne.; Seminole Condensed Millc Co.; Peerless Construction & Repair Co.; Direct Realty Co.; and Empire City Racing Association.

   OPINION.

Littleton:

The petitioners contend that James Butler owned or controlled the stock of the six companies hereinbefore mentioned and that the Commissioner should, therefore, have held that all of the companies were affiliated. The Commissioner held that James Butler Grocery Co. owned or controlled substantially all of the stock of James Butler, Inc., and that these two companies were affiliated with each other but not with the other four companies in which James Butler owned all or substantially all of the stock; that the Seminole Condensed Milk Co., Peerless Construction & Repair Co.,' Direct Realty Co. and the Empire City Racing Association were affiliated with one another for the reason that substantially all of the stock was owned or controlled by J ames Butler.

At the hearing and in his brief the Commissioner contended that he was in error in holding that James Butler Grocery Co. and James Butler, Inc., were affiliated with each other and that the Board should hold that the net income and invested capital of these two companies should be computed upon the basis of separate returns for the years involved, for the reason that James Butler did not own or control substantially all of the stock of the J ames Butler Grocery Co. and that the stock of this company and James Butler, Inc., was not owned or controlled by the same interests.

No question is raised by any of the parties as to the correctness of the Commissioner’s determination that the Seminole Condensed Milk Co., Peerless Construction & Repair Co., Direct Realty Co., and the Empire City Racing Association were affiliated with one another, since substantially all of the stock of those companies was owned by James Butler. The statute provides that corporations shall be deemed to be affiliated if one corporation owns directly or controls through closely affiliated interests substantially all of the stock of the other. The James Butler Grocery Co. owned directly 90 per cent of the voting stock of James Butler, Inc., and in the circumstances of this appeal we are of the opinion that it controlled the 10 per cent owned by James Butler. In view of this fact it is immaterial that certain stockholders of James Butler Grocery Co. were not stockholders of James Butler, Inc., and the Commissioner therefore correctly held that these two companies were affiliated.

The Board is also of the opinion that the Commissioner correctly held that James Butler Grocery Co. and James Butler, Inc., were not affiliated with the other four corporations. The evidence does not warrant the conclusion contended for by the taxpayers that the stock of the six companies was owned and controlled by James Butler, or that substantially all of the stock of the six companies was owned or controlled by the same interests, within the meaning of the statute. The James Butler Grocery Company controlled substantially all of the stock of James Butler, Inc., but had no control over the stock of the other four corporations. James Butler owned substantially all of the stock of four of the corporations but did not own or control 'substantially all of tbe stock of either James Butler Grocery Co. or James Butler, Inc., and the minority stockholders owning a substantial amount of stock in James Butler Grocery Co. owned no stock in any of the other five corporations. We believe, therefore, that the Commissioner’s determination should be- affirmed.

Judgment for the 0 ommissioner.


author: ARUndell:

text:
    Appeal of STAMEY-MACKEY CONSTRUCTION CO.
    Docket No. 1271.
    Decided July 26, 1926.
    Under section 326(a) of the Revenue Act of 1918, interest-bearing demand promissory notes of solvent and responsible makers, actually and Iona fide paid in for preferred stock of a Kansas corporation, constitute invested capital of sueb corporation at tbe time paid in to tbe extent of tbeir actual cask value.

      H. L. Washington, Esq., for the petitioner.

      B. A. Littleton, Esq., and B. G. Simpioh, Esq., for the Commissioner.
    Before SteRNHageh, LaNsdoN, and Artjndell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended March 31, 1921, in the amount of $6,553.66, of which $5,192.66 is in controversy. The only issue is the right of the petitioner to include in invested capital two notes aggregating $125,000.
    FINDINGS OK PACT.
    The taxpayer is a Kansas corporation with its principal office at Hutchinson. It was organized April 1, 1919, and took over the assets and liabilities of a partnership.
    At that time it was in need of funds in excess of the amount that could legally be loaned to it by its bank. In order to secure the desired funds it issued all of its authorized preferred stock, in the amount of $125,000, to Messrs. Stamey and Mackey, who had been members of the predecessor partnership. In exchange for this stock Stamey and Mackey, who were solvent and financially responsible, each gave the petitioner his two-year, interest-bearing note for $62,500, which the petitioner entered in its notes receivable account. The petitioner turned these notes over to its bank as collateral for the securing of loans. The makers of the notes, Stamey and Mackey, endorsed and turned over to the bank, as collateral security, stock of another corporation.

