author: SteRNhagen :

text:
    Charles Rubens & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5736, 6356, 12569.
    Promulgated March 26, 1927.
    1. Upon the organization of a corporation, it issued stock for the tangible property of a preceding business to its owner. The intangible property was expressly transferred separately. Held, that the intangible property may not be included in invested capital and no apportionment may be made as in St. Lows Screw Oo., 2 B. T. A. 619.
    2. The distribution in prewar years of an amount to stockholders in proportion to stockholdings, although not expressly declared as a dividend, may upon proper evidence be treated as such rather than as an expense and will not reduce prewar income in determining war-profits credit.

      Oscar M. Wolff, Esq., and /Stanley 8. Waite, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.

      These proceedings involve deficiencies for the following years, as noted:
    1918_$1,784. 63
    1919_ 2,332. 27
    1920_ 2, 668.48
    1921_ 1,363.97
    The deficiency for 1918 arises partly from the refusal of the respondent to include in the petitioner’s prewar income certain amounts alleged to have been improperly classified as expense. The remaining portion of the deficiency for 1918 and the deficiencies for the other years arise from the respondent’s refusal to include in invested capital any amount for the alleged value of good will.
    FINDINGS OK FACT.
    The petitioner is an Illinois corporation with its principal office in Chicago. It is engaged in the business of importing and jobbing buttons.
    Charles Rubens had conducted the business in his individual capacity under the style of Charles Rubens & Co. from 1884, and the petitioner was incorporated in December, 1911, for the purpose of taking over this business.
    Under date of December 27, 1911, Charles Rubens addressed the following letter to the board of directors of the petitioner:
    About July 1, 1884, the undersigned began business as Charles Rubens & Company for the purpose of buying and selling buttons, tailors’ trimmings and clothiers’ small wares. From then to the present day the undersigned has been successfully engaged in business, has built up a large and profitable trade, an enviable trade name and a valuable good will. The character and credit of the House of Charles Rubens & Company have always been beyond question; and since I desire to perpetuate that name, that business and that good will, and for the further purpose of permitting certain of my old and valued employees to participate, in a larger measure, in the reward of our combined efforts, I accordingly hereby make the following offer:
    1: I am willing to sell and hereby offer to sell, assign, transfer and deliver to your Corporation all and singular the furniture, fixtures, machinery, implements of every kind, all cuts, plates and printed matter, and all other tangible inventoried property of every description belonging to the undersigned, doing business as Charles Rubens & Company, and all other goods, wares and merchandise of every name, nature and description, on hand and in transit, on consignment or on memorandum, and all bills receivable and accounts receivable, at and for the inventory prices thereof on this date, according to the inventory prepared on and as of this date, showing all of the assets of every character and description wheresoever situate, which the undersigned, as Charles Rubens & Company, owns or is interested in on this date; the said purchase price shall be paid to me by the issuance and delivery to me of full paid, non-assessable capital stock of the Corporation at par, and such stock when so issued shall be in full satisfaction and discharge
      pro tanto of the amount of my subscription to the capital stock of the Corporation.
    If such inventory shall amount to less than One Hundred and Seventy-five Dollars [sic] ($175,000.), I hereby agree to pay the difference to the Corporation; but if such inventory shall amount to more than One Hundred and Seventy-five Thousand Dollars ($175,000.), then the Coi-poration shall pay the excess to me.
    2: As a part of this transaction, it is expressly understood that all orders, commitments, contracts, leases and other acts and things, as may have heretofore been entered into or done prior to the date hereof in respect to the business after the date hereof, shall he assumed by the Corporation on and as of this date, and fully and faithfully performed, paid, discharged and carried out by the Corporation as a part of the consideration of this transa'etion; and that the Corporation shall hereafter enter into all such contracts and other instruments as the undersigned shall deem necessary or proper fully and faithfully to effectuate and perform the understanding here-inbefore set forth.
    3: As a part of this transaction, the undersigned will also transfer and assign to your Corporation all of the good will and trade as a going concern of the undersigned, Charles Rubens & Company. This good will and trade as a going concern will be conveyed for a nominal consideration, although in my judgment its fair cash value is actually in excess of the entire capitalization of the Corporation.
    Under tbe same date three of the directors reported to the board that they had examined the assets of Charles Rubens & Co. and found the net tangibles (the total of the tangible assets, less the liabilities assumed), to be Avorth $174,300, and they further reported as follows:
    The good will of Charles Rubens & Company, ineluding its trade as a going concern, is, in our opinion, easily and fairly worth, at a conservative cash valuation, at least the sum of One Hundred and Seventy-five Thousand Dollars (175,000.).
    Whereupon, the board of directors adopted a resolution authorizing the issue of capital stock of $174,300 to Charles Rubens for the assets of his business and approving the execution of the agreement hereinafter set forth, the folloAving recitals being contained in the resolution:
    Whereas, Charles Rubens & Company and Charles Rubens offer to sell all of its assets of every name, character and description and wheresoever situate which Charles Rubens & Company shall OAvn or be interested in on December 27, 1911, at and for the inventoried prices thereof on said date; and
    Whereas, Charles Rubens & Company also offers to sell its good will and trade as a going concern at a nominal consideration; and
    Whereas, all of the said assets have been duly appraised by Isaac Benjamin, Godfrey M. Cohn and Robert Mayer, all of the Commissioners herein and Directors of this Company and they have reported the fair cash value to be at least One Hundred Seventy-four Thousand Three Hundred Dollars ($174,300.) ; and
    Whereas, it appears to the Board that the said assets are of great value to and necessary for the business of this Corporation, and that said assets and good will and trade and trade name will enable this Corporation to enter an established business forthwith with most excellent prospects of earning at once a large return upon its capital stock * * *.
    Under date of December 31, 1911, tbe following agreement was entered into between Charles Rubens as “ vendor ” and the petitioner as 'the “company”:
    Whereas, the Vendor is the owner of the assets hereinafter described; and
    Whereas, the Company has been organized under the laws of the State of Illinois with an authorized capital stock of One Hundred and Seventy-five Thousand Dollars ($175,000.) divided into seventeen hundred and fifty (1750) shares of the par value of One Hundred Dollars ($100.) each; and
    Whereas, the said assets have been appraised by Isaac Benjamin, Godfrey M. Cohn and Robert Mayer, the Commissioners to open books for subscription to the capital stock of said Company and said Commissioners have reported the fair cash value of said assets to be at least One Hundred and Seventy-four Thousand Three Hundred Dollars ($174,300.), and that the acquisition thereof is necessary for the business of the Company and to carry on its contemplated objects;
    Now, Therefore, This Agreement Witnesseth, That in. consideration of One Dollar and other good and valuable considerations, the parties hereto do hereby agree as follows, to wit:
    1: That the Vendor has sold, assigned, transferred, set over and delivered and does hereby sell, assign, transfer, set over and deliver unto the Company, its successors and assigns, all of the following goods, chattels, assets and property, to wit: All and singular the furniture, fixtures, machinery, implements of every kind, all cuts, plates and printed matter, and all other goods, wares and merchandise of every name, nature and description on hand and in transit, on consignment or on memorandum, and all bills receivable and accounts receivable, according to the inventory made and dated December 27, 1911, which inventory is hereby made a part hereof with the same force and effect as if each and every item thereof was fully set forth in this agreement.

      2: The Company hereby agrees, in consideration of the said sale, assignment and delivery to it of the assets, more particularly described in said inventory, the receipt whereof is hereby acknowledged, to issue to the Vendor and his nominees at such times, and in such amounts as the Vendor shall direct, certificates of stock of the Company in the aggregate amount of seventeen hundred and forty-three (1743) shares, which stock and shares shall be deemed to be and are hereby declared to be full paid and nonassessable shares, and not liable to any further call or assessment, and the holders of said stock and their transferees shall never in any event be liable to any further payment thereon.
    3: Said assets are hereby accepted by the Company in full payment, satisfaction and discharge of the subscription to the capital stock of the Company made by the said Charles Rubens in the amount of One Hundred Seventy:four Thousand Three Hundred Dollars ($174,300.).
    4: The Vendor hereby guarantees the collectibility of each and all of the bills receivable and accounts receivable set forth in the inventory and any and all accounts substituted or exchanged therefor, and further covenants and agrees that in case the same should not net the Company the sum of Fifty-six Thousand Sixty-one Dollars and Four Cents ($56,061.04), he will promptly make good and pay in cash any difference that there may be in the aggregate amount of the net proceeds of said bills receivable and accounts receivable and said sum of Fifty-six Thousand Sixty-one Dollars and Four Cents ($56,061.04) ; and the Company covenants and agrees that in case the same should net more than the sum of Fifty-six Thousand Sixty-one Dollars and Four Cents ($56,061.04), .it will promptly pay in cash to the Vendor any excess over and above Fifty-six Thousand Sixty-one Dollars and Four Cents ($56,061.04).
    5: The Vendor hereby covenants and agrees with the Company, upon the request and at the instance of the Company, to execute all such further assurances and do all such things as shall reasonably be required by the Company for vesting in it the bills receivable and accounts receivable hereby sold and giving the Company the full benefit of this agreement.
    6: The Vendor, for and in consideration of the sum of One Dollar, lawful money of the United States of America, to him in hand paid, at or before the ensealing and delivery of these presents, by said Company, the receipt whereof is hereby acknowledged, has also granted, bargained, sold and assigned, and by these presents does grant, bargain, sell and assign unto the Company all of the good will of the party of the first part and all of his trade as a going concern, and also all of the right, title and interest of the party of the first part in and to the trade name of Charles Kubens & Company; to have and to hold all and singular the said goods, chattels and property, also the said good will and all the trade as a going concern of the said party of the first part, and also all the right, title and interest of the Vendor in and to the trade name of “ Charles Rubens & Company,” unto the said Company, its successors and assigns, to and for its own proper use and behoof forever.
    7: And the Vendor does vouch himself to be the true and lawful owner of the said goods, chattels and property, and good will, trade and trade name, and has in himself full power, good right and lawful authority to dispose of the same in the manner as aforesaid; and he does, for himself and his heirs, executors and administrators, covenant and agree to and with the said Company, to warrant and defend the said goods, chattels and property and the said good will, trade as a going concern, and the trade name, to the said Company, its successors and assigns, against the lawful claims and demands of all and every person and persons whomsoever.
    The individual business of Charles Rubens was transferred to the petitioner effective as of January 1, 1912. All of the tangible assets and good will and trade name of the individual business was included in this transfer. The net value of the tangible property of the business at the date of the transfer was $174,300.
    Capital stock of the petitioner of a par value of $174,300, being all of the stock except seven shares, was issued to Charles Rubens for the tangible property transferred. The remaining shares of the petitioner’s capital stock were sold to seven other individuals for $700 cash.
    The amount of $1 recited as the consideration for the good will and trade name was never paid to Charles Rubens.
    After issuance of the certificate of incorporation a report was rendered to the Secretary of Stale of the State of Illinois, oí which the following is a part :

