author: Phillips

text:
    Appeal of WEST END CONSOLIDATED MINING CO.
    Docket No. 2172.
    Submitted August 29, 1925.
    Decided November 24, 1925.
    1. Where tangible property is paid in for stock prior to January 1, 1914, the basis for computing invested capital' under section 207 of the Revenue Act of 1917 is actual cash value of such property as of January 1; 1914, even though the January 1, 1914, value is less than the value of the property at the time of acquisition.
    2. The fact that the January 1, 1914, value to be used in computing invested capital is much less than the value at the time of acquisition is not a ground for special relief under the provisions of section 210 of the Revenue Act of 1917. ‘
    3. Costs incurred in defending title to property, 7iel& capital expenditures.

      M. L. McLaren, G. P. A., George Naus, Esq., and Louis Bennett, Esq., for the taxpayer.

      John D. Foley, Esq., for the Commissioner.
    Before Gratjfnee, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency of $60,-607.01 income and profits taxes for 1917, of which approximately $50,000 is in controversy.
    FINDINGS OF FACT.
    The taxpayer was incorporated May 5, 1906, under the laws of the State of Arizona, with a capital stock of 2,000,000 shares of a par value of $5 each, for the purpose of consolidating three companies operating mines in the Tonopah District of Nevada.
    On June 27, 1906, it acquired by deed all the property of the Tonopah Extension Milling & Mining Co. and assumed the obligations of that company. It issued in exchange therefor 1,000,000 shares of its capital stock. The property so acquired had an actual cash value of $1,800,000 at the date of acquisition.
    On October 27, 1906, the taxpayer acquired by deed the Tonopah properties of the Ohio Tonopah Mining Co. and issued therefor 200,000 shares of its capital stock. The property so acquired by the taxpayer had an actual cash value of $300,000 at the date of acqui-. sition.

      On November 5, 1906, taxpayer acquired a one-half interest in the Porcupine Fraction claim and issued therefor 3,000 shares of its capital stock.
    Between July 31, 1906, and January 31, 1907, taxpayer acquired 193,850 shares of the capital stock of McNamara Mining Co., which had an actual cash value at date of acquisition of $155,160, and issued therefor 95,572 shares of its own stock. This stock was disposed of prior to 1917 and other property acquired in its stead.
    On or about July 6, 1911, taxpayer purchased from F. M. Smith, one of its directors, 185,865 shares of the capital stock of the Halifax Tonopah Mining Co., giving therefor its note for $190,160.86, with the option to said Smith of taking taxpayer’s stock at the rate of 50 cents per share, at any time within a period of three years, in payment of said note, or taking cash therefor, as he might decide. On or about February 29, 1912, said Smith elected to take stock of the taxpayer, whereupon 395,027 shares of -the capital stock of taxpayer were issued to said Smith in payment of said note and interest, amounting in all to $197,513.71.
    On or about April 30, 1912, taxpayer purchased a one-sixteenth interest in the Santa Posa Mine and .issued therefor 1,887 shares of its capital stock.
    Upon the purchase of the property of the Tonopah Extension Milling & Mining Co., taxpayer received a deed to such property, the consideration being 1,000,000 shares of taxpayer’s capital stock, as hereinbefore set forth. Taxpayer’s stock, instead of being issued to the Tonopah Extension Milling & Mining Co., was issued by the taxpayer directly to the stockholders of that company. A number of the smaller stockholders could not be located and taxpayer issued to itself, as trustee for such stockholders, 13,325 shares of its capital stock. Dividends declared by the taxpayer have regularly been set aside in a special trust fund for the benefit of such stockholders.
    In computing invested capital the Commissioner used the January 1, 1914, value of taxpayer’s properties, computed at $671,873.83, from which he deducted depletion sustained to December 31, 1916, in the sum of $329,487, leaving a balance of $342,386.83, to which there was added a surplus of $752,409.54, making taxpayer’s total invested capital $1,094,796.37.
    During the years 1914 to 1918, inclusive, taxpayer was engaged in a suit over its right to mine certain veins. The suit was brought by the Jim Butler Tonopah Mining Co.-, as plaintiff, against the taxpayer, as defendant, and was carried to the Supreme Court of the United States, resulting in a judgment for the taxpayer. 247 U. S. 450. The suit was brought to enjoin taxpayer from exercising an asserted extralateral right in respect of a vein of ore extending beneath the surface from taxpayer’s claim into plaintiff’s claim. The questions involved were:
    (1) Whether the vein in question apexed on the taxpayer’s land;
    (2) Whether the vein in question passed through the side lines or end lines of taxpayer’s claim; and
    (3) Whether, where there are two or more veins apexing in one claim, the owner of such claim under a claim of extralateral rights can follow more than the vein originally discovered ?
    The suit resulted in a complete victory for the defendant, sustaining its right to mine a vein which apexed on its property but extended downward and beyond the side line of its claim. In connection with such suit the taxpayer expended, from 1914 to 1916, $79,469.35 in preparing for such suit, as well as other sums for counsel fees. In computing invested capital the Commissioner capitalized the expenditures for counsel fees, but failed to capitalize the expenditure of $79,469.35.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, under Buie 50.
   OPINION.

Phillips

: All expenses incurred in connection with the suit to defend its right to mine the vein apexing on its property are properly to be capitalized. Appeal of Consolidated Mutual Oil Co., 2 B. T. A. 1067. The surplus and invested capital should be increased accordingly.

Section 207 of the Bevenue Act of 1917 provides:

Sec. 207. That as used in this title, the term “ invested capital ” * * * means * * *
(a) In case of a corporation or partnership; ⅜ * * (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in ca~¡e such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor). * * * (Italics ours.)

It is undisputed that tangible property was paid in for stock of the taxpayer long prior to January 1, 1914, and that this property had a greater value at the time it was paid in than it had on January 1, 1914. It is also undisputed that the actual cash value of the property paid in did not exceed the par value of the original stock specifically issued therefor. The question is presented whether, in such a case, the actual cash value at the time the property was paid in can be used, or whether the taxpayer is restricted to the lesser value of January 1, 1914. Taxpayer urges that the clause relating to the January 1, 1914, value is a relief measure, and was not intended as a restriction, and that, when applied to the taxpayer, it works a hardship and not a relief. We are asked to examine into the legislative history of the section for the purpose of interpretation. Such legislative history, even though we may consider it available for the purpose of interpreting language which appears unambiguous, does not furnish much light. The clause which has been italicized in the above quotation was first inserted into the draft of the Revenue Act of 1911 by the conferees of the Senate and House after the bill, with various differences, had passed both Houses of Congress. The report made to the House of Representatives by its members on the Conference Committee reads, with reference to section 201:

The House bill levied an excess-profits tax in addition to the excess-profits tax now upon the statute books of 8 per cent upon the net income of corporations and partnerships in excess of 8 per cent of the capital actually invested, and an additional exemption of $5,000. The Senate struck out the House provision and substituted therefor a war-profits tax providing graduated rates, ranging from 12 to 60 per cent upon incomes of corporations, partnerships, and individuals in excess of their respective average incomes during the years 1911, 1912, and 1913. The Senate provision, however, limited the exemption to an amount not less than 6 nor more than 10 per cent of the actual capital invested.
The Senate provision also provided that if the exemption on the basis of the prewar period (the average income for the years 1911, 1912, and 1913) allowed corporations, partnerships, and individuals in any individual case did not represent the deductions allowed representative concerns engaged in similar businesses, that the Secretary of the Treasury could allow an exemption in such cases equal to the same proportion of their net income for the taxable year that the deduction granted representative concerns was of the net income for the taxable year of such concerns, provided that the exemption granted should not be less than 6 nor more than 10 per cent of the actual capital invested.
The House recedes from its disagreement to this amendment with an amendment levying an excess-profits tax upon the excess profits of corporations, partnerships, and individuals ranging from 20 to 60 per cent. In arriving at the excess profits, an exemption from the net income as shown by the income-tax returns of not less than 7 nor more than 9 per cent of the actual capital invested is to be allowed. In addition to this exemption, all domestic partnerships and citizens or residents of the United States are to be allowed a flat exemption of $6,000 and all domestic corporations a fiat exemption of $3,000.

It is to be noted that no reference is made by the House to the clause relative to January 1, 1914, value. The report to the Senate merely sets out the changes and gives no exposition of the reasons.

The report of the Conference Committee passed both Houses with little debate. On the floor of the Senate, Senator Simmons, chairman of the Senate .Finance Committee and in charge of the bill, said:

Mr. President, before leaving the subject of the excess-profits tax I wish to say that before agreeing to the amendment made in the conference changing the maximum and minimum prewar exemptions as fixed by the Senate from 6 to 10 per cent to 7 and 9 per cent, your conferees insisted that if these changes were made, there should be a liberalization of the definition of capital as contained in the bill as it passed both the House and the Senate. That definition, as you will recall, provided in substance that tangible property paid in in the place of cash for stock or shares in a corporation should be valued as at the time of payment. This part of the definition was qualified so as to provide that in case such tangible property was paid in before January 1, 1914, it should be valued at its actual cash value as of January 1, 1914, not to exceed the par value of the stock or shares specifically issued therefor.