      The bank held the notes for over two years and from time to time made loans to the petitioner with the notes as security. The maximum amount loaned was $133,000.
    No interest was eAmr paid on the notes. By the time they became due the obligations on them had been so reduced that the bank made no demand for payment of them. Sometime in 1921, the notes Avere turned back to the petitioner, who canceled them and called in and canceled the preferred stock. No dividends were ever paid on the preferred stock.
   OPINION.

ARUndell:

The petitioner claims the right to include in invested capital the amount of $125,000 represented by the notes of Stamey and Mackey, for Avhich preferred capital stock of the petitioner was issued.

Section 326(a) (2) of the Revenue Acts of 1918 and 1921 provides that “ invested capital ” means the “ actual cash value of tangible property * * * bona fide paid in for stock or shares * * That notes are tangible property is settled by the provisions of section 325(a) of the 1918 and 1921 Acts, and we have then only to determine the actual cash value of the notes and whether they were bona fide paid in for stock.

Prior to the incorporation of the petitioner the bank had loaned considerable sums to Stamey and Mackey on their personal notes and continued to do so after the notes here invoNecl were turned back to the petitioner. An officer of the bank testified that he considered the notes good and collectible. The bank in fact did loan to petitioner A^arious sums based on the security of the notes, the maximum amount loaned at one time being $133,000. As further security there Avas deposited by Stamey and Mackey certain stock in a hotel company, but the record does not disclose its value. We are satisfied from the entire record that Stamey and Mackey were entirely solvent and that the notes were collectible and Avorth their face value.

No citation has been furnished us nor can we find anything in the statutes of the State of Kansas which forbids the acceptance by corporations in that State of notes in payment of capital stock. Section 2148 of the General Statutes of Kansas (McIntosh 1915) provides:

Tlie board of directors or trustees of any corporation may require the subscribers to capital stock of the corporation to pay the amount by them respectively subscribed, in such manner and in such installments as may be required by the by-laAvs.

It was not until 1923 that any regulation of the receipt of obligations for capital stock was made by statute. (See Revised Statutes of Kansas, 1923, sec. 17-1219.)

The Commissioner urges that the fact that the stock was retired when the financial condition of the taxpayer rendered unnecessary the further use of the notes indicates that the notes were not “ bona fide paid in for stock or shares.” We considered a similar proposition in the Appeal of American Steel Co., 1 B. T. A. 839, and we said there, at p. 845,

The mere fact of cancellation of the notes, and retirement of the stock by the corporation several years later, in the absence of any circumstance to indicate bad faith, can not justify the disallowance for invested capital purposes of the actual cash value of the notes at the time paid in.

In the Appeal of Cross Mountain Coal Co., 2 B. T. A. 587, a subsidiary of the petitioner accepted 6 per cent, demand notes in exchange for stock. Some time later the corporation found it would have no need for the money represented by the notes and thereupon canceled them, without having made any use of them. In that case the inclusion of the notes in invested capital was allowed. The case for the petitioner in the present appeal is stronger than in the Cross Mountain Co. appeal, for here we have the petitioner making use of the notes to increase its working capital. There is nothing in the record to show that this transaction was not entirely in good faith between the petitioner and the holders of its preferred stock; that it was not a real transaction, or that it was not entered into for the best interests of the petitioner. Appeal of Hewitt Rubber Co., 1 B. T. A. 424, 429.

We conclude from the facts that the notes here involved had an actual cash value of $125,000 and that they were bona fide paid in for that amount of preferred stock of the petitioner. The petitioner is accordingly entitled to include the face amount of the notes, $125,000, in invested capital for the fiscal year- ended March 31, 1921.