      The Commissioners, duly authorized to open Books of Subscription to the Capital Stock of Ghabucs Rubens & Company, pursuant to license heretofore issued, bearing date the seventh day of December, A. D., 1911, do hereby report that they opened books of Subscription to the Capital Stock of said Company, and that the said Stock was fully subscribed; that the following is a true copy of such subscription, viz:
    We, the undersigned, hereby severally subscribe for the number of shares set opposite our respective names, to the Capital Stock of Chahles Rubens & Company, and we severally agree to pay the said Company, for each share, the sum of One Hundred Dollars ($100.).

    Amount of capital stock actually paid in_$176,000. 00
    Amount of capital stock not paid in_ None
    Stock subscribed and not paid, disposed of as follows: None
    Capital paid in property, appraised as follows: $169, 420.00
    Goods, wares and merchandise, furniture, fixtures and bills receivable and accounts receivable appraised at and actually worth one hundred sixty-nine thousand four hundred and twenty dollars ($169,420.00)
    The net tangible assets (the total tangible assets less the liabilities) of the individual business of Charles Rubens for the years 1907 to 1911 were as follows:
    1907_$130, 698. 74
    1908_ 161,331. 64
    1909_ 161,171. 86
    1910_ 224,267. 71
    1911___ 210,201.80
    Total_ 877, 661. 76
    The net earnings for those years were as follows:
    1907_ $25, 548. 94
    190S_ 13, 031. 92
    1909- 67, 337.36
    1910_ 23, 884.37
    1911_ 30,000. 00
    Total_ 129,802.59
    At the close of the calendar years 1912 and 1913 the petitioner, in addition to the regular dividend, voted and paid to its stockholders an additional 10 per cent on its stock in the amount of $17,500 for each year.
    At the close of the year 1913 the petitioner also charged to profit and loss and credited to surplus 5 per cent of the surplus nf the company at the beginning of that year, amounting to $808.75. This amount was not distributed to the stockholders.
   OPINION.

SteRNhagen :

Reduced to its essentials, the petitioner’s first contention is that its original 1,750 shares of capital stock were issued for an aggregate of tangibles and intangibles and that by the application of the method approved in St. Louis Screw Co., 2 B. T. A. 649, it may properly compute its invested capital by including a portion of the good will of the preceding business as property paid in for stock or shares, thus leaving some part of the tangible property to be treated as paid-in surplus so as to increase the invested capital fro tanto. It contends that the contract and resolutions covering the transactions at the time of its incorporation are to be read in their entirety and that, if properly so read, they indicate that Rubens turned in all of the property of his business, both tangible and intangible, for 1,743 shares of its capital stock.

We are impelled, however, by a fair reading of the written evidences of the transaction, to decide against the petitioner in this respect. The express language of the offer, the resolution and the contract, as well as the certificate of subscription filed with the Secretary of State, are unequivocal and unambiguous and leave no room for construction. The parties themselves deliberately and with unmistakable clearness chose to have the tangible property alone paid in for capital stock and the intangible property separately treated. This was their manifest intention and it was legally fulfilled. The fact that a subsequent revenue law makes their choice less fortunate to them than it might otherwise have been and imposes upon the corporation a greater tax than if another course had been adopted, can not serve to justify an interpretation of the transaction at variance with the clear language of the instruments by which it was performed. The argument that contracts should be interpreted as a whole and so as to give effect to each term is beside the point, for it is by thus reading the documents that we are led to the conclusion reached.

As no intangible property was in fact paid in for stock or shares, and since the statute does not provide for the inclusion of intangible property as paid in surplus, Herald-Despatch Co., 4 B. T. A. 1096; Shope Brick Co., 5 B. T. A. 1042; Nature’s Rival Co., 6 B. T. A. 294, it becomes unnecessary to consider or determine the value, if any, to be ascribed to the intangible property of the preceding business at the time of the acquisition thereof by the petitioner. Upon this point the respondent is sustained.

The petitioner seeks an increase of its war-profits credit by including within its prewar net income the amount of $17,500 paid to its stockholders in 1912 and 1913 in proportion to their stock holdings. This it is entitled to do. The evidence is clear enough to establish that this was merely a method of distribution of earnings before adding the profits to surplus for the year. It was not done with the precision of the declaration of a dividend, but it was in fact a distribution to stockholders rather than an expense of operating the business. As such it was part of the petitioner’s net income for prewar years in question and should be so treated in the determination of the credit. Upon this point the respondent is reversed.

Judgment will be entered on 20 days’ notice, under Bule 50.


source: Caselaw Access Project

author: Sternhagen:

license: Public Domain

text:
    Mary A. Powers, Executrix, Estate of Richard J. Powers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5422.
    Promulgated March 28, 1927.
    1. The amount approved by the local probate court in Illinois as “ a sum of money reasonable for the support of the widow for the period of one year after the death of the testator,” is not ipso facto the amount deductible under section 403 (a) (1), Revenue Act of 1921; and the correct amount is determinable from the evidence.
    2. The proceeds from a sale of property held jointly by decedent and another belong to both, and upon decedent’s failure to account to the coowner up to the time of his death, the amount of one-half of such purchase price is deductible as a claim against the estate.

      Hugh W. McCulloch, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    Deficiency of $1,262.71 estate tax. The Commissioner reduced the amount of deduction for support of dependents from $12,000 to $9,000, and denied the deduction of a claim of $25,000 of the widow as her share of the proceeds of a sale of property formerly held jointly by her and decedent.
    FINDINGS OF FACT.
    Richard J. Powers died January 20, 1924, leaving a gross estate of approximately $356,000, and petitioner is his duly appointed executrix. During the latter years of his life decedent spent an average of more than $12,000 annually in the maintenance of his household. His dependents were his wife and unmarried daughter. He employed a maid, and a chauffeur to drive an automobile which was used exclusively for family purposes. The family lived well. The amount reasonably required and actually expended for the support of dependents during the settlement of the estate was not more than $9,000.
    Prior to 1922 the decedent and his wife owned as joint tenants a piece of real estate which was sold in 1922 for $50,000. It had been purchased in 1902, and decedent furnished the money. Decedent received the entire amount of sale price and thereafter during his lifetime transferred no part thereof to his wife. After his death, the widow made claim for one-half of the sale price, $25,000.
    The Probate Court of Cook County, Illinois, approved a widow’s award of $12,000 and the claim of $25,000.
   OPINION.

Sternhagen:

The petitioner contests the Commissioner’s reduction from $12,000 to $9,000 of the statutory deduction, under section 403 (a) (1) of “ such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.” The petitioner introduced in evidence an itemized statement of the amounts included within the $12,000 deduction. The statement aggregates more than $16,000, and at the hearing it was said that some of the items were not included within the deduction in question because they had been deducted more properly as funeral expenses and expenses of administration. We have, however, examined the remaining items and find that the statement includes several items which, however deductible they may or may not be otherwise under the statute, are in our opinion not deductible as for dependents’ support. They include amounts voluntarily given to a collateral relative; amounts paid for pleasure trips of the family of decedent; amounts paid as Federal income taxes; amounts paid as interest on business loans; amounts paid to attorneys during the settlement of the estate; amounts paid as dues of the decedent’s social club; amounts donated to charitable institutions. Talcing such items from the list leaves something less than $9,000, which is the amount allowed by the Commissioner as the proper deduction, and we are unable to say, therefore, from the evidence that the deduction should be greater than that allowed by the Commissioner.