In the debate on the floor of the House, Representative Kitchen, chairman of the House Ways and Means Committee and in charge of the bill, stated, in answer to'a question:

We have agreed on a definition as to invested capital substantially as the House had it with some modifications as to good will and other intangible assets. We also provide that property turned over for shares and stock in a corporation or partnership prior to January 1st, 1914, to be valued at its cash value not as of the time it was turned over, but as of January 1st, 1914. All ’ property turned over since January 1st, 1914, is valued at its cash value at the time so turned over.

We have before us the language of the statute which appears clear and unambiguous, together with the statements of the persons responsible for the bill before each House of Congress. The statement in the Senate is to the effect that the provision for the January 1, 1914, valuation was to work a liberalization of the definition of capital. On the other hand, a statement before the House is that, as to property paid in prior to January 1, 1914, the value is to be that of January 1, 1914, and not the value when paid in. It is true, as urged by counsel for the taxpayer, that the Revenue Act of 1917 was hastily drawn and passed without great consideration of its details. Even so, we do not consider that we would be justified in accepting the statement made on the floor of the Senate against the plain wording of the law and the equally authoritative statement made on the floor of the House.

Taxpayer further alleges that the Commissioner has not permitted it to include anything in invested capital on account of the stock issued to itself as trustee for certain unlocated stockholders of a company whose assets were purchased by the taxpayer. The record is not sufficient to indicate whether the January 1, 1914, value has been reduced because of this circumstance. If so, the amount by which it has been reduced should be restored to invested capital.

Taxpayer urges that, if its tax is to be computed upon the January 1,1914, value, it is entitled to relief under section 210 of the Revenue ^A.ct of 1917, which provides as follows:

Sec. 210. Tlvat if the Secretary of the Treasury is unable in any ease satis-faetorily to determine the invested capital, the amount of the deduction shall be the sum of (1) an amount equal to the same proportion of the net income of the trade or business received during tbe taxable year as the proportion which the average deduction * * * for the same calendar year of representative corporations, partnerships, and individuals, engaged in a like or similar trade or business, bears to the total net income of the trade or business received by such corporations * * *. (Italics ours.)

This section provides only one ground for special relief, namely, “if the Secretary of the Treasury is unable satisfactorily to determine the invested capital.” The invested capital of the taxpayer, based on the January 1,1914, value of its assets, has been determined and was not attacked upon the hearing before the Board. There is nothing in the history relating to this section to which our attention has been called, or which we have been able to find, which would extend the scope of this section beyond its words. It is true, as pointed out by counsel for the taxpayer, that the Commissioner found it impracticable to follow the section literally and laid down regulations which broadened its scope, and that .this was done with the implied consent of Congress, but the taxpayer has not, in our opinion, brought itself within any of the classes mentioned within the regulations. Whether it would be entitled to special relief under the broader provisions of the Revenue Act of 1918, we are not called upon to decide.


source: Caselaw Access Project

author: Korner, Chairman:

license: Public Domain

text:
    Appeal of KUNKEL & CO., INC.
    Docket No. 3519.
    Submitted June 25, 1925.
    Decided November 24, 1925.
    1. The acceptance or rejection of amended returns, submitted to the Commissioner by taxpayers, is a matter of internal administration in the Bureau of Internal Revenue and it is not within the province of this Board to decide questions of policy in that bureau. Appeal of Cleveland Some Bremng Co., 1 B. T. A. 87, 91.
    2. Lessee holding option of renewal of his lease, and making permanent improvements on the leased premises, is entitled to exhaust the cost thereof over the remaining term of his lease plus the renewal term thereof, unless the life of the addition is less than such period.
    3. Where invested capital can be determined, and abnormalities mentioned in section 327 do not exist, the tax liability should be computed under the provisions of section 301 of the Revenue Acts of 1918 and 1921, provided the tax thus computed does not exceed the maximum limitations prescribed by section 302.

      Meyer Kurz, Esq., for the taxpayer.

      Blount Balls, Esq., for the Commissioner.
    Before KoeneR.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1919 to 1921, inclusive, in the amount of $1,135.81.

      BINDINGS OB BACT;
    1. Taxpayer is a New York corporation with its principal office at Brooklyn. It was organized in or about the month of May, 1910, with an authorized common capital stock of $10,000, all of which was issued for cash at par. It is engaged in the automobile repair and painting business.’
    2. The books of account of the corporation consisted solely of cash and check books. All receipts were deposited in the bank, and all disbursements were made by check, other than petty cash. Records were also kept of accounts receivable and accounts payable, but they were memorandum records merely, and no postings to ledgers were made. The accounts were maintained on a cash receipts and disbursements basis.
    3. For the years 1919, 1920, and 1921, the taxpayer filed income-tax returns which' purported to be on the cash receipts and disbursements basis. Estimated inventories of supplies were used in ascertaining the net income. These returns were prepared by an accountant employed by the taxpayer for that purpose.
    4. In 1922 an accountant was employed by the taxpayer to install a double entry system of accounts. In the course of this work it was discovered that the receipts and disbursements reported in the original returns for 1919 to 1921, inclusive, were not in accordance with the cash records. After an exhaustive analysis of the cash records, amended returns for the years under consideration were prepared and submitted to the Commissioner purporting to show the true net income, which, in each instance, was less than that reported in the original returns. These amended returns were rejected by the Commissioner, who proceeded to determine the tax liability of the taxpayer upon the returns originally filed.
    5. On January 7, 1919, taxpayer entered into possession of the premises where its business is carried on, under a lease, bearing even date, for a period of 10 years at a stipulated annual rental, with an pption for renewal for a further term of 10 years. During the years under consideration taxpayer made certain permanent improvements to the leased premises in the way of installation of electric lights, a steam heating plant,- plumbing, smokestack, concrete floors, etc. The cost of these improvements to the taxpayer, according to the years in which incurred, was as follows:
    J919 1920 1921
    $8,603.65 $242.90 $1,292.60
    6. During the years 1919, 1920, and 1921, taxpayer expended the sums of $89.50, $226.55, and $156.00, respectively, for the acquisition of machinery and tools. During the same years the sums of $165.00, $93.00, and $550.30, respectively, were expended for office furniture and fixtures. The average useful life of the machinery, tools, and furniture and fixtures so acquired is 10 years.
    7. In 1918, taxpayer acquired 4 second-hand automobiles at a total cost of $2,350. These were used solely in the conduct of taxpayer’s business throughout the three years under consideration. The useful life of these automobiles at the date of acquisition was 4 years.
    8. In its original returns for the years 1919 and 1921, taxpayer claimed deductions for depreciation in the amounts of $655 and $870, respectively. No depreciation deduction was claimed in the return for the year 1920. The claimed deductions were merely arbitrary amounts and were disallowed by the Commissioner.
    9. During 1919, 1920, and 1921, Joseph Kunkel was president of the corporation, and he personally devoted all his time to the business. In addition to the duties performed by him in his executive capacity, he personally supervised all work done in taxpayer’s shop, made all estimates on contract work, and kept such accounting records as were maintained by the taxpayer. J. E. Brennan was secretary and treasurer and devoted his entire time to the business. These two individuals were the only executive officers employed by the taxpayer.
    10. The affairs of the taxpayer were informally conducted. No formal meetings of stockholders or directors were held. Matters requiring the attention of the stockholders and directors were informally discussed and disposed of. No minutes of informal discussions were recorded.
    11. At the informal discussions of the officers and directors certain weekly drawing accounts were agreed upon to be drawn by the two executive officers as compensation for services rendered. These amounts were to be drawn weekly, as the condition of the taxpayer’s treasury permitted.
    12. In its returns for the years under consideration taxpayer claimed deductions on account of salaries paid to officers in the following amounts:
    1919_$1, 785.00
    1920_ 3, 763. 30
    1921_ 6, 060. 00
    In the amended returns which the taxpayer submitted to the Commissioner, but which the latter rejected, taxpayer claimed deductions on account of salaries paid to officers in the following amounts :
    1919_$8,124.83
    1920_ 6,259. 07
    1921_ 6. 672. 06
    The Commissioner has allowed the deductions claimed' in the original returns and nothing more.

      13.As heretofore pointed out, the entire authorized capital stock of the taxpayer of a par value of $10,000 was issued for cash at par. None of the stock has been repurchased or retired. By stipulation of counsel it was agreed that the Board, for the purpose of determining the invested capital, might find that the net incomé reported on the income-tax returns for the years 1910 to 1918, inclusive, represented the correct earnings of the taxpayer for those years. The Board accordingly finds that the net income of the taxpayer for the years 1910 to 1918, inclusive, was as follows:
    1910- $535.00
    1911- 895.87
    1912-1,195.12
    1913-1, 216.11
    1914- 1,468.00
    1915-2, 36S. 44
    1916-1, 061. 62
    1917- 1,445.18
    1918- 1, 968. 77
    Total net earnings to Dec. 31,1918-12.154.11
    14. During its corporate existence the taxpayer has paid but two dividends, one of 6 per cent, amounting to $600, in 1915, and another of 10 per cent, amounting to $1,000, in 1921. There were no other distributions of any character by the taxpayer prior to and during the years under consideration.
    15. The Commissioner was unable satisfactorily to determine the taxpayer’s invested capital for each of the years under consideration and determined the taxpayer’s profits-tax liability for those years to be the maximum limitation under the provisions of section 302 of the Revenue Acts of 1918 and 1921.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be made on 10 days’ notice, in accordance with Rule 50.
   OPINION.