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


author: Arundell

text:
    Appeal of Mrs. D. SYDNEY SMITH.
    Docket No. 3262.
    Decided July 26, 1926.
    1. Joint returns op husband and wipe. — A return'purporting to contain all of the gross income produced by or accruing to both husband and wife, although made in the husband’s name only, is a joint return in accordance with the statute.

      2. Statute of limitations. — The statute of limitations contained in section 277(a)(2) of the Revenue Act of 1924 and section 277 (a) (3) of the Revenue Act of 1926, in respect to income-tax returns for the calendar year 1917, began to run on the day following the filing of the original return, and its running can not in any way be affected or suspended by the later mating of an amended return.

      Leslie J. Aker, Esq., for the petitioner.

      Thos. M. 'Wilkins, Esq., for the Commissioner.
    Before Arundell and LaNsdoN.
    The Commissioner has determined a deficiency in income taxes for the year 1917 in the amount of $205.57, all of which is in dispute.
    FINDINGS OF FACT.
    The petitioner is a resident of the State of Idaho.
    On March 8, 1918, D. Sydney Smith, husband of the petitioner, filed a joint income-tax return for the calendar year 1917, purporting to show the gross income and deductions of himself and wife. ■ On May 2, 1921, separate amended returns were filed by petitioner and her husband in which the income for the year 1917 was reported on the community property basis.
    The Commissioner reaudited the returns of the partnership of Fred W. Gooding & Son, Shoshone, Idaho, for the year 1917, and increased the inventory value of certain sheep and live stock owned by said partnership on December 31, 1917, which increased ■ the income of said partnership. By reason of such increase in the income of the partnership, the distributive shares of the partners were correspondingly increased. The proposed additional tax results from this adjustment.
    Under date of March 6, 1925, the Commissioner mailed to petitioner a deficiency letter, dated on that day, in which he determined a deficiency against petitioner in the sum of $205.57.
   OPINION.

Arundell

: This case was submitted on petition and answer, with the exception of the joint return filed by D. Sydney Smith on March 8, 1918, which return was offered as an exhibit by the Commissioner. The Commissioner contends that the statute of limitations fixing the time within which the tax may be assessed against petitioner began to run from the date she filed her separate amended return, viz, May 2, 1921, and not from the date the joint return was filed by her husband.

It appears to have become the settled practice in the Treasury Department to accept separate individual income-tax returns by husband and wife in which the so-called community income may be equally divided between the two and the income tax computed upon such basis. This course was followed by the Treasury Department after the rendition by the Attorney General of an opinion holding, in effect, that community income could be separately reported by the husband and wife. It was by reason of the opinion of the Attorney General and the regulations of the Department that petitioner and her husband filed separate amended returns on May 2, 1921, in which they sought to report on the community property basis. It is not necessary in this opinion to determine whether the income in question is community income or, if it is community income, the right of petitioner and her husband to report the same in the manner attempted by them. The question for our determination is whether or not the statute of limitations began to run from the date of filing the original joint return or from the date petitioner filed her so-called separate amended return. A similar question was before the Board in the case of the Appeal of Belle R. Weaver, 4 B. T. A. 15, wherein it was held that the separate returns filed by husband and wife were merely amendments of the original joint return and related back to and became a part of the original joint return. The Board in that opinion stated that amended returns, not being returns required by law, do not furnish a starting point for the running of the statute of limitations, and “ we are, therefore, brought to the conclusion that in each of the present cases the five-year statute of limitations provided for in section 277(a) (2) of the Revenue Act of 1924 began to run on the 16th day of March, 1919, and that on the 12th day of March, 1925, the Commissioner was without authority of law to make assessments of any income tax for the year 1918 against either of the petitioners herein.”

Section 277(a) (3) of the Revenue Act of 1926, in so far as is here material, uses the identical language found in section 277(a) (2) of the Revenue Act of 1924.

We are satisfied, both on the plain wording of the statute and on the authority of the Appeal of Belle R. Weaver, supra, that the statute of limitations has run in this case and that the Commissioner is without authority to assess the proposed deficiency.