The petitioner urges that since the amount of $12,000 was approved by the local probate court in settling the estate, as a proper amount for the widow’s award, this should be determinative of her right to the same under the Federal estate tax Jaw. The contention is untenable. The deduction in the local probate proceeding is of “a sum of money reasonable for the support of the widow for the period of one year after the death of the testator.” Under the Federal statute, however, the amount must be not only reasonably required for the support but also actually expended for such support, and in no case in excess of the amount allowed by the local law. In other words, the amount allowed by the local law is a maximum and not a minimum. Here the Commissioner has determined that the amount reasonably required and actually expended is $9,000, and this amount being less than that allowed by the local law, such limitation provision of the statute is not called into consideration. We sustain the Commissioner in this issue.

The petitioner deducted as an indebtedness of the decedent $25,000. The indebtedness is proven to have arisen by reason of tlie fact that when the decedent sold the joint property for $50,000 he failed, and had up to the time of death failed, to account to the coowner for her share of the proceeds. The evidence is clear as to the facts upon which the claim is based. The Commissioner urges that the decedent paid certain amounts to his widow and thus wiped out the claim, but the facts as to such payments, both in point of time and character, are not sufficient to support the Commissioner’s contention in this respect.

As a matter of law the petitioner’s position is amply supported. Clearly the decedent had no legal right to retain the full sale price of the property held jointly by himself and another. The sale destroyed the joint tenancy and gave each a right in one-half the proceeds. In the absence of any evidence that this right had been voluntarily relinquished or otherwise destroyed, it was properly a claim against the estate when the decedent died. As such it was deductible from tlie gross estate. The respondent is on this issue reversed.

Judgment will be entered on W days’ notice, under Rule 50.


author: Steenhagen:

text:
    Tyler & Hippach, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 995.
    Promulgated March 28, 1927.
    1. Where the evidence discloses that at the time oí organization a corporation received a mixed aggregate of tangibles and intangibles in exchange for its capital stock, the stock may be apportioned ratably with the value of each such class, and under Si. Louis Screw Co., 2 B. T. A. 649, to include in invested capital so much of intangibles as does not exceed 25 per cent of the capital stock outstanding March 8, 1917, and all the tangibles so paid in. The remaining value of tangibles, but not the intangibles, may be included as paid-in surplus.
    2. Compensation to officers expressly contracted to be a percentage annually of annual net profits, definitely calculable and a fixed legal obligation related directly and solely to the business of the particular year, is deductible as an accrued expense for that year.

      J. 0. Halls, Esq., H. O. Hammam,, Esq., and W. F. Mehrlich, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This proceeding involves deficiencies of $123.94 and $1,789.69 for the years 1920 and 1921, and an overassessment of $1,303 for the year 1918. Several errors are alleged.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation with its principal office in Chicago. It is engaged in the jobbing of plate and window glass. It was organized in 1898 to take over the partnership business of Tyler & Hippach.
    The partnership was organized in 1886 by Albert S. Tyler and Louis A. Hippach with a capital of $10,000, $7,500 of which was borrowed and later repaid out of the profits of the business. By 1890 the net worth of the partnership had increased to $40,000. By 1898 the net worth of the partnership had increased to $289,671.86, not including any value for good will. This increase was brought about by the earnings of the partnership which were allowed to remain in the business. The balance sheets for the years from 1890 to 1898, except for 1894, for which no records are available, show the net worth of the partnership at the end of each of the following years to be as indicated:
    1889_$26,712.61 1890_ 40, 000. 00 1891_ 72, 040. 00 1892_ 100, 000.00 1893_ 140,045.01 1895_$164,726.82 1896_ 172, 045. 54 1897_ 153, 747. 35 1898_ 289, 671.80

      .The balance sheets for 1891 and 1897 contain data showing specifically the status of the partners’ individual accounts as of the close of the year before adding the profits for the year. In 1891 the total in both partners’ accounts before adding the profits was $37,223.55, and in 1897 it was $123,402.75. In 1898 a profit of $172,779.36 was realized.
    In 1898 there -were transferred to this petitioner all of the assets and liabilities of the partnership, the bill of sale specifically referring to good will as one of the assets transferred. $100,000 of the capital stock of the petitioner was issued to the partners and the excess of the value of the assets credited to the accounts of the wives of the partners and later to the partners themselves. This credit balance was still later made the basis for the issuance of additional capital stock.
    Good will has never appeared as an asset on the books of either the partnership or the corporation.
    The value of the good will acquired by the petitioner from the partnership was $33,333.33.
    On November 30, 1918, the petitioner entered into contracts with Clinton Norris and H. A. Herrmann, the petitioner’s treasurer and secretary, respectively, each of which provided:
    That Whereas, second party lias been in tlie Company’s employ for a number of years and has been elected Treasurer [in the case of H. A. Herrmann, “ Secretary ”] of the Company, and it is desired to make provision for his compensation, for all of his services as an officer and otherwise;
    Now, Therefore, in consideration of the premises and of the mutual covenants hereinafter set forth, the parties hereto agree as follows:
    First: Second party agrees to continue in the service of the Company, and the Company agrees to employ second party, for the term of five (5) years from January 1, 1018, last past. Second party shall be manager of his department as heretofore, and shall perform, substantially, the same duties as heretofore, in addition to being an officer of the Company, — all of his services, at all times, to be subject to the supervision and control of the Board of Directors of this Company.
    Second: Second party shall give his entire time and attention and his best efforts to the Company’s business and to the furtherance and success of the
    Third : For his services, so to be performed under this contract, the Company agrees to pay second party a salary of Five Thousand Dollars ($5,000.) per year, beginning January 1, 1918, in convenient monthly or weekly installments, and also to pay second party, annually, a sum equivalent to Three percent. (3%) of the annual net profits of the Company’s business, said net profits to be computed after each' fiscal year of the Company, as soon as income and other taxes can be estimated; the determination of the amount of the said profits, and the computation thereof, to rest solely and finally with the Board of Directors. Interest paid and depreciation shall be deducted in calculating profits. Income taxes, excess profit taxes and taxes of every other nature shall likewise be deducted as an expense of the business from profits of the year upon the income or profits of which such taxes are levied. In calculating such profits the board of directors shall estimate the amount of taxes payable for such year and the per centum payable to the second party shall be figured tentatively on such estimate; and all settlements shall be subject to subsequent adjustments if such estimate of taxes shall prove incorrect.
    The second party shall not have an interest in or to the profits of the business, but only to an amount equal to the per centum of the profits here-inbefore specified. The books of account of the Company shall be conclusively presumed to be correct in making an accounting to ascertain the profits, excepting as to specific items, the correctness of which shall be questioned upon specific grounds. Otherwise the books of the Company shall be equally binding upon both parties hereto.
    PouitTH: It is further agreed that any disability of second party incapacitating him from the performance of his duties hereunder for the period, continuously, of six (6) months, or for the period of six (6) months out of any period of twelve (12) months, shall, at the option of the Company, be cause for the cancellation of this contract by the Company; and the death, insanity or' permanent disability of second party shall also terminate this contract, and,, in case of such termination, second party shall be entitled only to such proportionate part of his salary as shall have been earned and of the net profits as: shall have been earned, and shall be payable hereunder, up to the time of such: termination.
    Should the stock of Albert S. Tyler or Louis A. Hippach be transferred or disposed of so that the actual ownership of the stock be changed, or should the corporation sell out its business, or its business cease, or such changes be made therein that its character shall be substantially different, then the Board of Directors shall have the right in its option to terminate this contract.
    From the date of the contracts to May 28,1924, there were credited to the drawing accounts of each of these officers, from time to time, varying amounts aggregating $42,000, and on May 28, 1924, a balance of $4,291.89 was paid to each after a final determination of the-amount due.
    The profits for 1918, 1919, 1920, and 1921 upon which the 3 percent payment was computed were as follows:
    1918_$140, 089.63
    1919_ 153,950.00
    1920 _ 444,970.86
    1921_ 201,462.76
    The books of the petitioner were kept on the accrual basis.
    The following is a tabulation showing the trucks acquired' by-petitioner prior to 1919, the dates of their acquisition, and the life of each:

    The probable average useful life of these trucks when acquired was ten years.
    The petitioner during the years involved owned six Ford coupes, which were used by its salesmen. The average useful life of these automobiles was three years and nine months.
    On June 29, 1920, the petitioner purchased a tract of land improved with a two-story brick building, contiguous to its warehouse. The price paid for this property was $125,000, of which $85,000 represented the cost of the land and $40,000 represented the cost of the building.
    In 1919 or 1920 the petitioner erected for use in its business a garage on property owned by it about one block and a half from its warehouse.
    Under date of August 21, 1924, the respondent sent to the petitioner a letter proposing the overassessment and deficiencies noted below, and granting thirty days within which to prepare a protest against his determination. The explanatory statement accompanying this letter was as follows:
    In re: Tyler & Hippach, 400 West Ohio St., Chicago, Ill.

    Net overassessment $967.51.
    The additional assessment of $6,454.06 for the year 1918 has been changed to an overassessment of $1,303.00 due to the fact that the Agent did not take into consideration the additional assessment of $7,757.06 made by this office.
    The overassessments shown herein will be made the subject of Certificates of Overassessment which will reach you in due course through the office of the Collector of Internal Revenue for your district and will be applied by that official in accordance with the provisions of Section 281 of the Revenue Act of 1924.
    Your claim for the abatement of $7,757.06 representing part of corporation income and profits taxes for the year 1918 has been examined.
    Inasmuch as the audit of your return indicates an overassessment of $1,303.00, your claim will be allowed for $1,303.00 and rejected for $6,454.06.
    Your claim for the refund of $210.40 representing part of corporation income and profits taxes for the year 1920 has been examined.
    Since the audit of your return for this year discloses an additional assessment of $123.94 your claim will be rejected for $210.40.
    On October 10, 1924, the respondent sent a notice to the petitioner of his determination of these deficiencies and overassessments. The petitioner appealed to this Board on December 9, 1924.
   OPINION.