Korner, Chairman:

In its petition taxpayer alleges that the Commissioner, in determining the deficiency here in issue, made the following errors:

(1) That the net income as reported in the original returns for each of the years 1919, 1920, and 1921, is incorrect and not supported by the financial records of the company, and the Commissioner was therefore in error in accepting such returns as a basis for the computation of its tax liability for the years under consideration and in rejecting the amended returns which it is alleged showed correct computations of net income.

(2) That the Commissioner erred in refusing to allow a deduction for each of the years under consideration representing a reasonable allowance for exhaustion, wear and tear of assets used in the business.

(3) That the Commissioner erred in refusing to allow as deductions for each of the years under consideration amounts actually paid to officers during those years as compensation for services rendered, in excess of the amounts claimed on the original returns.

(4) That the Commissioner has erroneously computed its profits-tax liability for each of the years 1919, 1920, and 1921, under the provisions of section 302 of the Revenue Acts of 1918 and 1921, although the tax when computed under the provisions of section 301, using the invested capital which can be determined for the purpose of determining the exemption, is less than that computed under section 302.

The acceptance or rejection of amended returns prepared and submitted to the Commissioner by taxpayers is a matter of internal administration in the Bureau of Internal Revenue, solely within the discretion of the Commissioner. It is no part of the duty of this Board, nor has it the right to decide in any manner questions of policy in the administration of the office of the Commissioner. Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87, 91. Therefore, the issue raised in the instant appeal relative to the filing of amended returns purporting to show correct computations of net income and the rejection of those returns by the Commissioner, is a question beyond the jurisdiction of this Board.

Taxpayer filed returns within the time prescribed by law purporting to show the correct net income for each of the years 1919 to 1921, inclusive. With the" exception of the deductions for depreciation claimed therein, the Commissioner accepted these returns as a correct statement of all items of income and expense for the respective years. In 1922 the taxpayer employed an accountant to install a new system of accounting, who, in the course of his work, it is alleged, ascertained that the original returns were incorrect and not supported by the financial records. Amended returns for the years under consideration, which were substantially different from the original returns and showed a much less income for each year than the original returns, were prepared and submitted to the Commissioner, who. rejected them.

The accountant who installed the new system of accounts and who prepared the amended returns testified on the stand that he made a careful and exhaustive analysis of the taxpayer’s receipts and disbursements for the years under consideration and that the original returns were incorrect and not supported by the records. He submitted in evidence schedules prepared by him purporting to show a correct analysis of all items of income and expense for the years under consideration, supported by profit and loss statements and balance sheets, and testified that in his opinion such schedules correctly interpreted the accounts and showed a correct computation of net income for each of the years involved. In support of these detailed schedules the books of the company, comprising, as we have pointed out, check stubs and memorandum books recording- expenditures from petty cash funds, were submitted in evidence.

We have examined the taxpayer’s books of account, such as they are, and, to say the least, they are not susceptible of intelligent interpretation. Literally, there are hundreds of check stubs which bear nothing more than the serial number, date check was drawn, amount of check; and name of payee, and which bear no notation of the purposes for which the check was drawn. Of little value are the petty cash memorandum books as evidence, for we find the same lack of detail'in the entries made therein as in the case of the check stubs. As far as we can ascertain, the accountant’s schedules, purporting to show in detail a correct computation of the net income of each of the years under consideration, are not supported by the books. Accordingly, we conclude that neither the amended returns nor the schedules prepared by the accountant may be accepted as correctly reflecting the net income of the years 1919 to 1921, inclusive. Subject to such revision as will be later indicated herein, we approve the Commissioner’s computation of net income for each of the years involved as a basis for determination of the deficiency.

The reason for the Commissioner’s disallowance of the deductions claimed for depreciation in the original returns for 1919 and 1921 is not entirely clear from the record. It would appear, however, that his action was predicated upon the failure of the taxpayer to furnish satisfactory information relative to the costs of depreciable assets and the probable useful life of those assets from date of acquisition.

We have pointed out in our findings of fact that, during the years 1919, 1920, and 1921, the taxpayer expended the sums of $8,603.65, $242.90, and $1,292.60, respectively, in making permanent improvements to the premises which it occupied under a lease dated January 7, 1919, said lease having a life of 10 years, with an option of renewal for a further term of 10 years.

Where the cost of making permanent improvements to premises, of which it is the lessee, is borne by the taxpayer, the lease running for a definite term with a provision for the renewal thereof for a further term at the option of the lessee, the taxpayer is entitled to exhaust the cost of such improvements ratably over the number of years representing the remaining term of the lease plus the renewal term provided for, and is entitled to claim such ratable portion of the cost applicable to each year as a deduction from income, unless the probable life of the improvements is less than the remaining term plus the renewal term, in which case the deduction must take the form of a depreciation allowance based upon the physical life of the improvements. Appeal of Eimer & Amend, 2 B. T. A. 603; Appeal of Gladding Dry Goods Co., 2 B. T. A. 336; Appeal of G. S. Stewart Co., 2 B. T. A. 1016.

The improvements made by the taxpayer to the leased premises occupied by it are of such a nature that, ordinarily, their probable useful life would be greater than the remaining term of the lease plus the renewal term. We have no evidence before us indicating that the facts are otherwise in this case. We conclude, therefore, that the taxpayer is entitled to a deduction from the income of each of the years under consideration representing a ratable portion of the cost of the improvements spread over a period from the date of installation to the end of the renewal period.

The taxpayer is entitled to a deduction for each of the years under consideration on account of depreciation of machinery and tools, office furniture and fixtures, and automobiles. The deductions should be predicated upon the costs set out in our findings of fact, and should be computed at the following rates:

Per cent.
Machinery ancl tools_ 10
Office furniture and fixtures- 10
Automobiles_ 25

With respect to the deductions to which the taxpayer may be entitled for the years under consideration on account of salaries paid to executive officers, we call attention to our findings of fact, wherein we point out the material differences between the amounts of these deductions claimed in the original returns and those claimed in the amended returns, the latter amounts being also set out in the accountant’s schedules offered in evidence as having actually been paid during the years involved.

We have attempted to verify the amounts shown by the amended returns and the accountant’s schedules from the accounting records submitted in evidence, but have met only with ‘dismal failure. The check stubs evidence only the following amounts paid to Joseph Nunkel:

1919.
51 payments of $35 each_l-$1,785
1920.
I payment of $35- 35
II payments of $40 each_ 440
29 payments of $45 each_ 1,305
12 payments of $50 each_ 600
Total_ ¾ 380
1921.
9 payments of $50 each_ $450
41 payments of $60 each_ 2, 460
Total_ 2, 910

There was but one other executive officer, J. E. Brennan, and, if a salary was paid to him during the years involved, the payments apparently were included in the shop pay roll, since we find no evidence of specific payments to him on account of salary.

In the absence of competent evidence to prove that any greater amounts were paid to officers as salaries during the years under consideration than those claimed as deductions on dhe original returns, we approve the Commissioner’s action in refusing to allow the larger deductions contended for by the taxpayer.

The last allegation of error made by taxpayer relates to the action of the Commissioner in computing the profits-tax liability for each of the years involved under the provisions of section 302 of the Revenue Acts of 1918 and 1921, because of his inability satisfactorily to determine taxpayer’s invested capital.

In our findings of fact we have set out, with one exception — and that relates to the aggregate income and profits taxes paid by the taxpayer during the years 1910 to 1918 — all of the essential facts necessary to compute the taxpayer’s invested capital for the years under consideration. We found that the original capital paid in was $10,000 cash, which has not been impaired; that the aggregate earnings from date of organization to and including the year 1918 were $12,154.11; and that prior to the year 1919 but one dividend was paid, and that was in the amount of $600 and paid in 1915

As a starting point in the determination of taxpayer’s invested capital, there should be taken the sum of the original capital paid in plus the earnings to the close of 1918. From this sum there should be deducted the dividend paid in 1915, and the aggregate of all income taxes paid during the years 1910 to 1918, as evidenced by the tax returns for those years, if not already deducted in computing the net income set forth in the findings of fact. The resultant will represent the capital and earned surplus as of January 1, 1919, which should be increased or decreased according to the financial history of the taxpayer for the three years involved.

The profits-tax liability should be computed under the provisions of section 301 of the Revenue Acts of 1918 and 1921, using for that purpose the invested capital determined in the manner herein outlined, provided, of course, that the tax as thus computed does not exceed the maximum limitations prescribed by section 302.


author: Trammell:

text:
    Appeal of OSAGE STEAMSHIP CO., LTD.
    Docket No. 3396.
    Submitted September 24, 1925.
    Decided November 24, 1925.
    Ordinary and necessary repairs in tlie operation of a vessel are not required to be capitalized merely because they were made soon after the acquisition thereof.’

      Henry P. MoTloy, Esq., for the taxpayer.