Judgment for the petitioner.


author: Aeundell:

text:
    Appeal of Mrs. FRED W. GOODING.
    Docket No. 3263.
    Decided July 26, 1926.
    1. Joint betubns of husband and wife. — A return purporting to contain all of the gross income produced by or accruing to both husband and wife, although made in the husband’s name only, is a joint return in accordance with the statute.
    2. Statute of limitations. — The statute of limitations contained in section 277(a)(2) of the Revenue Act of 1924 and section 277(a)(3) of the Revenue Act of 1926, in respect to income-tax returns for the calendar year 1917, began to run on the day following the filing of the original return and its running can not in' any way be affected or suspended by the later making of an amended return.

      Leslie J. Alcer, Esq., for the petitioner.

      Thos. M. Willcins, Esq., for the Commissioner.
    Before Arundell and LaNsdoN.
    The Commissioner has determined a deficiency in income taxes for the year 191 7 in the amount of $569.32.
    FINDINGS OF FACT.
    The petitioner is a resident of the State of Idaho.
    On March 5, 1918, Fred W. Gooding, husband of the petitioner, filed a joint income-tax return for the calendar year 1917, purporting to show the gross income and deductions of himself and wife. On May 2, 1921, separate amended returns were filed by petitioner and her husband in which the income for the year 1917 was reported on the community property basis.
    The Commissioner reaudited the returns of the partnership of Fred W. Gooding & Son, Shoshone, Idaho, for the year 1917, and increased the inventory value of certain sheep and live stock owned by said partnership. By reason of such increase in the income of the partnership, the distributive shares of the partners were correspondingly increased. The proposed additional tax results from this adjustment.
    On March 6, 1925, the Commissioner'mailed to petitioner a deficiency letter, dated on that day, in which he determined a deficiency against petitioner in the sum of $569.32.
   OPINION.'

Aeundell:

The facts in this appeal are substantially identical with the facts set forth in the Appeal of Mrs. D. Sydney Smith, this day decided, ante, 385. For the reasons set forth in the Smith appeal we are of the opinion that the statute of limitations has run in this case and that the Commissioner is without authority to assess the proposed deficiency.

Judgment for the 'petitioner.


author: Aiutndell:

text:
    Appeal of Mrs. E. G. GOODING.
    Docket No. 3264.
    Decided July 26, 1926.
    1. Joint returns of husband and wife. — A return purporting to contain all of the gross income produced by or accruing to both husband and wife, although made in the husband’s name only, is a joint return in accordance with the statute.
    2. Statute of limitations. — The statute of limitations contained in section 277(a) (2) of the Revenue Act of 1924 and section 277(a) (3) of the Revenue Act of 1926, in respect to income-tax returns for the calendar year 1917, began to run on the day following the filing of the original return and its running can not in any way be affected or suspended by the later making of an amended return.

      Leslie J. Alter, Esq., for the petitioner.

      Thos. M. Wilkins, Esq., for the Commissioner.
    Before Arundell and Lansdon.
    The Commissioner has determined a deficiency in income taxes for the year 1917 in the. amount of $213.50, all of which is in dispute,
    FINDINGS OF FACT.
    The petitioner is a resident of the State of Idaho.
    On March 5,1918, Edward G. Gooding, husband of the petitioner, filed a joint income-tax return for the calendar year 1917, purporting to show the gross income and deductions of himself and wife. On May 2, 1921, separate amended returns were filed, by petitioner and her husband in which the income for the year 1917 was reported on the community property basis:
    The Commissioner reaudited the returns of the partnership of Fred W. Gooding & Son, Shoshone, Idaho, for the year 1917 and increased the inventory value of certain sheep and live stock owned by said partnership on December 31,1917, which increased the income of said partnership. By reason of such increase in the income of the partnership, the distributive shares of the partners were correspondingly increased. The proposed additional tax resulted from this adjustment.

      Under date of March 6, 1925, the Commissioner mailed to petitioner a deficiency letter in which he determined a deficiency against petitioner in the amount of $213.57.
   OPINION.

Aiutndell:

The facts in this appeal are substantially identical with the facts set forth in the Appeal of Mrs. D. Sydney Smith, this day decided, ante, 385. For the reasons set forth in the Smith appeal we are of the opinion that the statute of limitations has run in this case and that the Commissioner is without authority to assess the proposed deficiency.