Steenhagen:

Intangibles faid in for stools or shares. The respondent in computing the petitioner’s invested capital has excluded any value for intangible property paid in for stock or shares at the time of the incorporation in 1898. At that time, the evidence shows, there was a net worth of tangibles amounting to $289,671.86,. which was the accumulation of earnings from the beginning of the business. Some of this consisted of inventories. The books of the partnership took no account of good will or other intangible property. When the corporation was organized, capital stock of a par value of $100,000 was issued in exchange for all the property of the business, which, as shown by the bill of sale in evidence, consisted of good will and other intangibles as well as tangible property. The petitioner at the hearing and in its brief contended that at the time of incorporation there was in fact paid in for stock or shares good will of a value not less than $33,333.38. As evidence of this, petitioner introduced the balance sheets of the partnership and a statement of the annual earnings during the period of its existence. Using these figures as a base, it computes a good will mathematically by assuming a return on the value of tangibles and capitalizing the remaining earnings upon an assumed rate to arrive at the value of intangibles. There is no evidence to indicate what, during the period in question, was a proper rate of return upon tangibles, nor is there any evidence in support of any rate for the capitalization of intangibles. However, the petitioner’s rate of capitalization of intangibles is so high that it is beyond attack as to its fairness; and since, after all, the valuation of good will presents a problem that can not be solved with certainty or precision, we have, after a full consideration of such facts as are in evidence upon which the valuation can be predicated, found that the value of good will paid in to the corporation at the time of its organization is, as claimed by the petitioner, $33,333.33.

The petitioner next contends that it is entitled to the full statutory maximum value of $25,000 for such good will, since this represents 25 per cent of the capital stock outstanding on March 3, 1917. It also relies upon the Board’s decision in St. Louis Screw Co., 2 B. T. A. 649, in support of this contention. In this the petitioner is inconsistent. Under the St. Louis Screw Co. decision the petitioner is entitled to have the aggregate of its capital stock, viz, $100,000, apportioned to tangibles and intangibles ratably with the value of each class of properk/ paid in for such capital stock. By this method and in accordance Avitli our findings, it will be seen that $100,000 of capital stock was issued in exchange for an aggregate value of $323,005.19, consisting of $289,671.86 tangibles and $33,-333.33 intangibles. By the apportionment approved in the St. Louis Screw Co. case, supra, the $100,000 of capital stock was thus presumably issued for $10,319.75, value of intangibles, and $89,680.25., value of tangibles. Since the $10,319.75 of intangibles is less than 25 per cent of the capital stock outstanding on March 3, 1917, it may be included in its entirety. In addition to the tangibles thus regarded as paid in for stock or shares, there is, after deducting this from the total tangibles of $289,671.86 paid in at the time of organization, a remainder of $199,991.61, which may properly be included in invested capital as paid-in surplus. The net result of this will probably be merely to increase the petitioner’s invested capital by the amount of $10,319.75, intangibles paid in for stock or shares, and this is less than contemplated by the petitioner in presenting its case. But this is the result of the petitioner’s error in its construction of the method laid down in. the St. Louis Screw Co. appeal and its valuation of good will at $33,333.33, the evidence being inadequate to support a greater value other than by mere mathematics.

Contractual compensation- to officers. Under the contracts made in 1918 by the petitioner with Norris and Herrmann, the compensation to be paid to these individuals was expressly stated to be a percentage annually of the amount of annual net profits computed in a prescribed manner. The amount of such compensation was definitely calculable and was a fixed legal obligation. It was an obligation related directly and solely to the business of the particular year for which the compensation was contracted to be paid. It is a situation which in all essential respects is within the principles recognized by the Board in Josiah Wedgwood & Sons, Ltd., 3 B. T. A. 355; Block & Kohner Mercantile Co., 4 B. T. A. 673; and Canton Art Metal Co., 6 B. T. A. 446. In accordance with these decisions the petitioner may properly deduct as accrued expenses the amount resulting from the application of the contract percentage to the net profits of the year to which it is related.

Depredation of automobiles. The respondent has computed depreciation upon the petitioner’s trucks and passenger automobiles at 20 per cent. The petitioner claims 10 per cent on trucks and 27 peí-cent on passenger automobiles. The latter were Ford coupes used by its salesmen. The trucks were used in hauling plate glass and were therefore carefully driven. They were also kept in very good repair in the petitioner’s own shop. The evidence upon this question of fact establishes that the probable useful life of the trucks was ten years, and of the Ford coupes was three years and nine months, and we therefore hold that the proper rate of depreciation upon the trucks is 10 per cent, and upon the Ford coupes is 27 per cent. The decision on this point will affect both income and invested capital.

Basis for depredation of brick budding. The petitioner, on June 29, 1920, paid $125,000 for a lot on Ohio Street, upon which stood a two-story brick building. The respondent in computing depreciation of the building has used as a base the amount of $15,000 Avhich is treated as the amount of the purchase price properly allocable to the building. The petitioner’s evidence as to the proportionate cost of the building varies from $35,000 to $45,000, the lower figure being that of one of the officers of the corporation and the higher figure being that of the real estate dealer who negotiated the transaction. None of the evidence conclusively demonstrates any definite allocation, but from such evidence as the record contains we find the cost of the building to have been $40,000.

Depredation and obsolescence of garage. The respondent has allowed 2% per cent depreciation and obsolescence upon the garage built in 1919 or 1920. The petitioner claims a rate of 10 per cent and seeks to support this by testimony that the garage building is not suitable for the land by reason of the land’s rapid increase in value. The evidence, however, is too slight and conjectural. We sustain the Commissioner.

Jurisdiction as to 1918 determination. The evidence shows that an assessment for 1918 was made and that claim for abatement thereof was by determination of August 21, 1924, allowed in part and rejected in part. This brings the matter within section 283 (f), Revenue Act of 1926, and the Board has jurisdiction. Elizabeth W. Stranahan, 4 B. T. A. 1141.

Judgment will be entered on %0 days’ notice, under Rule 50.


author: KoenicR, Chairman:

text:
    Clifton City Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18491.
    Promulgated March 28, 1927.
    The taking of possession by the Bank Commissioner of the State of Missouri of a state bank therein for the purpose of liquidation on account of insolvency of the bank is such a receivership as will deprive the Board of jurisdiction of a proceeding brought before it subsequent to the said action of the Bank Commissioner. Section 282 (a) of the Revenue Act of 1926.

      Albert S. Lisenby, Esq., for the respondent.
    This proceeding came on for hearing on the motion of the respondent to dismiss on the ground that the petitioner is, and was at the time of filing its petition on July 13, 1926, in receivership, within the meaning of section 282 (a) of the Revenue Act of 1926.
    FINDINGS OF FACT.
    The petitioner is a banking corporation organized under the laws of the State of Missouri to do a general banking business. It was so organized and conducted such business for a number of years prior to the year 1922. Since May, 1926, it has been in the hands of the Bank Commissioner of the State of Missouri, going through the process of liquidation due to insolvency.
    The statutory notice of deficiency was mailed to the petitioner on May 14, 1926, advising it of a deficiency in income tax for the year 1922, in the amount of $123.77.
    The petitioner filed its petition with the Board on July 13, 1926.
   OPINION.

KoenicR, Chairman:

If the action of the Bank Commissioner of the State of Missouri in taking possession of the property and effects of the Clifton City Bank and the process thereafter of liquidating the same constitutes such a receivership proceeding as is contemplated by section 282 (a) of the Revenue Act of 1926, the Board is without jurisdiction to hear and determine this appeal. Plains Buying & Selling Association v. Commissioner, 5 B. T. A. 1147; section 282 (a)- of the Revenue Act of 1926. Accordingly, the only question for determination is whether the acts and procedure of the Bank Commissioner constitute such a proceeding within the meaning of that section.

The laws of Missouri of 1915, p. 102, sec. 11673, Rev. Stats. Mo., 1919, vol. Ill, pp. 3649 et seq., provide for a State Banking Department under the management and control of the Bank Commissioner; empower the latter to take possession of the business and property of a bank when the same shall be discovered to be insolvent; authorize a judicial proceeding, on application of the bank, in the district in which the principal office of the bank is located, within ten days of the taking of possession, to determine whether the Bank Commissioner may continue in possession; authorize the Bank Commissioner upon taking possession to liquidate the affairs of the bank, collect debts due it, conserve its assets and business, dispose of its property, compound its debts,- and compromise claims against it upon order of the circuit court. The Bank Commissioner is required to notify creditors to make proof of claims and may accept or reject the same, but must within thirty days after the acceptance or rejection of the same file a list of such claims in his office and file one copy in the office of the recorder of the county or city in which the principal office of the insolvent bank is located. A judgment recovered against the bank after the Bank Commissioner has taken possession does not operate as a lien. The Bank Commissioner is authorized to prosecute and defend any and all actions and legal proceedings in the name of the insolvent bank and to exec'ute, acknowledge and deliver any and all instruments necessary to effectuate the liquidation.