      R. P. Smith, Esq., for the Commissioner.
    Before Geattpnee and Teammell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended April 30, 1921, in the amount of $17,442.94, of which approximately $10,572.21 is in dispute. The deficiency arises on account of the disallowance by the Commissioner of a deduction claimed by the taxpayer as expense, the Commissioner taking the position that the expenditure was not an ordinary and necessary expense but that it was a capital expenditure.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of Delaware on February 2, 1920. On May 1, 1920, it acquired the S. S. Osage. It was announced that the vessel would engage in trade on that date. She was then in her loading berth at a pier at the foot of Thirty-third Street, Brooklyn, N. Y., and began receiving and loading cargo. She was taking on merchandise for Finland and Sweden and it was contemplated that the voyage would take about four months.
    The vessel was acquired from the Shipping Board and had been operated for about 12 months. While she was being loaded for her first voyage after the taxpayer acquired it, the taxpayer determined to have certain repairs made. The Cosmopolitan Iron Works, Inc., was employed to make the repairs and, on May 28, 1920, it submitted an itemized statement of the work done and material furnished, together with a statement of the cost thereof, from which it appears that the work in the engine department consisted in straightening crank shaft, trueing up journals, adjusting air pumps, tightening up various connections, reseating valves and other similar work in the engine room. In doing this work some items of new material were furnished, such as. piston rod packing, valve stem placing, small pieces of pipe, valve stems, pipe hangers and other necessary materials. The cost of doing the work in the engine room was the principal part of the expense. In the deck department the work consisted of repairing the refitting hatches, removing certain broken cement on hatches and replacing with new cement, repairing fire bell alarm system, repairing railings, and other items of a similar nature. In the steward’s department gratings were repaired and renewed where necessary, pots and pans were retinned, store room bulkhead was tightened, coffee urn repaired, galley range was overhauled and rebricked, steam tables retinned, and other work of a similar character was done.
    Before beginning to load and before any repairs were made to the vessel, it was inspected and a certificate of inspection was duly issued by the Steamboat Service of the Department of Commerce. The certificate was dated December 17, 1919, and was effective for a period of 12 months from that date. The vessel was classified by the American Bureau of Shipping as class A-l.
    The vessel was in a seaworthy condition and the repairs which were made were not necessary to enable it to proceed on the voyage. They were not required by either the insurance bureaus or the United States Steamboat Inspection Service. The New York Board of Underwriters had surveyed the vessel and issued a certificate which entitled it to load its cargo. Certain members of the United States Board of Underwriters carried insurance on the cargo of the vessel. No report was made to a United States inspector of the repairs made on the vessel, and no authority was secured or requested by the taxpayer of the inspector of steamboats to make such repairs. It was not necessary to obtain authority to make ordinary and customary repairs to maintain a vessel in ordinary efficiency of operation. The repairs were of such a nature that they could have been made at any time, but it was not essential that they be made at the time they were made.
    The expenditures were for ordinary and customary repairs, which were not betterments or replacements. They were necessary in order to maintain the vessel in good condition, but were not additions or structural improvements.
    DECISION.
    The deficiency should be computed in accordance with the following- opinion. Final determination will be settled on 10 days’ notice, in accordance with Bule 50.
   OPINION.

Trammell:

The question presented is whether the expenditure for the repairs, which are set out in detail in the findings of fact, is an ordinary and necessary expense or is a capital expenditure and therefore not deductible in determining net income.

We are convinced from the evidence that the repairs in question were not of a structural nature and were no more than ordinary repairs. It was not necessary that the repairs be made in order to make the vessel seaworthy.' It had been surveyed and inspected by proper authorities, who had determined that it was seaworthy and entitled to load its cargo for shipment. The insurance companies accepted the vessel as being seaworthy and issued insurance upon the cargo. The repairs which were made could have been made at a later date and it was not essential that they be made at the particular time while the vessel was loading or prior to its sailing. But it is contended by the Commissioner that, when property which has been acquired is very shortly thereafter extensively repaired, the expenditures should be considered as a capital investment, even though they might be considered as ordinary and necessary expenses if the repairs had not been made immediately after acquisition of the property. Repairs which are admittedly ordinary and necessary in the operation of a vessel are not required to be added to the capital investment merely because they were made soon after the acquisition thereof.


author: Tires sell

text:
    Appeal of GRACE M. KNOX, HENRY D. KNOX, WALTER P. COOKE, and SEYMOUR H. KNOX, Executors of the ESTATE OF SEYMOUR H. KNOX.
    Docket No. 2936.
    Submitted May 21, 1925.
    Decided November 24, 1925.
    Decedent’s will provided that his executors and trustees should be paid annually an amount in the will named in lieu of statutory fees. Held, compensation of executors and trustees so provided for is a lawful deduction from the taxable income of the estate which must be reported in accordance with section 219 of the Revenue Act of 1918.

      J. H. Kenefick, Esq., for the taxpayer.

      L. G. Mitchell, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tkussell.
    This appeal involves a deficiency in income tax for the year 1919 in the amount of $1,037.25, arising from the disallowance of a deduction from gross income of certain amounts paid to the executors of the estate of Seymour H. Knox, deceased, for services rendered by them during the year 1919. .
    FINDINGS OF FACT.
    Seymour H. Knox, a resident of Buffalo, N. Y., died in May, 1915, leaving a last will and testament, which was duly admitted to probate and record in the Surrogate’s Court of Erie County, N. Y., on June 3, 1915. The said Seymour H. Knox nominated and appointed, as executors of his last will and testament, Grace M. Knox, bis widow, Henry D. Knox, his brother, and Walter P. Cooke, all of the City of Buffalo, and he further nominated and appointed his son, Seymour H. Knox, to be one of the executors of his last will and testament when the said Seymour H. Knox should have attained the age of 21 years. The said Grace M. Knox, Henry P. Knox, and Walter P. Cooke duly qualified as executors under the said last will and testament, and they are now, and have been since the date of their qualification, acting as such executors. Seymour H. Knox did not attain the age of 21 years and qualify as executor until some time subsequent to the year 1919. Seymour H. Knox, deceased, left a large estate, consisting principally of various kinds of securities, and, instead of permitting his executors to receive the fees and commissions that would otherwise be payable to them under the laws of the State of New York for their services, he made provisions for the payment to them of fixed annual compensation, such compensation being provided by article 26 of his last will and testament, as follows:
    I further will and direct that in view of the provisions herein contained for her benefit, that my wife, Grace M. Knox, serve as executrix of this my last Will and Testament, without fees, commissions or compensation, and I further will and direct that in lieu of the commissions and compensation provided by law, that each of my acting ’executors, administrators with the will annexed or trustees, whether herein appointed or appointed by the court, excepting only the Bankers Trust Company of Buffalo, as Trustee of the various trusts created by Articles Thirteenth, Fifteenth, Sixteenth, and Seventeenth thereof, shall during his service as such, receive an annual compensation of Twelve thousand ($12,000) each, to be paid out of the income of my estate and the trust funds herein contained and apportioned ratably between the said estate and the said trust funds created by the provisions of Article Twenty-first hereof in substantial proportion to the value of the property contained in each, from time to time, such sum to be received in full payment for his services as such executor, administrator, and trustee under this Will, and to cover the entire services of each, both as executor, administrator and trustee. I hereby expressly will and direct that the appointment of any other executor, trustee or administrator with the will annexed which may be made by any court, shall be upon the express condition that every such executor, trustee or administrator shall at the time of his appointment, accept the compensation above provided for his services, in lieu of commissions or compensation provided by law. I will and direct that- the Bankers Trust Company of Buffalo in acting as trustee of Article Thirteenth, Fifteenth, Sixteenth, and Seventeenth hereof shall receive the usual commissions for such services as allowed by law.
    During the year 1919 the trusts referred to in article 26 of the last will and testament of Seymour H. Knox had not been created and they were not created until the year 1921. The services rendered by the executors during the year 1919 consisted of managing and taking care of the estate and the income therefrom.

      There was paid to Henry P. Knox and Walter P. Cooke during the year 1919, as compensation for their services in that year as executors of the estate of Seymour H. Knox, the amount of $12,000 each, and the total amount of $24,000 so paid was deducted from the gross income of the estate for the year 1919.
    The net income of the estate of Seymour H. Knox for the year 1919, before deductions were made on account of compensation paid to the executors, was more than $1,000,000, a considerable part of which was exempt from taxation, being derived from securities such as municipal bonds and United States Government bonds. The Commissioner, upon audit of the taxpayer’s income-tax return for the year 1919, determined that the estate was entitled to deduct such portion of the compensation as the taxable net income of the estate, before making any deductions on account of such compensation, bears to the total net income before deducting compensation. He accordingly disallowed $4,857.60 of the total deduction of $24,000 claimed and determined that there is a deficiency in tax for the year 1919 in the amount of $1,037.25.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Tires sell

: The only question presented by this appeal is whether or not the estate of Seymour H. Knox, in computing its net income for the year 1919, is entitled to deduct the amount of $24,000 paid to the executors of the estate as compensation for services rendered by them in that year. The Commissioner allowed as a deduction that part of the compensation so paid which bears to the total compensation the same ratio that the taxable net income of the estate bears to the total net income. However, at the hearing it was contended by the Commissioner that no part of the compensation paid to the executors of the estate in the year 1919 should have been or should be allowed as a deduction from gross income.

Seymour H. Knox, in his will, named certain persons who should act as executors in the necessary proceedings for the settlement and distribution of his estate, and provided further that the same executors should at once become the trustees of certain trusts specifically, provided for and set forth in the will. The decedent, knowing that his estate would continue to produce a large income annually and that the execution of the trust provided for would extend over a period of years much longer than the period ordinarily required for the administration and settlement of an estate, provided in his will that his executors and trustees should, during the period of their service in such capacity, receive as compensation a fixed annual salary in lieu of statutory fees and commissions. He also provided that such salary should be paid out of the income of the estate.