Judgment for the petitioner.


author: Artjndell:

text:
    Appeal of NEWMAN THEATRE CO.
    Docket No. 3694.
    Decided July 27, 1926.
    Leaseholds valued for invested capital purposes and as a basis for an allowance for depreciation.

      Perry W. Shrader, Esg., and E. J. Dillon, 'O. P. A., for the petitioner.

      A. H. Fast, Esg., for the Commissioner.
    Before SteRni-iagen, Lansdon, and Aettndell.
    The Commissioner has determined a deficiency in income and profits taxes for the calendar year 1920 in the amount of $11,158.05. The deficiency arises from the exclusion from invested capital of $350,000, alleged to be the value of certain leaseholds assigned to the corporation by one of its stockholders, and from the consequent refusal of the Commissioner to allow depreciation on the leaseholds.
    FINDINGS OP PACT.
    The petitioner was incorporated under the laws of Missouri on August 9, 1918, with its principal place of business at Kansas City. The purpose was to construct and operate a motion-picture theatre. Frank L. Newman, the promoter of the enterprise and the president, manager, and chief stockholder in the corporation, came to Kansas City in 1913 and immediately engaged in the operation of motion-picture houses. He organized the Royal Theatre Co. and the Regent Theatre Co. and was their president and manager. The same persons who were associated with him in these corporations later were associated with him in the Newman Theatre Co.
    In 1915 Newman negotiated a lease on a tract of land on Main Street in Kansas City, Missouri, having a frontage of approximately 24 feet, known as the McGonegal property, which he had T. H. Cochrane take in his own name. The lease so taken was dated November 30, 1915, ran for 99 years from January 1, 1916, and provided for a rental of $12,500 per annum and the payment of all taxes, special assessments and other public levies. The rental of this property for a period of 2% years was paid by the Royal Theatre Co. This lease was assigned to Newman on June 12, 1918, and by the latter to the petitioner on March 1, 1919.
    Under date of May 15, 1918, Newman secured a lease for a period of 99 years from May 1, 1918, on the property immediately adjoining the McGonegal property, which property had a frontage on Main Street of substantially the same width. By the terms of the agreement Newman was to pay an annual rental of $12,960 and all taxes, special assessments and other levies. This lease was on what is known as the Turner property. On- March 1, 1919, Newman assigned the Turner lease to the petitioner.
    Newman also secured a lease on the Brady property, immediately adjoining the Turner property, with a frontage of approximately 48 feet on Main Street. This lease was for a term of 99 years from May 1, 1918, and provided for a rental of $35,000 for the first 20 years and thereafter a rental of $40,000, the lessee to pay all taxes, special assessments and other public levies. On March 1, 1919, this lease was assigned to the petitioner.
    The purpose of Newman had been to secure a lease of property on Main Street, having a frontage of 50 feet, on which to erect and operate a motion-picture theatre. To that end the McGonegal tract was leased in 1915, the lease being taken in the name of Cochrane. Difficulties were encountered, however, in securing the adjoining tract owned by Turner, and it was not until 1918 that a lease was secured. The original plans did not contemplate the lease of the Brady property. This was made possible solely because the building thereon was destroyed by fire, thus affording an opportunity for the acquisition of the lease which was taken.
    Newman took all the steps neeessary to secure these leases and acted on his own initiative, although there was an informal understanding between him and his associates that the leases would be turned over to a corporation thereafter to be organized for the purpose of constructing and operating a motion-picture theatre should that course be later determined on. The restrictions Of the Government incident to the World War made difficult the securing of certain building materials and lent uncertainty to the carrying out of the plans, and it was understood between the several interested parties that, should it become impracticable to erect the theatre, Newman would retain the leases and proceed with his own plans. It was his intention, in that event, to erect business buildings on the property. Some money was expended by Newman in securing the leases and also in starting the building of the theatre, the latter expenditure being incurred prior to the incorporation of the petitioner but after a charter had been applied for.
    The authorized issue of common stock of the petitioner was $550,000, divided into shares of the par value of $100 each. By April 22, 1919, there had been paid in by the stockholders in cash approximately $157,000. All advances made by Newman in securing the leases and in construction of the building were credited to his stock account and stock was issued against the same. At the stockholders’ meeting of April 22,1919, there was voted to Newman stock in the amount of $25,000, in recognition of his efforts on behalf of the corporation. Three shares of stock were issued for each share paid for and, in determining the amount to be received by Newman, the stock voted to him was treated as if purchased. After the issuance of the stock on the basis of three shares for one, Newman held 2,250 shares, T, H. Cochrane 845 shares, J. G. L. Harvey, secretary of the company, 600 shares, and others in less amount.
    The leases were valued by the company at $350,000 and this valuation was the principal basis for the issuance of stock in an amount in excess of the cash paid in.
    The fair market value of the three leases when turned in to the corporation on March 1, 1919, was $140,000.
   OPINION.