The liquidation sections of the banking acts of Missouri do not materially differ from those of the National Banking Act or from those of the banking acts of the other States. Sec. 5234 et seq., Rev. Stats., U. S.; sec. 9821 et seq., U. S. Comp. Stats.; Birdseye’s Cons. Laws of New York (2d ed.), vol. 1, pp. 509-526; General Acts of Alabama, 1911, pp. 60-67; Code of Alabama, 1923, sec. 6275 et seq.; Olson’s Oregon Laws, 1920, sec. 6223; Wise. Stats., 1913, sec. 2022; 1925, sec. 220.01 et seq.-, Vernon’s Sayles’ Tex. Civ. Stats., 1914, art. 523; Vernon’s Ann. Tex. Stats., 1925, art. 369 et seq.

It has been uniformly held that under such circumstances the Comptroller of the Currency or a bank commissioner is, and acts as, a statutory receiver. In re Bologh, 185 Fed. 825; In re Union Bank of Brooklyn, 161 N. Y. S. 29, 36; 204 N. Y. 313, 316; 97 N. E. 737; In re Bank of Cuba in New York, 191 N. Y. S. 88, Montgomery Bank & Trust Co. v. Walker, 181 Ala. 368; 61 So. 951; Bennett v. Green, 156 Ga. 572; 119 S. E. 620.

A law authorizing the Comptroller of the Currency or a superintendent of banks to take possession of the property and effects of an'insolvent, or unsafe bank is not unconstitutional as a legislative invasion of judicial power or as a violation of the due process clause. Bushnell v. Leland, 164 U. S. 684; In re Chetwood, 165 U. S. 443; Montgomery Bank & Trust Co. v. Walker, supra; State Savings & Commercial Bank v. Anderson, 165 Cal. 437; 132 Pac. 755; affd, 238 U. S. 611; Jeffries v. Brown, 90 Kans. 495; 135 Pac. 582.

It is the apparent intent of such statutes to throw the entire control of an insolvent bank into the hands of the designated official for the purpose of facilitating the winding up of its affairs and the payment of its obligations. Jackson v. United States, 20 Ct. Cls. 298; Bennett v. Green, supra.

Equity will enjoin any unauthorized interference with such statutory receiver’s possession of the assets of an insolvent bank. Bennett v. Green, supra. Property in his possession as such receiver is in custodia legis. Citizens’ Savings Bank v. Ingham, 98 Mich. 173; 57 N. W. 121. In Alabama the statutory receiver administering the insolvent estate is an agent or receiver of the court. Walker v. Mutual Alliance Trust Co., 196 Ala. 154; 71 So. 697, 698.

Under the provisions of the statutes of the United States and the various States, the property of an insolvent bank can not be sold, nor can its debts be compounded by such a receiver, except upon order of a court of competent jurisdiction, and a sale or compounding not so authorized, or contrary to the order authorizing it, is void. Schofield v. Baker, 212 Fed. 504; Tourtelot v. Booker (Tex. Civ. App., 1913), 160 S. W. 293, and cited cases. A sale by a receiver of a national bank, under order of the court, in accordance with the statutory provisions referred to, is a judicial sale. In re Third National Bank, 4 Fed. 775.

In Montgomery v. Chemical National Bank of New York, 209 Ala. 585; 96 So. 898, the court, in referring to the status of the statui ory receiver of insolvent banks in Alabama, stated:

The Banking Act (Acts 1911, p. 50, et seq.) indicates that, when the Superintendent takes charge of the affairs of an insolvent bank, he becomes a statutory assignee of its assets, a receiver with such powers and duties as are usually incident to receiverships * * *.

In Montgomery Bank & Trust Co. v. Walker, supra, the court, in speaking of the act of the statutory receiver in taking possession of the assets and effects of an insolvent bank, referred to it as a proceeding in these words:

Moreover, we do not understand the act as making this proceeding operate as a change in the ownership or legal title to the property, but the superintendent is in reality a receiver who takes charge of the bank for the benefit of the stockholders, depositors, and other creditors.

High on Receivers, 3d ed., sec. 39, is quoted with approval in the case of Jeffries v. Brown, supra, to the following effect:

It has been held that the appointment of a receiver is not necessarily a judicial act in all cases, in the sense that it must be made only by the courts. And the right of the Legislature of a state to enact a law, authorizing the Governor of the state to appoint a receiver of an insolvent banking corporation, is not a violation of the constitutional provision limiting each department of the government to its own particular sphere; the appointment of a receiver under such law being in no manner a decree or judgment affecting title to property, and not being a final determination of any rights, either legal or equitable.

It appears from the above review of the authorities that the provisions of the statutes, which provide that some administrative officer in a State whose powers and duties require him to take immediate and summary possession of the property of an insolvent bank, are intended to be substitutes for the method of instituting receiverships through chancery existing prior to the passage of such acts. Such statutes represent a legislative purpose to obviate delay and expense in administering the estates of insolvent banks. They are intended as a protection to depositors and creditors in general. Such receivership proceedings appear to be different from other receiverships only in the manner in which the receiver is appointed.

In this connection it is significant to note that section 282(a) of the Revenue Act of 1926 is a development of the amendment offered by the Finance Committee of the Senate to the Senate on January 16, 1926 (H. R. 1, Sen. Rep. No. 52, 69th Cong., 1st sess.). The amendment was in the following language:

If any proceeding for redetermination of such deficiency under tlie provisions of this Act is pending before the Board at the time of such adjudication of bankruptcy or appointment of a receiver and no decision of the Board, final or otherwise, has been rendered therein, then such proceeding shall be dismissed by the Board. (Italics ours.)

The embodiment of the amendment in the statute indicates that Congress had in mind only a state of receivership without reference to the manner in which that receivership had legally been instituted. Any legal receivership, subject to the supervision, control or direction of court, was the evident intent of Congress.

The statutory receivership proceeding having been pending in the case of this petitioner subsequent to the passage of the Revenue Act of 1926 and prior to the filing of its petition, no jurisdiction is conferred on the Board herein.

Motion granted. Proceeding dismissed.


author: ARUndell:

text:
    Orange & Domestic Laundry Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8554.
    Promulgated March 30, 1927.
    Petitioner in the conduct of its business occupied real estate owned by its sole stockholder. It neither paid nor offered proof of any obligation to pay rent to the owner of the land for the taxable year. Held,, petitioner is not entitled to a deduction for claimed rental value of the land occupied.

      John A. Bigelow, Esq., and E. B. Burt, O. P. A., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended March 31, 1919, in the amount of $2,301.03.
    FINDINGS OF FACT.
    Petitioner was incorporated under the laws of the State of New Jersey on July 21, 1914, and during the taxable year was engaged in the business of operating a laundry.
    In April, 1912, Sarah E. Gill inherited from her husband a laundry business in Orange, N. J., and the real estate in which the business was conducted. She continued to carry on the business as an individual until July 2Í, 1914, when she transferred it to the petitioner corporation, which had been organized for the purpose of taking over the going business. She became and continued to be the sole stockholder of that company. In 1920 the corporation was dissolved and Mrs. Gill again became the owner of the laundry business and since that time has carried it on as an individual.
    Throughout the whole life of the corporation Mrs. Gill remained the owner of the real estate which was occupied by the corporation in the carrying on of its business. No formal lease or rental agreement was made by Mrs. Gill with the petitioner with reference to the occupancy of the real estate, nor was any agreement made between the parties as to the payment of any rent for the occupancy of the building or that the petitioner should have the use of the real estate without the payment of rent. The books of the corporation disclose that under date of June 2, 1916, Mrs. Gill was credited with $750 for rent and immediately thereafter she received $250 a month for seven or eight months. No rent was paid to her subsequent to that time. During the taxable year no rent was paid by the corporation, no item of rent was entered on the books of the corporation, nor was any rent paid subsequently covering the taxable year ended March 31, 1919.
    During the taxable year petitioner paid insurance on the building amounting to $312.55 and taxes amounting to $390.06, which sums were charged to Mrs. Gill’s account on the books of the corporation.
   OPINION.

ARUndell:

Petitioner urges that it be permitted to deduct as an ordinary and necessary expense the sum of $3,000, representing what it contends to be the reasonable rental value of the real estate occupied by it and owned by its sole stockholder. The only evidence of the rental value of the premises offered was the amount paid to Mrs. Gill for a few months in an earlier year. During the taxable year petitioner neither paid nor entered on its books an amount evidencing that it owed rent, and in fact it never did at a later date pay any amount to its sole stockholder for the use of the real estate occupied by it. Section 234(a) (1) of the Revenue Act of .1918 provides that in computing the net income of a corporation there shall be allowed as a deduction “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * including rentals or other payments required to be made as a condition to the continued use or possession of the property * * The amount sought to be deducted in the instant case as rental for the buildings occupied by petitioner was not paid nor was there any obligation incurred to pay $3,000 to Mrs. Gill during the taxable year.

Judgment will be entered for the respondent.


author: Tkussei.l :

text:
    Martha B. Phelps, Executrix, Last Will and Testament of William L. Phelps, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4803.
    Promulgated March 30, 1927.
    Gross Estate, Inclusion or Proceeds or Insurance Policies.— Tlie proceeds of insurance polices in which a beneficiary other than the insured or his estate has been named prior to the effective date of the Revenue Act of 1921 and not again changed, should not be included in the valuation of the gross estate of the insured.