There appears to be no provision in the statutes of the State of New York, or in the Federal tax laws, which can be urged as in any way preventing or defeating the carrying out of the testator’s purpose set forth in his will. This is not a case of a will or of an estate which is to be administered, settled, and distributed within the short time ordinarily required for such purposes. On the other hand, it is a case of the creation of long-time trusts, the execution of which must extend over such a period of years as to constitute a continuing business of handling large trust properties, collecting and receiving large incomes, and disposing of the same in accordance with the terms of the trusts. In such a case it appears to be eminently wise and proper that the executors’ and trustees’ compensation should be determined on the basis of annual salaries, and that such salaries should be paid out of the income of the estate and trust properties.

Section 219 of the Revenue Act of 1918 laid upon the executors and trustees in this case the duty of making an income-tax return for the estate and properties under their charge, and it further provided that the gross and net income of such estate should be ascertained and computed in substantially the same manner as required of living persons. The executors and trustees are essentially employees of the estate. Their compensation is one of the ordinary and necessary expenses of the estate and properly deductible from the income thereof without regard to the fact that a portion of the estate’s income is exempt from taxation.


text:
    Appeals of J. E. CHANDLER and E. B. TEAGUE.
    Docket Nos. 4039, 4040.
    Submitted October 23, 1925.
    Decided November 24, 1925.

      George E. E. Goodner, G. P. A., for the taxpayers.

      W. F. Gibbs, Esq., for the Commissioner.
    Before Littleton, Smith, and Thussell.
    These appeals are from determinations of deficiencies in income tax for the years 1919, 1920, and 1921, in the amounts of $2,299.78, $24.90, and $5.13, respectively, as to J. E. Chandler, and in the amounts of $6,878.81, $61.12, and $37.84, respectively, as to E. B. Teague. Separate appeals were filed but they were heard together by consent. The issues presented are whether the Commissioner erred (1) in his determination of the value of 197 shares of the capital stock of the Pioneer Lumber & Creosoting Co. owned by the Advance Lumber Co. at the time of-its dissolution on August 1, 1919; (2) in holding that the value of property received by taxpayers upon liquidation of the corporation in excess of the cost of their stock was subject to the normal tax; and (3) in holding that premiums on policies of life insurance taken out upon the lives of the taxpayers and paid by the partnership, of which they were members, were not proper deductions as ordinary and necessary expenses.
    FINDINGS OF FACT.
    Taxpayers are residents and citizens of Birmingham, Ala. In November, 1918, the Advance Lumber Co., hereinafter referred to as the Advance Company, a corporation, the entire capital stock of which they owned in the proportion of one-third and two-thirds, respectively, purchased 197 shares of capital stock of the Pioneer Lumber & Creosoting Co., hereinafter referred to as the Pioneer Company, for which it paid $17,400. The Pioneer Company was organized in 1911 and had operated with little success in the way of profits until 1917. For about five years prior to 1919 the Advance Company had an arrangement with the Pioneer Company whereby the former furnished the lumber, poles, tiling, ties, etc., which were treated by the latter for a stipulated price, after which the material was sold by the Advance Company. The Pioneer Company agreed not to take business from others and to permit the Advancé Company to store its stock in the yards of the Pioneer Company without cost. In November, 1918, the Advance Company had a large stock of lumber, poles, tiling, ties, etc., in the yard which had not been creosoted. A short time prior to November, 1918, the Advance Company was advised by the Pioneer Company that the arrangement would be discontinued and, also, that its majority stockholders would place their stock upon the market. Thereupon, the Advance Company, in order to prevent a’ possible loss and considerable expense through the moving of its material and the making of other arrangements for having its timber creosoted, began negotiations for the purchase of a majority of the stock of the Pioneer Company, with the result that 197 shares were purchased for $17,400, thereby enabling it to continue the arrangement as theretofore.
    During 1914 the stock of the Pioneer Company sold for $50 a share. In 1917, 50 shares were sold for $20 a share. In that year the taxpayers were offered 75 shares at $20 a share, par value $100, but did not purchase them.
    The balance sheets of the Pioneer Company at December 31, 1917, and at December 31, 1918, were as follows:

      Assets: 1917 1918
    Merchandise on hand-$6,197. 56 $8, 287.06
    Accounts receivable- 1,036.46 3,079. 77
    Bills receivable--2, 300. 00
    Machinery_ 25,037.74 22, 557. 44
    Livestock and equipment- 175. 00 244. 00
    Office fixtures and supplies- 479. 00 431.10
    Liberty bonds-300. 00
    Cash in bank- 127. 75 630. 43
    Cash in hand--15. 00
    Deficit_11,413.02
    Loss and gain-'-7,100.00
    44,466. 53 44, 945. 20
    Liabilities:
    Capital stock-25, 400.00 30, 000.00
    Accounts payable-744. 88 445.20
    Bills payable—
    Bank of Ensley-— 16, 500. 00 14, 500.00
    Bank of Alabama-1, 500. 00 _
    Interest due January 1. 321.65 _
    44, 466. 53 44, 945. 20
    The balance sheet at December 31, 1919, was as follows:
    Assets:
    Accounts receivable_$9, 915.17 .
    Bills receivable_ 2, 300.00
    Merchandise_ 7,197.61
    Livestock and equipment_ 200. 00
    Machinery_'_ 20, 620.15
    Liberty bonds_ 500.00
    Office fixtures_ 400.00
    Cash in bank_ 21.66
    Deficit- 4, 581. 79
    45, 736. 38
    Liabilities: ‘ ==
    Accounts payable_t_ 100. 00
    Bills payable- 13,000.00
    Capital stock- 30, 000.00
    Interest due bank_ 238.92
    E. B. Teague- 1,000.00
    J. E. Chandler_ 500.00
    H. C. Russell_ 897. 46
    45, 736.38
    The earnings of the Pioneer Company amounted to $2,709.64 in 1917, $6,612.63 in 1918, and $2,518.61 in 1919.
    On August 1,1919, the Advance Company was dissolved and these taxpayers received one-third and two-thirds, respectively, of the assets of the company, and assumed the same proportion of its liabilities, carrying on the business thereafter as a partnership under the firm name of the Advance Lumber Co. The 197 shares of stock of the Pioneer Company were set up on the books of the partnership at a value of $15,047.66 at the date of dissolution of the Advance Company. Each of the taxpayers reported as a profit his distributive share of the assets received upon the dissolution, the only item in dispute being the value on August 1, 1919, of the 197 shares of stock, which the Commissioner valued at $17,400. The value of the 197 shares of stock of the Pioneer Company on August 1, 1919, was $15,047.66.
    The Commissioner also held that the amounts received by taxpayers upon dissolution in excess of the cost or fair market value on March 1, 1913, of their stock, which is not in dispute, was subject to both normal and surtax under section 201 (a) (c) of the Revenue Act of 1918.
    During the years 1920 and 1921 the partnership, composed of the taxpayers, borrowed considerable sums of money from the banks. In order to obtain these loans they took out insurance policies upon their lives, placing them with the banks as security. The partnership paid the premiums on said policies and deducted, as an expense in the years 1920 and 1921, the premiums so paid, amounting to $482.60 and $466.10, respectively, which deductions the Commissioner disallowed and increased the incomes of the taxpayers accordingly.
   DECISION.

The deficiency should be computed on the basis of the value of 197 shares of the Pioneer Lumber & Creosoting Co.’s stock of $15,047.66. The determination is otherwise approved. Appeal of John K. Greenwood, 1 B. T. A. 291. Final determination will be settled on 15 days’ notice, under Rule 50.


author: Smiti-i:

text:
    Appeal of THE BOSTON AMERICAN LEAGUE BASEBALL CLUB.
    Docket No. 2324.
    Submitted April 27, 1925.
    Decided November 24, 1925.
    In 1919 tbe taxpayer assigned two contracts which it had with • two ball players to render services over a three-year period ending with 1921, and received the entire amount of the consideration in 1919. Held, that the entire amount of the consideration received by the taxpayer in 1919 constituted taxable income of the taxpayer for that year.

      Jacob I. Goodstein and George D. Straehan, Esqs., for the taxpayer.