Artjndell:

We are satisfied from the evidence that the leases acquired by Newman were his individual property until such time as they were turned over by him to petitioner. It is true there was an informal understanding between Newman and his associates that the leases would be turned in to a theatre company thereafter to be organized, should that course prove desirable, but the record does not disclose any formal or binding agreement to that end, and in fact it was clearly understood, should the theatre project not be carried through, that Newman would proceed in his own way to develop the leases. This being true, the company would be entitled to take the leases into its invested capital, assuming that they had a value when paid in to it by Newman, and as stock was not issued directly for the leases, they would form a part of petitioner’s paid-in surplus. At the time the leases were acquired no steps looking to the organization and incorporation of petitioner had been undertaken and it was then uncertain whether a company would ever be organized and a theatre built.

The authorities are not uniform as to the relationship which a promoter bears to a corporation organized by him. The rule in Missouri, where petitioner was incorporated and where it operates, is that a promoter can not be an agent of a corporation not then in existence. Reynolds v. Title Guaranty Trust Co. (Mo. 1916), 189 S. W. 33. The United States Supreme Court has stated,, however, in the case of Dickerman v. Northern Trust Co., 176 U. S. 181, 204, that, “ The promoter is the agent of the corporation and subject to the disabilities of an ordinary agent.”

In many jurisdictions a corporation may ratify the acts of its promoters, though the rule appears to be to the contrary in Missouri. The Supreme Court of that State, in the case of Queen City Furniture & Carpet Co. v. Crawford, 30 S. W. 163, states:

Strictly speaking, there can be no ratification by a corporation of a contract formed by its promoters prior to the completion of the corporate organization. The so-called “ ratification ” by the corporation is nothing more nor less than the making of an original contract. * * * This is plainly so for the reason that there was no corporation in existence at the time these promoters made the contract in question * * *.

The several decisions examined by us are directed rather to the right of the promoter to make secret profits and ■ to the right of the corporation to secure the benefits of contracts made by promoters in its behalf, and not to a state of facts such as we have here. On the facts before us we have no hesitancy in reaching the conclusion that petitioner is entitled to include in its invested capital the value of the leases.

We are left then to determine the value of the leases at the time they were turned in to petitioner on March 1, 1919. The evidence establishes to our mind that the rental exacted for the Brady lease represented, the full rental value of the property and that the lease has no bonus value. On the contrary, we believe that the Turner and McGonegal leases had a distinct value on March 1, 1919. The three assembled leases when turned in to petitioner we have found to be of a fair market value of $140,000, and its invested capital should reflect that value. This amount should also be used as a basis for an annual deduction for depreciation.

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

Philijps dissents, on the ground that the transaction involves section 331 of the Bevenue Act of 1918.


author: Lansdon:

text:
    Appeal of W. H. MOREFIELD and Wife.
    Docket No. 5721.
    Decided July 27, 1926.
    1. Tlie Board is without jurisdiction to redetermine an over-assessment for any year in which no deficiency is asserted.
    2. Loss from transactions in oil leaseholds determined and allowed.