      R. A. G'dlagher, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
    This action is for the redetermination of a deficiency in estate taxes under the Revenue Act of 1921, asserted by the respondent in a letter dated April 15, 1925, in the amount of $810.30.
    findings of fact.
    William L. Phelps died on June 30, 1923. The petitioner, Martha B. Phelps, was duly appointed and qualified as executrix of the estate of the deceased.
    Prior to his death the deceased had procured four life insurance policies, aggregating $100,000, the dates of issue and the facts concerning which are as follows:
    The Mutual Benefit Life Insurance Company, Newark, New Jersey, Policy No. 820,913 for $50,000.00. The policy was issued under date of October 31, 1917, and was made payable to Martha B. Phelps, wife, if living, otherwise to decedent’s estate.
    On December 29, 1920, the beneficiary was changed to William L. Phelps, the decedent. On the same day (December 29, 1920) William L. Phelps borrowed money from the insurance company on the policy. On December 30, 1920, William L. Phelps renamed his wife, Martha B. Phelps, as beneficiary, if living, and if dead, to his estate.
    The State Mutual Life Assurance Company of Worcester, Massachusetts, Policy No. 110,708 Ex. for $16,000.00. The Policy was issued under date of October 4, 1909, and was made payable to Martha B. Phelps, wife. On December 23, 1920, the insured changed the beneficiary to his estate, borrowed money from the company on the policy and then renominated his wife, Martha B. Phelps, irrevocably (all on the same day).
    The State Mutual Life Assurance Company of Worcester, Massachusetts, Policy No. 140,203 for $20,000.00. The policy was issued under date of July 1, 1914, and was made payable to the insured’s estate. Under date of August 21, 1922, the insured changed the beneficiary to Martha B. Phelps, his wife, revocably.
    The State Mutual Life Assurance Company of Worcester, Massachusetts, Policy No. 169,207 for $15,000.00. The policy was issued under date of October 4, 1916, and was payable to the insured’s estate. Under date of August 21, 1922, the insured changed the beneficiary to Martha B. Phelps, his wife, revocably.
    On June 21, 1924, the petitioner prepared and filed with the collector of the district within which the deceased had resided, a return for Federal estate tax, with which return she furnished information respecting the above-mentioned policy contracts and claimed that all the proceeds thereof were exempt from estate taxes, and protested against the inclusion of any part of such proceeds in the value of the gross estate of the deceased. The respondent disregarded the petitioner’s protest with respect to the proceeds of insurance policies, added $60,000 thereof to the amount of the gross estate reported, and assessed a tax on the return as so amended in the amount of $11,368.58, which amount petitioner has paid.
    Following a further audit of said return the respondent on April 15, 1925, determined that there was a further deficiency in tax in respect to said return in the amount of $810.30, whereupon the petitioner instituted this proceeding and now contends that there is not only no deficiency but that there is an overpayment in the amount of the difference between the sum of $2,400, added to the tax shown on the original return and heretofore paid, and the amount of $810.30.
   OPINION.

Tkussei.l :

The deceased herein named, having died on June 30, 1923, all questions respecting Federal taxes upon the passing of this estate are governed and controlled by the provisions of the Revenue Act of 1921.

Respecting the two policy contracts numbered 820,913 for the amount of $50,000, and 110,708 Ex. for the amount of $15,000, it is noted that each of these policy contracts was procured by the deceased prior to the effective date of the Revenue Act of 1918, and when procured the proceeds thereof were made payable to Martha B. Phelps, if living.

If, in respect to these two policies, no change of beneficiary or other action had been taken by the insured prior to his death, the matter of the inclusion of any part of the proceeds thereof in the estate of the deceased would be governed and controlled by the rule laid down by the United States Supreme Court in the case of Lewellyn v. Frick, 268 U. S. 238, and there would then be no question raised here as to the exclusion of the proceeds of those two policies from the gross estate. However, in December, 1920, the insured, finding it necessary to borrow funds upon the security of these two policies, did on December 29, 1920, cause the beneficiary in policy 820,913 to be changed, so that he could use it as a basis for borrowing money thereon, and, having effected a loan, again on December 30, 1920, renamed his wife, Martha B. Phelps, the beneficiary of said policy. For the same reasons on December 23, 1920, the insured caused the beneficiary in policy 110,708 Ex. to be changed, and, having effected a loan thereon, again on the same day renamed his wife, Martha B. Phelps, as the beneficiary therein. This action of the insured was taken at a time when the Revenue Act of 1918 was in force and effect, and the respondent argues that this last action of the insured removes these two policies and the proceeds thereof from the rule laid down by the Supreme Court in the case of Lewellyn v. Frick, supra.

In the Appeal of Charles L. Harris, 5 B. T. A. 41, the Board had under consideration a case in which the deceased had on March 15, 1912, procured a policy of insurance in the amount of $50,000, payable to his estate, but on September 30, 1920, had caused the beneficiary of said policy to be changed, and his wife, Elizabeth E. Harris, named as such beneficiary. The insured, William L. Harris, died on September 11, 1923.

Section 402 (f) of the Revenue Acts of 1918 and 1921, having been in all respects identical as to language, the Commissioner claimed that the amoiint of the last above-mentioned policy should be included in the valuation of the gross estate of the said decedent, William L. Harris. In that case the Board held that, in view of the fact that the Revenue Act of 1918 was expressly repealed by the Revenue Act of 1921, any rights which the Government might have had by virtue of section 402 (f) of the Revenue Act of 1918 ceased to exist when the repealing section of the Revenue Act of 1921 became effective, and that, inasmuch as the beneficiary in said policy had been named prior to the effective date of the Revenue Act of 1921, the rule laid down by the Supreme Court in the case of Lewellyn v. Frick, supra, must be regarded as controlling in that case.

There is no substantial difference between the facts in the case of Charles L. Harris, supra, and the case at bar. We are, therefore, of the opinion that the proceeds of the said policies numbered 820,913 and 110,708 Ex., aggregating $65,000, should not be included in the valuation of the gross estate here under consideration.

The proceeds of the other two policies in the case at bar, being less than $40,000, are automatically excluded from the gross estate by the exemption contained in section 402 (f) of the Revenue Act of 1921.

The amount of the deficiency, or overpayment, as the case may he, will he redetermined in accordance %oith the foregoing opinion, pursuant to Rule 50, and judgment entered upon 15 days' notice.


author: Smith:

text:
    E. S. Briant, Administrator, Estate of J. D. Sugg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8860.
    Promulgated March 30, 1927.
    Amounts paid by an individual for legal services in the collection of a debt arising out of an ordinary business transaction are deductible from gross income in income-tax returns as ordinary and necessary exxJenses in computing net income under the Revenue Act of 1918.

      Edmivnd B. Quiggle, Esg., and A. S. Walker, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $41,034.30, only a portion of which is in controversy. The petitioner excepts to the disallowance by the respondent of a deduction from gross income of $32,848, paid by J. D. Sugg in 1919 as attorneys’ fees.
    FINDINGS OP FACT.
    J. 33. Sugg’s business during the calendar year 1919, and for many years prior thereto, consisted of various enterprises, such as ranching, banking, lending money, dealing in real properties and investments.
    About 1904 he made some cash advances to the Belton Oil Mill, a corporation of Belton, Tex., of which N. K. Smith was president and active manager. Additional advances were made from time to time, some of the money being used for financing the operations of the Belton Oil Mill and some for the construction of new oil mill plants at Bartlett and Granger, located nearby. The Bartlett and Granger plants were built about 1906 and were incorporated separately.
    On July 18, 1911, the combined indebtedness of the three corporations to Sugg for said advances was $227,131, and on the said date they executed general warranty deeds transferring their entire properties to him, the consideration stated in these deeds being the cancellation of such indebtedness. On July 14,1911, the three corporations were dissolved. On July 17,1911, Sugg executed deeds conveying the identical property to the Mid-Tex Oil Mills, of Belton, Tex., a new corporation chartered under the laws of Texas on June 15, 1911, with a capital stock of $250,000, the consideration stated in these deeds being the execution by the new corporation of two vendors’ lien notes payable to Sugg, one for $100,000 and the other for $127,131, both dated July 17, 1911, and bearing 8 per cent interest, payable quarterly. At the same time the corporation, to further secure the two notes, executed a deed of trust to C. C. Kirkpatrick, trustee, wherein an additional lien was given to Sugg on the same property and any other property which the Mid-Tex Oil Mills might acquire. The president of the corporation, N. K. Smith, also at the same time gave Sugg a deed of trust on a business house at Temple, Tex., and 400 acres of land in Williamson County, Tex., which was his individual property.
    On January 26, 1914, an agreement was placed on record in Bell County Avhich shows that the two notes, aggregating $227,131, had been reduced to $181,000, which were renewed and extended as follows:
    Note No. 1, due June 15, 3014- $2, 000
    Note No. 2, due Oct. 15, 1914_ 25, 000
    Note No. 3, due Jan. 15, 1915_ 2,000
    Note No. 4, due June 15, 1915_ 2, 000
    Note No. 5, due Oct. 15, 1915_ 25, 000
    Note No. 6, due Oct. 15, 1910_ 25, 000
    Note No. 7, due Oct. 15, 1917_ 25, 000
    Note No. 8, due Oct. 15, 1918_ 75, 000
    Total-181, 000