      Ellis W. Manning, Esq., for the Commissioner.
    Before James, Smith, and Trussell.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1919 in the amount of $27,575.09. The point in issue is whether the taxpayer received income in 1919 to the full amount of the consideration agreed to be paid to it for the assignment of certain contracts which it had with two ball players.
    FINDINGS OF FACT.
    On January 30, 1919, and March 21, 1919, the taxpayer entered into contracts with Carl W. Mays and George H. Euth, under which these individuals agreed to render services as ball players for the taxpayer for the seasons 1919, 1920, and 1921, which contracts provided in part as follows:
    9. Whenever, in the sole judgment of the club owner, it is to the advantage of the club that such action be taken, the club owner may transfer the player to another base ball club and assign the rights and obligations of the club owner hereunder to the owners of such other base ball club save as to the player’s compensation, which in the event of assignment to another club of the American League of Professional Base Ball Clubs, or of the National League of Professional Base Ball Clubs, shall be the same as herein fixed; in the event said assignment is made to a club of any other league, the compensation shall be the same as that ordinarily paid in such other league to players of equal ability; and the parties hereto agree that in the event of disagreement between the player and the owner of such other club as to the compensation, the same shall be fixed by The National Base Ball Commission, and the decision of said Commission, or a majority of them, shall be final.
    On July 29, 1919, the taxpayer entered into an agreement with the American League Baseball Club of New York, Inc., whereby it agreed to release Mays to the New York Club and assign its rights under its contract with Mays for a consideration of $40,000 and the release to the taxpayer of the services of Allen Eussell and and Eobert E. McGraw of the New York Club. Payment of the-$40,000 was to be made, $25,000 upon execution of the agreement and $15,000 on August 15, 1919. The player was to report immediately to the New York Club “ in good physical condition.” The contract was fully performed.
    On December 26, 1919, the taxpayer also entered into an agreement with the American League Baseball Club of New York, Inc.,, whereby it released to that club the services of player George H. Euth, under the following conditions:
    By herewith assigning to the party of the second part the contract of said Player George PI. Ruth for the seasons of 1919, 1920 and 1921, in consideration of the sum of One Thousand ($1000) Dollars and other good and valuable consideration paid by the party of the second part, receipt wher.eof is hereby acknowledged.
    Under a separate contract of even date it was agreed in part as follows:
    It is agreed as follows:
    First. The purchase price of the services of the said Player Ruth and of the assignment to the party of the first part of his contract with the party of the second part is the sum of One Hundred Thousand ($100,000.) Dollars, which the party of the first part agrees to pay to the party of the second part, and the party of the second part agrees to accept as follows:
    Twenty-five Thousand ($25,000.) Dollars in cash on the execution and •delivery of this agreement, receipt whereof is hereby acknowledged.
    Twenty-five Thousand ($25,000.) Dollars by the party of the first part making and delivering its promissory note, for that amount, payable to the order of the party of the second part, on the first day of November, 1920, with interest at the rate of six per centum (6%) per annum.
    Twenty-five Thousand ($25,000.) Dollars by the party of the first part making and delivering its promissory note for that amount, payable to the order of the party of the second part, on the first day of November, 1921, with interest at the rate of six per centum (6%) per annum.
    Twenty-five Thousand ($25,000.) Dollars by the party of the first part making and delivering its promissory note for that amount, payable to the order of the party of the second part, on the first day of November, 1922, with interest at the rate of six per centum (6%) per annum.
    Each of the said promissory notes shall be endorsed by Jacob Ruppert and Tillinghast L. Huston, and the party of the first part shall have the privilege •of taking up either or all of the said promissory notes at any time before the -due date thereof by paying to the party of the second part, or the holder thereof, the amount secured thereby with the interest accrued thereon at the date of such payment. The said notes shall be made and delivered by the party of the first part to the party of the second part on the execution and •delivery of this agreement.
    Second. It is understood and agreed that in the event that the said Player George H. Ruth shall not report to the party of the first part on or before the first day of July, 1920, this contract and the said assignment may, at the option of the party of the first part, be cancelled, and in the event of such cancellation the party of the second part shall forthwith repay to the party of the first part the sum of Twenty-five Thousand ($25,000.,) Dollars, paid on account of this contract, all sums paid on account of any of the said promissory notes and forthwith redeliver to the party of the first part the promissory notes above mentioned which shall then be unpaid, or, in default or the redelivery •of the said promissory notes, or any of them, the party of the second part shall forthwith pay to the party of the first part the sums secured thereby with the interest accrued thereon to the date of such payment.
    It was further agreed that, in the event that Ruth should demand an increase in salary for the years 1920 and 1921 beyond a stipulated amount, the taxpayer would pay the New York Club “ on or before the first day of August, in each of the years 1920 and 1921, the amount of such excess up to the sum of Twenty-five Hundred ($2,500) for each of the years 1920 and 1921.” It was further provided that if he did not demand any increase in salary but should claim to be entitled to some compensation or bonus for executing his consent to the assignment of his contract with the taxpayer, the New York Club would pay Ruth a certain amount to satisfy the claim and, if the amount was in excess of $10,000, the taxpayer would repay to the New York Club on account of such excess up to the sum of $5,000, this amount being, payable in two equal payments of $2,500 each on the first day. of July, 1920, and the first day of July, 1921.
    The transactions between the clubs were governed by the rules-of the National Base Ball Commission, Buie 28 of which reads as follows:
    In the event of the death or permanent incapacity of a purchased player while in the service of the releasing club, or prior to his reporting to the club acquiring title to him in the training or championship season, or of his failure to report to and contract with the purchasing club at a salary conforming to its classification, the agreement covering his release shall be null and void, and the party of the first part thereto shall forthwith return to the party of the second part all or any of the consideration received for his release, whether it be in money or the release of one or more players, and; the purchasing club shall be relieved from all obligations for payments that have not matured.
    On December 26, 1919, the taxpayer received $25,000 cash upon the execution of the agreement with the New York Club. On the same date it received promissory notes for the payment of the balance of the consideration, such notes being endorsed and bearing-interest at the rate of 6 per cent per annum, as provided in the agreement above referred to. These notes were worth their face value. Buth reported to the New York Club in 1920 prior to-July 1.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Smiti-i:

The facts in this appeal are fully set forth in the findings of fact. Counsel for the taxpayer contends that the profit derived from the transactions resulting in the sale of players Carl W. Mays and George H. Buth should be spread over the number of years the players were required to play under their contracts with the Boston Club. In making this argument, special attention was-called to Buie 28 of the National Base Ball Commission, quoted above. It was argued that the profit was earned in the same proportion that the players rendered services under the contracts assigned to the New York Club, and that, even though the players-reported as provided in the releases but failed to play for the full period prescribed in their contracts with the taxpayer, the taxpayer would be required to return a proportionate part of the money received under the releases to New York.

There appears to be no basis for such contentions in the provisions of Buie 28 of the National Base Ball Commission or in the contracts of release and assignment. Buie 28 merely provides for the return of the consideration if the player fails to report in good physical condition to the club to which he is released or fails to contract with said club. It has nothing to do with the failure to play under such contracts after he has reported.

There is no question in our minds as to when the profit was derived by the taxpayer from the release of player Mays. The contract of release ivas signed July 29, 1919. His contract to play with the taxpayer during the seasons 1919, 1920, and 1921, was assigned on the same date. The player involved in the transaction reported immediately and on August 15, 1919, the New York Club paid to the taxpayer the balance due under the contract. The transaction was initiated and concluded within the year 1919, and the income derived therefrom was income of that year.

The release and assignment of the contract which the taxpayer had with player Euth and the supplemental contract between the taxpayer and the New York Club were executed on December 26, 1919. On the same day the New York Club paid to the taxpayer $25,000 cash and gave it three promissory notes for the balance of the consideration, such notes being endorsed and bearing interest at the rate of 6 per cent per annum, as provided in the contract of sale. One of the provisions of this agreement reads:

Second: It is understood and agreed that in the 'event that the said Player George H. Ruth shall not report to the party of the first part on or before the first day of July, 1920, this contract and the said assignment may, at the option of the party of the first part, be canoelleH. * * * (Italics ours.)

At the hearing of this appeal it was argued on behalf of the taxpayer that, in the event that Euth did not report to the New York Club on or before July 1, 1920, the contract of sale with the New York Club was null and void under Eule 28 of the National Base Ball Commission (quoted in the findings), and that, in such event, it would be obligated to repay to that club all of the consideration it had received from it under the contract of sale. We do not think that this is so. The New York Club reserved to itself the right to determine whether it would consider , the contract of sale void in case Euth did not report to it at the time contemplated by both parties. If he did not report, the New York Club might have elected to have him report to some other club to which it might sell his services.

The contract of sale entered into on December 26, 1919, was a valid contract until it was canceled. The consideration for the contract ($100,000) was received by the taxpayer in 1919 in the form of cash and promissory notes. There is nothing in the evidence to indicate that the notes were worth less than their face value, and, in the absence of such evidence, we conclude that they were. The facts are, therefore, that the taxpayer received income to the extent of $100,000 in 1919 from the sale of Euth under a contingency that this amount might have to be returned in the event that Ruth did not report to the New York Club. We do not think that this contingency affects the income character of the receipt of the $100,000 consideration in 1919.

In the argument of this appeal counsel for the taxpayer claimed that the total amount of consideration received by the taxpayer upon the sale of the services of Ruth was only $95,000; that under its agreement the taxpayer was obligated to and did pay to the New York Club $5,000, as provided for in the contract of December 26, 1919. No evidence of such payment was submitted, however, and it must be held that the taxpayer realized taxable income of $100,000 upon the sale, as determined by the Commissioner.


author: Sjuith:

text:
    Appeal of THATCHER MEDICINE CO.
    Docket No. 3904.
    Submitted September 1, 1925.
    Decided November 24, 1925.
    1. Reserves set up to meet a liability in part contingent are not legal deductions from gross income.
    2. A corporation which erects a building on land rented month by month from its principal stockholder is not entitled to deduct from gross income of the year in which the building is erected the full cost of the building under the conditions herein stated.

      Morris D. Koffle, Esq., for the taxpayer.