      E. W. B. Ewing, Esq., for the petitioners.

      Thos. P. Dudley, Jr., Esq., for the Commissioner.
    Before Arundell and LaNsdoN.
    The basis of this appeal is the Commissioner’s notice which advises W. H. Morefield of an overassessment for 1919 in the amount of $15,450.21, and asserts a deficiency as to each of the taxpayers for 1920 in the amount of $2,784.85. The petitioners seek a redetermination of their tax liability for each of said years, averring that the overassessment for 1919 should be increased and that the deficiency for 1920 should be reduced. Three issues are involved in this matter: (1) Whether the Board may redetermine tax liability for a year as to which the Commissioner admits an overassessment and asserts no deficiency; (2) deduction from gross income of certain debts due the petitioners which it is alleged were ascertained to be worthless and charged off during the year 1919; and (3) disallowance by the Commissioner of losses alleged to have been sustained in the year 1920 as deductions from income for that year.
    FINDINGS OF FACT.
    The petitioners constitute a marital community under the laws of the State of Louisiana. They reside at Shreveport, where W. H. Morefield, in equal partnership with one J. T. Tanner, was engaged in the business of buying and selling oil and gas leases during the taxable years. They made separate income-tax returns for the years 1919 and 1920, and the deficiency for 1920 is asserted in equal amounts against each of them.
    During the year 1919 debts due W. H. Morefield, in the total amount of $7,645,- were ascertained to be worthless and charged off the books of account kept by the petitioners.
    In June, 1920, as a joint venture, W. H. Morefield and J. T. Tanner acquired five oil and gas leases from one Evans, by purchase, at a total cost of $36,000. Subsequently, one lease, then and so acquired, was sold for $7,500. Titles of the. four remaining leases were ascertained to be defective. Such leases were never prospected for oil and gas, reassigned, or sold, and were abandoned and forfeited in 1920. These transactions resulted in a net los¡3 of $28,500, which was sustained during the year 1920. The taxpayer shared in such loss in the amount of $14,250.
    Resulting from an audit of the income-tax returns of the petitioners for the years 1919, 1920, and 1921, the Commissioner notified each of them of deficiencies. W. H. Morefield was advised of an overassessment for 1919 in the amount of $15,734.85, of a deficiency for 1920 in the amount of $2,734.85, and of no change for 1921. Mrs. W. H. Morefield was advised that'her tax liability for 1919 was adjusted in her husband’s return for that year, of a deficiency for 1920 in the amount of $2,734.85, and of no change for 1921.
    The letters addressed to the petitioners by the Commissioner state that, for the year 1919, the return of W. H. Morefield showed an overassessment in the amount of $39,575.60, and that the return of Mrs. W. H. Morefield showed a deficiency in the amount of $24,-125.39. Applying the additional tax due on the return of the wife to the overassessment shown on the return of the husband, the Commissioner ascertains a net overassessment of the husband for 1919 in the amount of $15,450.21.
   OPINION.

Lansdon:

The petitioners ash for redetermination of an over-assessment for the calendar year 1919, and of a deficiency for the calendar year 1920. The first question to be considered is whether the Board has jurisdiction that enables it to redetermine the tax liability of a taxpayer ivho has been advised of an overassessment for the year involved.

Prior to the enactment of the Revenue Act of 1926, we held, in the Appeal of E. J. Barry, 1 B. T. A. 156, that—

Where the Commissioner determines after June 2, 1924, that an assessment should be made in respect of the tax imposed by prior revenue acts in the amount of a deficiency in one year less an overpayment in another year, the Board has jurisdiction to consider the appeal as to both years and determine the correctness of the deficiency asserted.

In the Appeal of the Eagle Dye Works, 1 B. T. A. 638, we held that—

In an appeal fnom a deficiency in any year this Board has jurisdiction to consider the tax liability for any other year not barred by the statute of limitations when necessary to a correct determination of the deficiency asserted.