      On September 20, 1914, Sugg advanced to the corporation an additional $10,000, this loan being secured by the personal endorsement of A. W. Storrs, president of the First National Bank of Granger and a shareholder in the Mid-Tex Oil Mills, which made a total due Sugg of $191,000.
    In the latter part of 1914 or the early part of 1915, the. Mid-Tex Oil Mills brought suit against J. 1). Sugg, claiming that a usurious rate of interest had been charged them and asking for a cancellation of the said indebtedness. This suit was brought in the District Court of Bell County, and Sugg filed a cross-bill for the purpose of collecting the said indebtedness and asking for a foreclosure of the mortgages securing the same. This suit resulted in a decree being entered by the said District Court on February 21, 1916, canceling the notes given by the Mid-Tex Oil Mills and N. K. Smith to J. D. Sugg and also canceling the liens on the properties of the said company and N. K. Smith. Judgment was further entered in favor of N. Iv. Smith and against J. D. Sugg in the sum of $10,927.88, with interest until paid.
    Sugg immediately appealed from said judgment to the Court of Civil Appeals of the State of Texas and the said court sustained a motion to reverse the District Court and to enter tinal judgment in favor of J. D. Sugg. It was further decreed by the said Court of Civil Appeals on the cross-bill filed by J. D. Sugg that the Mid-Tex Oil Mills and N. K. Smith were indebted to J. D. Sugg in the amount of $277,300, and that the said indebtedness was secured by a lien upon the properties of the said company and N. K. Smith. The foreclosure of said lien and sale of the properties mentioned to satisfy the judgment were ordered by the court, the property of the Mid-Tex Oil Mills to be exhausted before the sale of any property belonging to N. K. Smith. Should said property not sell for sufficient to satisfy this judgment, it was directed that J. D. Sugg have execution against the company and N. K. Smith for the balance remaining unpaid. This judgment was certified to the court below for observance.
    A writ of error from the Supreme Court of Texas was refused, and in carrying out the mandate of the Court of Civil Appeals, the clerk of the District Court ordered the sheriffs of Williamson and Bell Counties to proceed with the sale of the properties in question in satisfaction of the judgment. The properties were levied upon, advertised for sale at the county court house and in the local papers according to law, and were finally sold by public sale to J. D. Sugg, he being the highest bidder. The property to be sold was situated in both Williamson and Bell Counties. It was arranged that the sale be conducted in both counties at the same time, J. D. Sugg and one of his attorneys, Lud Williams, attending the sale in Williamson County, and N. B. Williams, a law partner of Lud Williams, attending the sale in Bell County. J. D. Sugg instructed his attorneys prior to the sale that, if anyone should bid a sum sufficient to pay the debt and satisfy the judgment, he did not wish to purchase the property. In consultation prior to the sale it was agreed that a maximum amount should be fixed as the bid that would be made on each piece of property and, in the event anyone should bid higher than this amount, they would allow said bidder to buy it.
    The execution docket of the District Court of Bell County shows that sales of the corporation’s property under execution of this judgment began on June 3, 1919, and continued until 1922. The total amount received from these sales was $115,555, which amount was applied against the judgments theretofore referred to in favor of J. D. Sugg for $277,300. The balance of the judgment still remains unpaid.
    During the calendar year 1919, J. D. Sugg paid attorneys’ fees totaling $32,848. Twenty-eight thousand seven hundred and ninety-eight dollars of this amount was paid to the law firm of Williams <6 Williams, of Waco, Tex., in payment for their services rendered in connection with the prosecution of the suit above referred to before the Court of Civil Appeals of the State of Texas. All of the attorneys’ fees in question were paid in connection with the suit instituted against J. D. Sugg by the Mid-Tex Oil Mills or for services rendered in connection with the suit brought by him in the nature of a cross-bill to the suit brought by the corporation. The cross-bill which he instituted was for the purpose of collecting the amount owed to him by the Mid-Tex Oil Mills and N. K. Smith, and all of the attorneys’ fees paid by him in 1919 aforesaid were for legal services rendered in connection with efforts to collect the said debt.
   OPINION.

Smith:

The respondent has disallowed the deduction from gross income in J. D. Sugg’s return for 1919 of $32,848 for attorneys’ fees, upon the ground that they were not ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, and cites in support of his action Laemmle v. Eisner, 275 Fed. 504; Appeal of Consolidated Mutual Oil Co., 2 B. T. A. 1067; Appeal of Gilbert Butler, 4 B. T. A. 756; Appeal of Lincoln L. McCandless, 5 B. T. A. 1114; and Kornhauser v. United States, 62 Ct. Cls. 647.

We have carefully considered these decisions but are of the opinion that they are nofe strictly in point. In the case at bar, J. D. Sugg paid attorneys’ fees in 1919 in connection with the collection of a debt which arose out of an ordinary business transaction. We think that it is immaterial that he bought in at a foreclosure sale the property which had been mortgaged to him as security for the debt. He did not desire to purchase the property and gave specific instructions to his attorneys not to bid it in, if the property sold at a price in excess of his indebtedness. We think that the amount paid as attorneys’ fees in 1919 was a legal deduction from gross income under section 214(a) (1) of the Revenue Act of 1918.

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


author: Aeundull :

text:
    Dexter Folder Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7824.
    Promulgated March 30, 1927.
    1. Commissioner’s reduction of invested capital on account of expired patents approved.
    2. Good will which petitioner claims attached to patents and remained with their owner even, after the expiration of the patents may not- be included in invested capital.

      F. M. Goodwm, Esq., for the petitioner.

      Jolm D. Foley, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1919 in the amount of $8,447.20. Two errors were alleged in the petition but at the hearing the allegation as to depreciation of patents was abandoned, leaving in issue only the question whether error was committed by the respondent in excluding from invested capital the amount of $77,318.64, claimed to represent the cost of expired patents. The case was submitted on the pleadings.
    FINDINGS OF FACT.
    The petitioner is a Hew York corporation with its principal office in Hew York City.
    In determining the deficiency in tax for 1919 the Commissioner deducted several items from invested capital reported, including one in the amount of $77,318.64 designated in the computation of tax as “ patents expired.”
   OPINION.

Aeundull :

A patent “ is, of necessity, a wasting asset.” Appeal of Union Metal Manufacturing Co., 1 B. T. A. 395, 398. In the Appeal of Northeastern Oil & Gas Co., 5 B. T. A. 332, we held-that invested capital for the taxable year should be reduced on account of exhaustion of franchises, which, under section 32G of the Revenue Act of 1918, are in the same category as patents. We said there in part, that—

By the very nature of these franchises, they are invariably subject to exhaustion because the life thereof is of limited duration. Unlike exhaustion in the case of such items as machinery and equipment, which may be arrested through betterments and replacements, exhaustion in the case of franchises is definite and certain and can not be stayed. The passing of each year means the franchises have one year less of life to run and marks a proportionate loss of the capital invested in them.

The exhaustion of assets is reflected in earned surplus and must be reckoned with before the correct amount of earned surplus to be included in invested capital can be determined. Appeal of Alexandria Paper Co., 3 B. T. A. 239. In the Appeal of Winsor & Jerauld Mfg. Co., 2 B. T. A. 22, we approved the action of the Commissioner in refusing to allow the restoration to invested capital of the cost of patents which had expired and had been written off the taxpayer’s books prior to the taxable year involved.

It was urged in argument in this appeal that a certain good will grew up by virtue of the ownership of the patents and remained with their owner even after their expiration. Even if this contention be correct, such good will may not be included in invested capital. See Providence Mill Supply Co., 2 B. T. A. 791.

Judgment will be entered after 15 days’ notice, under Rule 50.


author: Aeundell:

text:
    J. R. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7439.
    Promulgated March 30, 1927.
    1. On the evidence, held that transfers of stock on December 31, 1920, were not Vova fide sales and will not support a claim for loss on account of sales of stock.
    2. Evidence held insufficient to prove worthlessness of a debt secured by corporate stock.
    3. Evidence held insufficient to establish worthlessness of corporate stock.