      Lee /. Park, Esq., for the Commissioner.
    Before Smith, LittletoN, and Thus sell.
    This appeal is from the determination of deficiencies in income and profits tax for the years 1918, 1919, and 1920, in the net amount of $12,018.66. The deficiency determined for the year 1918 is $14,650.83, against which there have been applied overassessments for the years 1919 and 1920 in the amounts of $1,536.49 and $1,103.68, respectively. The principal questions raised by the appeal are:
    1. The jurisdiction of the Board relative to the consideration of tax liability for the years 1919 and 1920.
    2. The right of the taxpayer to deduct from gross income reserves for freight on sales and for advertising signs in excess of the amounts allowed by the Commissioner.
    3. The deduction from gross income of the year 1920 of $14,873.57, representing the cost of certain improvements and betterments made by the taxpayer upon property which it rents month by month from its secretary and treasurer.

      FINDINGS OP PACT.
    The taxpayer is a Tennessee corporation with principal office and place oí business at Chattanooga. It is a manufacturer and wholesaler of patent medicines. It was incorporated in 1896. It has on its books accounts with many thousands of customers.. It solicits business principally in the Southern States through salesmen. It does its advertising through newspapers, sign billboards, mail lists, samples, etc. Its goods are usually sold on from four to six months’ time.
    Its usual method of transacting business during the years 1918, 1919, and 1920, was to ship goods to a dealer on a written order. The orders taken by salesmen were on blank forms, one of which was submitted in evidence. This provides, among other things, that “ no conditions recognized unless specified in this order; no countermand accepted.” “ We agree to pay in full on - — - or remit within 30 days from date of invoice less-per cent discount.” “ Freight -.” On the exhibit, which was an order received from a customer, there was written in pencil after the word freight “ allowed ”; also “ send 20 signs allow 5 cts. each for tacking up.” Goods were billed to the purchasers at the invoice price less the trade discount provided in the order. The freight was never prepaid but was always paid by the consignee. Where the order specifically provided that the freight was “allowed,” the purchaser' had the right in making payment to deduct from the amount of the bill the amount of the freight paid, and where the order also provided that the purchaser was to be allowed 5 cents each for the tacking up of signs, he had the right to deduct 5 cents for each of the signs tacked up.
    At the close of each of the years 1918, 1919, and 1920, the taxpayer recognized a liability in respect of freight which might be paid by customers and deducted from remittances receivable in the future; also for the tacking up of signs. To take care of these liabilities the taxpayer, at the close of the calendar years 1918, 1919, and 1920, set up reserves in respect of sales made during those years. The amounts of reserves set up for freight on sales and the amounts allowed by the Commissioner for the tax years in question were as follows:
    Reserve claimed. Reserve allowed.
    1918_$6, 900. 00 _
    1919_ 7, 636.26 $6, 900. 00
    1920 _ 8, 045.46 7, 636. 26
    The amounts of reserves set up for “ advertising signs ” and the amounts allowed were:
    Reserve claimed. Reserve allowed.
    $630. 00 1918
    1, 500. 00 1919 $630. 00
    1, 507.80 1920 1, 500. 00

      Of the reserve for freight on sales set up at December 31, 1918 ($6,900), the amount claimed by purchasers in 1919 was $2,210,57, and in 1920, $9.01; of that set up at December 31, 1919 ($7,636.26), the amount accounted for in 1920 was $2,849.13, and in 1921, $12.67; of that set up at December 31, 1920 ($8,045.46), the amount accounted for in 1921 was $1,514.20, and in 1922, $2.86. The reserve for advertising signs set up at December 31, 1918, was $630 and the amounts claimed by purchasers in 1919 and 1920 were $533.30 and $1, respectively; of that set up at December 31, 1919 ($1,500), the amount accounted for in 1920 was $817.38; of that set up at the end of 1920 ($1,507.80), the amounts accounted for in 1921 and 1922 were $578.93 and $1, respectively. Of the reserves on these two accounts set up at the close of the years 1918, 1919, and 1920, only about one-third had been paid out at December 31, 1922.
    When bad debts were charged off they were charged off in toto, and no deduction was made therefrom in respect of any reserves which had been set up for freight on sales or for advertising signs.
    In its tax return for the year 1920, the taxpayer deducted from gross income $14,873.57, which represented the cost of the erection of a warehouse. This warehouse was built upon land owned by the secretary and treasurer of the company, who also owned about one-third of the capital stock. The land was rented to the taxpayer under a tenancy at will. There was no written lease. The taxpayer suffered from a flood in 1917, and in 1918 and 1919 flood water entered its factory. The warehouse was built in order that the supplies kept in rooms that might be affected by flood water could quickly be removed to it.
    DICCTSION.
    The determination of the Commissioner is approved.
   OPINION.

Sjuith:

This appeal raises three questions, as indicated in the preliminary statement.

The deficiency letter sent to the taxpayer under date of March 5, 1925, shows a deficiency in tax for the year 1918 in the amount of $14,658.83, and overassessments for the years 1919 and 1920 in the amounts of $1,536.49 and $1,103.68, respectively. The Commissioner raises a question as to the jurisdiction of the Board to consider the years 1919 and 1920, since no deficiencies have been determined for those years. This Board is of the opinion, however, that the Commissioner has by his deficiency letter determined a deficiency for the three years 1918 to 1920, inclusive, of $12,018.66, and that the Board has jurisdiction to consider the tax liability of the taxpayer for the three years involved. Appeal of Banna Manufacturing Co., 1 B. T. A. 1037.

The second question is as to the right of the taxpayer to claim, as deductions from the gross income of the years 1918,1919, and 1920, certain amounts set up as reserves for freight on sales and for advertising signs. In its income-tax returns for the years 1918, 1919, and 1920, the taxpayer deducted $6,900, $7,636.26, and $8,045.46, as reserves for freight on sales, and $630, $1,500, and $1,507.80, as reserves for advertising signs. The Commissioner has disallowed the deduction of the reserve set up for 1918, and has allowed the deduction of rebates on sales of $6,900 and $7,636.26 for 1919 and 1920, respectively. He has also disallowed the deduction of the reserves for advertising signs for 1918, but has allowed the deduction of rebates on sales on account of advertising signs for 1919 and 1920 of $630 and $1,500, respectively.

The evidence relative to the practice of the taxpayer in the computation of its reserves is not at all satisfactory. An officer of the taxpayer testified at the hearing that it was the taxpayer’s practice to allow purchasers to pay the freight upon goods ordered, and to deduct from the remittance the amount of freight paid. The reserve for freight on sales set up at the close of each- tax year was set up to meet that liability at the close of each year. Where a customer purchased a comparatively large order of goods, the salesman would often agree to send 20 signs, for which the purchaser would be allowed a rebate on the bill of merchandise ordered of 5 cents on each sign for tacking up of same. The evidence is to the effect that the taxpayer’s customers did not always avail themselves of the privilege of deducting from remittances made to the taxpayer the freight which they had paid or the amount to which they might be entitled for the tacking up of signs. The experience of the company is shown to have been to the effect that not to exceed one-third of the reserve set up against freight on sales for each year was deducted by customers in the succeeding year, and that only a negligible amount was deducted in the second year. The result was, therefore, that at the end of 1920 a large part of the reserve that was set up by the taxpayer at the close of 1918 for freight on sales and for advertising signs had not been availed of by customers during the two succeeding years. The taxpayer claims, however, that the liability still existed, and that it was impossible to state how soon or when the liability would be liquidated.

The taxpayer now claims that the correct amounts of reserves which should have been set up for freight on sales for the years 1918, 1919, and 1920, were $9,189.45, $13,142.48, and $12,524.70, respectively, and that the corresponding amounts which should have been set up as reserves for advertising signs were $1,745.50, $2,863.50, and $2,223. These amounts have been arrived at by a very exhaustive study of the taxpayer’s records by a certified public accountant. The taxpayer has in excess of 18,000 customers and a card is kept for each individual Customer. Data were taken from these cards showing the sales to the several customers for each of the years 1918, 1919, and 1920, and the amount of freight which must have been paid by the customers upon those goods. The computation has been made upon the basis that each customer has claimed, or will eventually claim, the credit to which he may be entitled in respect of his purchases. The same method was followed with respect to determining what the taxpayer claims was the correct reserve for advertising.

We are of the opinion that the claim of the taxpayer with reference to reserves is without merit. Although it would appear that in many cases, if not in all, the customer was permitted to deduct from his remittance on a bill of goods the freight that he had paid upon the goods, a great many customers did not deduct the freight that they had paid. This was either through inadvertence or because they were not apprised of the fact that they had the right to make the deduction. The same would also appear to be true with respect to the advertising signs. Either the signs were not tacked up and the amount was not claimed, or else inadvertently the customer did not deduct the amount. There is no evidence that the taxpayer ever has been required to pay the full amount of the reserves set up for the years 1918, 1919, or 1920, or that it will ever be required to pay the full amount of those reserves. There is no evidence before us. that the taxpayer ever had a liability in excess of the amounts actually paid — far less than that claimed and for two years at least allowed by the Commissioner in each respective succeeding year. Reserves against contingent liabilities such as those of this taxpayer are not legal deductions from gross income. Appeal of William J. Ostheimer, 1 B. T. A. 18; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008. Amounts paid out by a taxpayer in settlement of contingent liabilities are proper deductions from gross income. We have no proof that the amounts paid were in excess of the amo'unts allowed by the Commissioner for the tax years involved.