The jurisdiction taken in the appeals cited supra, even if such reports might be construed to assert authority to redetermine over-assessments, appears to have been completely destroyed by the enactment of the Revenue Act of 1926, which defines a deficiency and sets forth the jurisdiction of the Board thereof in the following language:

Sec. 273. As used in this title in respect of a tax imposed by this title the term “ deficiency ” means—
(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax; * * *.
Sec. 274. (a) If in the ease of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within CO days after such notice is mailed (not counting Sunday as the sixtieth day), the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. * * *
(g) The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

From these excerpts from the statute that clothes the Board with all the jurisdiction that it may exercise, we conclude that it was the plain intent of Congress to restrict our authority to the redetermination of deficiencies asserted by the Commissioner. We may consider facts relating to tax liability of years for which no deficiency is asserted only as such facts affect tax liability for the year for which a deficiency has been found. In order that there may be no further controversy as to our authority in the matter of tax liability for years in which no deficiency is asserted, Congress has now declared, in express terms, that we have no jurisdiction to determine whether the tax for any year in which no deficiency has been asserted has been either overpaid or underpaid. We are of the opinion that this provision also denies us any authority either to increase or decrease an overassessment for any year in which no deficiency has been found. We hold, therefore, that in the case at bar we-have no jurisdiction to enable us to redetermine the overassessment for the year 1919. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255; Appeal of R. P. Hazzard Co., 4 B. T. A. 150.

The evidence that the petitioners sustained a loss in the amount of $14,250 in 1920 as the result of certain transactions in buying and selling oil leases is clear and uncontradicted. Such loss should be deducted from the gross income for that year.

Order of redetemdnation will be entered on 15 days'1 notice, under Rule 50.


author: ARundell:

text:
    Appeal of WALTER T. SMITH.
    Docket No. 4841.
    Decided July 27, 1926.
    Value of certain securities received as compensation for services determined.

      J. S. Y. Ivins, Esq., for the petitioner.

      Geo. G. Witter, Esq., for the Commissioner.
    Before SteRnhagen and Artjndell.
    The Commissioner has determined a deficiency in income taxes for the years 1919 and 1921 in the amounts of $10,641.40 and $6,174.44, respectively. The question involved is the valuation of certain securities received by petitioner as compensation for services rendered by him to the George A. Fuller Co.
    FINDINGS OF FACT.
    During the years 1919 and-1921 petitioner was employed in an executive capacity by the George A. Fuller Co. of New York City. In addition to a fixed salary, he had a contract with the company that he should receive a certain proportion of the profits of the company. Uiider the terms of the contract, where the company received its profits in cash, his share was to be paid to him in cash, and where the company received its profits in securities, he was to receive a ratable proportion of such securities.
    Petitioner received during the year 1919, as part of his profits under the profit-sharing contact with the George A. Fuller Co., 25 bonds -of the Bowman Hotel Corporation, and during the year 1921 he received ten bonds of the Bowman Hotel Corporation and four bonds of the Kerr Building Co. The par value of each of the bonds received was $1,000.
    The bonds of the Bowman Hotel Corporation were secured by a lien upon a leasehold estate in the property known as the Hotel Commodore, situated at Lexington Avenue and Forty-second Street, New York City. These bonds, being only on the leasehold, were, in effect, junior to two mortgages on the property, totaling $5,000,000, held by the Metropolitan Life Insurance Co. of New York, and to certain annual charges for ground and building rentals. The fair market value of the bonds of the Bowman Hotel Corporation at the time of their receipt by petitioner in June, 1919, was 50 per cent of their par value, making the total fair market value of the 25 bonds received by the petitioner $12,500.
   OPINION.

ARundell:

The evidence establishes to our satisfaction that the bonds of the Bowman Hotel Corporation at the time of their receipt by petitioner in June, 1919, had a fair market value of not to exceed 50 per cent of their face amount. Five bonds of this issue were sold during 1919 to a New York banker at that figure and this sale was the only one brought to our attention where the parties were dealing at arm’s length. Offers made by other dealers in securities were in an amount not to exceed 50 per cent of the par value of the bonds. The bonds were of a speculative character and their payment upon maturity was largely dependent upon the successful operation of the Hotel Commodore, which had been in operation less than six months at the time the bonds were received by petitioner in June of 1919. The fact that the bonds were paid with interest as they fell due is not sufficient to convince us that, at the time of their receipt in 1919, they had a market value in excess of that here found. Counsel for petitioner conceded that he had no evidence as to the value of the bonds of the Bowman Hotel Corporation in 1921, nor was any evidence offered as to the value of the bonds of the Kerr Building Co., likewise received in 1921. The Commissioner’s determination as to these values must therefore be approved.

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