      J. G. Peacock, Esq., for the petitioner. •

      J. E. Marshall, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1920 in the amount of $3,246.03. The deficiency arises from the disallowance by the Commissioner of deductions claimed as losses and a deduction claimed as a bad debt.
    FINDINGS OF FACT.
    The petitioner is an individual having his principal place of business at Charleston, S. C. During the fiscal year July 1, 1919, to June 30, 1920, he was a member of a partnership engaged in buying and selling cotton. His distributive share of the partnership profits for that period amounted to $79,162.20, represented by cotton on hand at the close of the fiscal year. This amount the petitioner reported as income in his return for the calendar year 1920. On July 1, 1920, the business was incorporated under the name of J. R. Young & Co., Inc., in which the petitioner received stock for his share of the partnership profits. He received no cash for his share of the profits of the partnership. He invested additional funds in the corporation for which stock was issued to him, making his holdings 936 shares in 1920, of a total capitalization of 1,250 shares.
    The greater part of the assets of the partnership turned in for stock of the corporation consisted of extra-staple cotton, which at that time sold for $1 to $1.25 per pound. By the end of the year the price for that grade of cotton had dropped to about 20 cents per pound, which resulted in greatly decreasing the value of the capital stock of the Young corporation, which the taxpayer owned.
    On December 31, 1920, the petitioner transferred to the persons listed the following corporate stocks:

    The amount of $85,220 was claimed by the petitioner as a loss in his income-tax return for the year 1920.
    In each of the above transactions the petitioner delivered endorsed stock certificates to the transferee and received in exchange the transferee’s check in the amount listed. The stock was not transferred on the books of the several corporations.
    The petitioner and W. T. Smith were the sole stockholders in W. T. Smith Cotton Co. in 1920, the petitioner owning a controlling interest. On delivery of the J. R. Young & Co. stock to him on Friday, December 31, 1920, Smith gave to the petitioner his check dated the same date in the amount of $23,400. Smith’s bank balance on that date was about $500. On the next succeeding business day, Monday, January 3, 1921, the petitioner deposited Smith’s check, which was endorsed on the following day, January 4, 1921, by the petitioner’s bank, the Bank of Charleston, for collection through the Charleston Clearing House. On the same day as the deposit of the check, January 3, 1921, Smith transferred the stock back to the petitioner at the same price at which he had taken it over.
    In each of the other transactions listed above the transferee gave the petitioner a check dated December 31, 1920, which the petitioner deposited on January 3,1921. In each case the stock was transferred back to the petitioner within from 30 to 60 days after the end of the year 1920 at the same price at which the petitioner had transferred it. All of the transferees listed above were business acquaintances of the petitioner.
    The above-listed transfers of stock were made for the purpose of permitting the petitioner to offset against his profits for the first six months of the year 1920 the shrinkage in the value of his stock in J. R. Young & Co., Inc., which occurred in the last half of the year. The commissioner disallowed the deduction of $85,220 claimed as a loss on the sale of stock by the petitioner.
    In 1920, J. O. Freeman was indebted to the petitioner in the sum of $9,100, for xvhich the petitioner held Freeman’s note and as collateral security, about 1,200 shares of stock of the J. O. Freeman Co. The company lost money in 1920 and was liquidated about 1922. Freeman did not pay the debt in 1920. The petitioner requested payment but made no effort to enforce collection, being of the opinion that any such action would be useless, as Freeman had no property. The Commissioner disallowed the deduction of the Freeman indebtedness claimed by the petitioner in his return for 1920.
    In 1920, the J. R. Young corporation, of which the petitioner was president, purchased stock to the amount of $5,000 in a corporation operating a warehouse in Atlanta. The stock was issued in the name of J. R. Young & Co., Inc., and charged as an expense on its books. Within 30 days thereafter the petitioner found that the warehouse company was in financial difficulties and before the close of the year he caused the amount which had been paid for the stock to be charged to his personal account. The warehouse company at that time had receipts outstanding for more cotton than it had in storage. It subsequently went into the hands of a receivers’ committee and the stock became worthless in the year 1920.
    The amount of $5,000 was claimed as a loss by the petitioner in his return for 1920 and was disallowed by the Commissioner.
   OPINION.

Aeundell:

The transactions through which the petitioner claims to have sustained deductible losses on sales of stock do not bear the marks of bona fide sales. The transfers were made to persons who appear to be. as said in Appeal of Harold B. Clark, 2 B. T. A. 555, “ accommodation ” purchasers rather than bona fide purchasers. The evidence in this case does not satisfy us that the petitioner parted with the stock “for the purpose of absolutely getting rid of the stock ’* nor that any of the transferees obtained it “ for the purpose of absolutely acquiring it as his own.” Appeal of Clark, supra.

Nor does the evidence in this case establish that the petitioner had ascertained that the Freeman debt of $9,700 was worthless in 1920. While there is some evidence that the stock of the Freeman Company held as security for Freeman’s note had depreciated in value during the year, it does not show that the stock was worthless. In fact, there is an obvious inconsistency in the claims of the petitioner in that, with respect to this item, he says that the stock was worthless, while with respect to the transfers of stock made on December 31, 1920, he claims to have made, a bona fide sale of a block of the Freeman Company stock at a price of $1,230.

The amount of $5,000 which the Young corporation paid for stock in an Atlanta warehouse company, was charged to- the petitioner’s personal account on the books of the corporation when it was discovered in 1920 that the stock was worthless. There is .nothing in the record to show that the petitioner reimbursed the corporation for this item either through funds on deposit which were reduced by the charge or by actual payment. A mere charge of the item to him does not establish a loss in the taxable year and is not sufficient to support the petitioner’s claim for a deduction ol the amount.

Judgment will be entered for the respondent.


text:
    A. B. Ice, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9597.
    Promulgated March 30, 1927.
    The disallowance by the Commissioner of the deduction of a part of the amount claimed on the taxpayer’s income-tax return affirmed for lack of evidence.

      Charles H. Garnett, Esq., and E. B. Willson, O. P. A., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 of $1,218.45. The petitioner alleges error on the part of the respondent in the denial of the deduction of a reasonable amount for depreciation of the property owned by the petitioner and used in his business.
    RINDINGS OR RACT.
    Prior to 1920 ihe petitioner acquired a quarter interest in a certain Oklahoma oil lease and a half interest in a compression plant for the extraction of gasoline from casinghead gas, which was operated by the partnership of Robinson & Ice, Tulsa, Okla. Additions to the plant were made from 1919 to 1922, as shown below. No partnership return ivas made for the years 1918 and 1919. The operations of the gasoline plant were accounted for in the returns of Robinson, and in the determination of his tax liability the respondent allowed deductions for depreciation of the gasoline plant of $11,707.01 for 1918 and $15,400.41 for 1919. At that time it was believed that the gasoline plant had a life in use of approximately five years, and it was contemplated that the cost of the plant should be charged off as depreciation over the five-year period. The salvage value was estimated to be 10 per cent. The cost of the plant is shown by the following:
    1918-$57,340.44
    1919- 1,013.05
    1920- 5,107.08
    1921- 1,00G. 49
    1922_ 360.67
    Total- 64,827. 73
    During the year 1923 one engine was sold for $1,150 and in 1926 the entire plant was sold for $7,500.
    The schedule of actual production of the plant from the date it began operations until the date of sale ivas as follows:
    Total gallons
    Rear. produced.
    1918 (6 months)- 54,061
    1919- 252,459
    1920- 173,194
    1921- 134,977
    1922- 103, 567
    1923- 102, 350
    1924- 48, 910
    1925- 21,099
    Total- 890, 617
    In his income-tax return for 1924 the petitioner deducted from gross income $3,280.41 for depreciation on the gasoline plant. This was disallowed by the respondent in the amount of $1,308.80 and allowed in the amount of $1,971.61.

      The gasoline plant ivas operated at a considerable profit during the years 1918 and 1919, and at a profit of $637.18 for 1920. It was operated at a loss during the years 1921, 1923, 1921, and 1925.
   OPINION.

Smith:

It is the claim of the petitioner that the reasonable depreciation allowance upon the gasoline plant for the year 1920 was $12,113.38 computed on units of gasoline produced. We have not before us the return of the partnership or the return of the petitioner for any year. The petitioner claims the right to deduct from gross income one-half of the total depreciation suffered by the plant. The record does not disclose whether the partnership claimed or was allowed any depreciation upon the plant. The conditions under which the plant was operated by the partnership are not in evidence. Depreciation upon partnership assets is deductible from gross income in partnership returns. Section 218 of the Revenue Act of 1918. The books of the partnership and of the petitioner for 1920 were audited by the respondent and a partnership return was compiled and the petitioner’s return was amended based apparently upon the partnership return and upon certain adjustments made in the individual return. For lack of evidence upon this point the determination of the respondent with respect to the deficiency must be and is sustained.

Judgment will he entered for the respondent.


author: ARDNdbdl:

text:
    Oak Grove & Georgetown Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19023.
    Promulgated March 30, 1927.
    In determining whether the net income for 1923 is in excess of §25,000 and the credit of §2,000 provided for by section 236(b) of the Revenue Act of 1921 is to be allowed, the net loss provided for by section 204(b) may not be deducted.

      George E. H. Goodmer, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $250. The only question involved is whether for the purpose of the application of the statutory credit of $2.000 provided for in section 236 (b) of the Revenue Act of 1921 the net income for the taxable year should be determined by deducting the net loss for the previous year.

      BINDINGS OB BACT.
    The petitioner is an Alabama corporation engaged in the transportation of freight.
    The net income of the petitioner for the year 1923, before allowance for any loss under the provisions of section 204 of the Revenue Act of 1921, amounts to $44,512. The net loss for the year 1922 computed under section 204 of the Revenue Act of 1921 amounts to $31,920.01. The income subject to tax and on which the deficiency here involved was computed for the year 1923, after applying the net loss for the year 1922, amounts to $12,591.99.
    In computing the deficiency the respondent denied the petitioner the right to the specific credit of $2,000 provided for under section 236 (b) of the Revenue Act of 1921, on the ground that the net income of the petitioner for the year 1923 was in excess of $25,000.
   OPINION.

ARDNdbdl:

The question involved in this case has heretofore been decided adversely to the contentions of the petitioner in Appeals of American Varnish Co., 2 B. T. A. 201, and S. W. Bridges & Co., 4 B. T. A. 150, and Chicago Nut Co. v. Commissioner, 5 B. T. A. 614.

Judgment will be entered for the respondent.