The third question relates to the right of the taxpayer to deduct from gross income the full amount of the cost of erecting a warehouse upon property occupied by it as lessee. This building was erected by the taxpayer with a full knowledge that it was a tenant at will in respect of the land upon which the building was erected. The lessor of the land testified, however, that he and the other officers of the corporation knew that the taxpayer would be privileged to occupy and use the building for an indefinite period. In this situation, we are of - the opinion that the amount spent in the construction of the building was not an ordinary and necessary expense of transacting business but was an investment in a building which would be used over a series of years. The amount that the taxpayer is entitled to deduct for 1920 and succeeding years in respect of the building is reasonable depreciation upon it. Appeal of National City Bank of Seattle, 1 B. T. A. 139; Appeal of Sentinel Publishing Co., 2 B. T. A. 1211.


text:
    Appeal of THE BONNER SPRINGS LODGE & SANITARIUM CO.
    Docket No. 361.
    Submitted November 3, 1925.
    Decided November 24, 1925.

      Edward Fraser, O. P. A., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before SteRNhagen, Lansdon, and AruNdell.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1921 and 1922, aggregating $1,070.41. The deficiency arises from the disallowance by the Commissioner of a deduction for salary alleged to have been paid to the president.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation doing business at Bonner Springs, Kans. During the taxable years all of its capital stock was owned by Henry C. Hays, its president. The corporation at no time voted or recorded any salary to Hays. The books were kept and the returns filed on the basis of cash receipts and disbursements. Hays regarded the business of the corporation as his own and treated his individual accounts and the accounts of the corporation indiscriminately, making no segregation between the two. All receipts, whether those of the corporation or those of Hays individually, and likewise all expenditures, were recorded upon the corporation’s cash book and checking accounts.
    Hays used the moneys of the corporation at his pleasure. Supplies purchased by the corporation were used in his personal household. All expenditures for such supplies were deducted by the corporation. The books did not disclose which of the items were those of Hays and which were those of the corporation. In making the original corporation returns, Hays excluded some expenditures which he regarded as purely personal, such, for example, as his payments to the University Club and his local church contributions.
    No salary was actually paid to Hays during the taxable years in question.
    Originally, the corporation filed returns in which no deduction for salary was made. Hays filed no individual returns whatever for any year back to 1913. In 1924, the corporation filed amended returns, claiming salary deduction of $4,000 per year to Hays, and Hays filed individual returns showing receipt of the salary thus claimed for the years 1921 and 1922.
   DECISION.

The determination of the Commissioner is approved.


author: Littleton:

text:
    Appeal of WADDELL COAL CO.
    Docket No. 3133.
    Submitted June 13, 1925.
    Decided November 25, 1925.
    Evidence held insufficient to sustain taxpayer’s claim for obsoles-cense of mining equipment.

      Don F. Reed, Esq., for the taxpayer.

      Lee I. Park, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of a deficiency for the calendar year 1920 in the amount of $25,098.03, against which is offset an overassessment of $2,095.50 for the calendar year 1918. No deficiency was determined by the Commissioner for the calendar year 1919, in which year the taxpayer had a net loss of $28,559.91, which was applied against the year 1918 under section 204 of the Revenue Act of 1918.
    The taxpayer alleged that the Commissioner erred (1) in failing to allow as a deduction from gross income for each of the years 1918, 1919, and 1920, a proper amount for obsolescence of property upon its claim that the life of the coal mine, in the operation of which the property was used, was shorter than the physical life of the property; and (2) in basing the allowance for exhaustion, wear and tear upon the physical life of the property rather than upon the life of the coal mine.
    FINDINGS OF FACT.
    Taxpayer is a West Virginia corporation engaged in the business of mining and selling coal, with principal place of business at Philippi. At the time of its organization in July, 1917, it acquired a lease to 371 acres of coal land at Philippi, Barbour County, W. Va., theretofore granted to the Humphreys Coal Co., on August 29, 1908, for a period of 30 years, with the right of renewal under certain circumstances. This lease provides for a royalty of 10 ■cents a ton. The provisions pertinent to this appeal are as follows:
    Third. The lessee hereby covenants that he will mine the coal in the Mahon-ing and” Freeport seams of coal, and shall also mine the coal from any and all other seams found on the demised premises, the mining of the coal from each of said seams to be carried on in such a way as to recover the greatest possible amount of coal from each and all of said seams, and in such manner that the mining on any one of the said seams shall not injure or destroy any other seam of coal, or prevent the mining thereof; but the lessee shall not be obliged to mine any seam of coal which does not contain between the top and bottom of the seam a sectional height of thirty-six (36) inches of coal commercially valuable. All the agreements, conditions and stipulations, rents and royalties contained and retained herein shall refer to all of the said seams of coal and the coal taken therefrom.

    Sixth. The lessee covenants and agrees to prosecute his mining operations upon the demised premises actively and diligently, and in careful, skillful and workmanlike manner, according to the rules of good mining and the laws of the State of West Virginia, and to mine all the merchantable coal that can be practicably mined with profit to him and the lessors, and will leave no more available coal in pillars and supports for the mine openings and workings than may be necessary for their full security and the safety of the workmen.
    Seventh. If the lessee on abandoning any room, entry or other working place, shall leave any available coal standing which, in the opinion of a representative or official of the lessors, is not necessary to be left for the proper security of the mine workings, the said official or representative shall give the lessee notice thereof, with directions to remove the same; and if the lessee shall refuse to proceed to mine and take away said coal for the period of ten days after receiving such notice, then the lessors and lessee shall submit the question to arbitration, and each one shall appoint one arbitrator, and those two shall meet and consider said question without delay, and in case the two thus ■chosen cannot agree they shall appoint a third; and in case either of the parties hereto neglects to appoint an arbitrator for a period of ten days (10) after receiving notice from the other party to do so, then said other party shall nominate two and the two thus appointed shall appoint a third, and the decision and award of such arbitrators, or any of them, shall be final, conclusive and binding upon the parties hereto; and the said arbitrators, or any of them, may in their decision or award, as part thereof, decide by whom the costs of such arbitration shall be borne and paid, and the amount of such • costs.
    ⅜ ⅞. ⅜ ⅛ ⅛ ⅜ ⅜
    Thirteenth. At the termination of this lease, otherwise than by forfeiture, .all the improvements placed upon the demised premises by the lessee shall be valued by two disinterested appraisers, one to be chosen by each of the ■parties hereto, and in case of disagreement, these two to choose a third, and the three thus chosen shall value the said buildings and improvements, and the lessors shall Rave tlie privilege of purchasing the same at such valuation within thirty (30) days after notice. And if lessors shall not within thirty (30) days accept said buildings and improvements at such valuation, the lessee shall have the privilege of removing the same from said demised premises within six months from the expiration of the said thirty days; after which said demised premises shall revert to and the possession thereof revert 'in the lessors.
    Fourteenth. At the expiration of the herein mentioned term of thirty (30) years,, for which this lease has been granted, the lessors shall have the right and privilege of purchasing the buildings and improvements of the lessee on said demised premises on an appraised valuation as provided for in Article 13. And if the lessors shall not within thirty (30) days after such valuation accept said improvements and pay for the same, said lessee shall, at his option, have the right to renew this lease for a period of fifteen (15) years under and subject to all the terms and stipulations hereinbefore mentioned and intended to be kept and performed by said lessors and lessee; and in the event lessee-elect not to renew the within lease, he shall have full free and unrestricted right to remove all buildings, improvements, etc., from said leased premises, within six months from the expiration of said thirty (30) days, as provided in Article 13 of this lease.
    It is admitted by the taxpayer that the amount allowed by the Commissioner for exhaustion, wear and tear of property was reasonable upon the basis of its physical life.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Littleton:

Taxpayer contends that, although in 1918, 1919, and 1920, its lease had 20, 19, and 18 years, respectively, to run, the life of its mine was only 7, 6, and 5 years, respectively. This contention is based upon its claim that, at the time the property was acquired in 1917, the estimated recoverable tonnage was 500,000 tons; that it mined an average of 60,000 tons a year and should, therefore, be allowed a deduction for each of the years for obsolescence of its mine equipment in addition to the amounts allowed by the Commissioner. In view of the lack of evidence going to establish the very basis of the taxpayer’s claim, we do not find it necessary to make a decision of the question as to whether obsolescence, if any, should be measured by the life of the mine. We have no evidence of the date the property, concerning which obsolescence is claimed, was acquired, its cost, or whether its life was longer or shorter than the claimed life of the mine, or what the probable salvage value of the property would be at the end of the life of the mine. In regard to the life of the mine, it appears from the evidence that, in November, 1918, the taxpayer, in support of its claim regarding its invested capital, submitted considerable evidence to the Commissioner that the tonnage of coal recoverable from its mining properties was 5,000,000 tons. We are not convinced from the evidence that on the date the lease was acquired by the taxpayer there were only 500,000 tons of coal which could be profitably mined.

For lack of proof of the life of the mine and of the elements necessary for the allowance of obsolescence of the mine equipment, and in view of the provisions of the lease, the determination of the Commissioner must be approved. Appeal of Wigwam Amusement Co., 1 B. T. A. 335; Appeal of Eimer & Amend, 2 B. T. A. 603.