text:
    Appeal of JULIA N. De FOREST.
    Docket No. 5857.
    Decided September 25, 1926.
    On June 21, 1920, the petitioner and others, being the owners of an undivided interest in a patent and licenses issued thereunder, transferred their interests in said patent and licenses to a trustee, in trust, for the purpose of enforcing all rights under the patent and collecting the royalties under the licenses then existing or which might thereafter be made, paying the necessary charges and expenses, and turning over the net moneys received by him to the grantors in proportion to their respective shares, semi-annually or oftener in his discretion, during the remaining life of the patent and licenses of four years and twelve days. Held, that in the circumstances of this proceeding petitioner was entitled to a deduction for 1920 and 1921 for the exhaustion of her interest in the patent.

      Robert Thorne, Esq., and J. S. T. Ivins, Esq., for the petitioner.

      Percy S. Crewe, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax for the calendar years 1920 and 1921, in the amounts of $3,916.63 and $5,032.31, respectively, arising from the refusal of the Commissioner to allow a deduction for exhaustion of a certain fractional interest in a patent, such deduction being a certain proportion of the royalties on such patent received and paid over by a trustee to the petitioner, which she claims represented a return of capital.
    FINDINGS OF FACT.
    The petitioner is a resident of New York City. On June 7, 1920, her husband transferred to her as an absolute gift, 333 shares of the common stock of the Vacuum Cleaner Company of New York, which company was at that time in process of liquidation pursuant to action taken on June 2, 1920, at which time there were 4,491 shares of common stock outstanding and no preferred stock. The assets in the hands of the directors of the corporation, as trustees in dissolution, consisted principally of a patent (No. 847,947, granted March 19, 1907) on vacuum cleaners and certain other patents on improvements thereto, and license agreements, whereby the Vacuum Cleaner Co. had licensed different manufacturers to make vacuum cleaners under its patent. The license agreement provided for the payment of royalties during the life of the principal patent.
    The license agreements provided for rebates to the licensees when royalties received by the licensor for a given year should exceed a stated sum. Allowing for rebates made under this provision, the net royalties received by the corporation for the calendar years 1916, 1917, 1918, and 1919, were as follows:
    Period covered: Amount
    Year ended December 31, 1910-$94, 692. 89
    Year ended December 31, 1917-1— 136,481.78
    Year ended December 31, 1918- 139, 060.84
    Year ended December 31, 1919_ 331,208.74
    These royalties were paid quarterly. The net royalties for the four quarters last completed before the dissolution of the corporation, that is, from April 1,1919, to March 31, 1920, were $113,239.27. At the time of dissolution of the corporation, the patent had until March 19, 1924, to run, and the owners thereof were entitled to receive under the license agreements royalty payments for four full years less only the last twelve days of March, 1924.
    On June 21,1920, the patents and license agreements were assigned, in dissolution of the corporation to the stockholders, including the petitioner, in undivided shares.
    On June 21, 1920, the stockholders transferred their undivided interests in the patents and license agreements to Frank H. Jones, in trust, for the purpose of enforcing all rights under the patents and collecting the royalties under the license agreements then existing or which might thereafter be made, paying the necessary charges and expenses, and turning over the net moneys received by him to the grantors in proportion to their respective shares, semi-annually or oftener in his discretion.
    Acting under such authority, the trustee received net royalties as follows:
    Period covered: Amount
    June 21, 1920, to December 31, 1920_ $358, 086. 46
    Year ended December 31, 1921_ 410,206.23
    Year ended December 31, 1922_ 445, 520. 02
    Year ended December 31, 1923_ 539,282.99
    Prom January 1, 1924, to March 19, 1924_ 245, 053.78
    1, 998,149.48
    After deducting expenses, the trustee distributed the royalties periodically among the persons who had conveyed the patents to him.
    There were no sales of stock of the Vacuum Cleaner Co., no sales of undivided interests in the patents and license agreements, and no sales of beneficial interests under the trust, at or near the time of the dissolution of the corporation and creation of the trust.
    The fair market value of the patents and license agreements thereunder on June 7, 1920, and on June 21, 1920, was $1,600,000.
    The value as of June 21, 1920, the date when these patents and license agreements were transferred to Jones as trustee, spread over the exact period of the remaining life of the patents to March 19, 1924, would require a deduction for exhaustion of the patents as follows:
    From June 21, 1920, to December 31, 1920_ $227, 066. 56
    For the calendar year 1921_ 427,212. 88
    For the calendar year 1922_ 427, 212. 88
    For the calendar year 1923_ 427, 212. 88
    From January 1, 1924, to March 19, 1924_ 91,294. 80
    1, 600, 000. 00
    In his information return for 1920, the trustee reduced the royalties received by expenses and by $227,066.56 for exhaustion of the patents. He indicated the balance after such reduction divided ratably among the beneficiaries as their respective distributive shares of the net income of the trust, this petitioner’s share so indicated being or $8,787.47.
    The petitioner in her income-tax return for 1920 reported $8,787.47 as income from the trust.
    The Commissioner’s field auditor found the total royalty receipts in 1920 by the trustee, less expense, to have been $345,578.75, and this petitioner’s share of the total royalty receipts, less expense, to have been $25,624.05, and the Commissioner in auditing her return for that year increased the petitioner’s distributive share of income from the trust by $16,836.58, thereby increasing her income tax for that year by the sum of $3,916.63, which is the deficiency appealed from.
    In 1921 the total net royalty receipts, after expenses, as found by the Commissioner’s field auditor, were $392,936.62, while the proportionate deduction for depreciation or exhaustion for that year was $427,212.88, leaving no part of the net royalties collected for that year attributable to income.
    The petitioner in her income-tax return for 1921 reported no income from the trust.
    The field auditor found the petitioner’s share of the total net royaltjr receipts for 1921, after expenses, to have been $29,135.73, .and the Commissioner in auditing her return for that year increased the petitioner’s distributive share of income from the trust by that amount, thereby increasing her tax for that year by $5,032.31, which is the deficiency appealed from.
   OPINION.

Littleton:

The issues in this appeal áre, first, the value of petitioner’s interest in the patent, licenses, etc., on June 21, 1920, the date of acquisition, and secondly, whether an allowance should be made for the exhaustion of such patent and licenses owned by a trust, the income of which was distributed periodically, in determining the distributive share of the beneficiary subject to tax.

We believe from the evidence submitted that the petitioner has established a value of $1,600,000 for the patent on June 21, 1920. This value was determined by persons who were best in a position to compute it. The patent had been declared valid by the courts, and the article covered by it had been manufactured for many years; it had come to be almost a household necessity — at least the demand for it was established and permanent. The income from sales was gradually increasing from year to year and the persons interested in it were justified in believing that during the remainder of its life the annual royalties would be greater than in prior years. The article was being manufactured and sold under various licenses, and while the royalties therefrom could not be computed with mathematical precision, the owners were able from information in their possession, and from that obtained by investigation as to the probable annual production in 1920, and the four subsequent years, closely to approximate the actual value on June 21, 1920. We do not know what value if anjr the Commissioner determined for the patent, or if he undertook to determine a value, what method he used. Upon all of the evidence, we approve the petitioner’s valuation of $1,600,000 on June 21, 1920.

The amount of the total royalties received by the trustee and the petitioner’s proportion thereof are admitted.

In making the information return, the trustee determined the net income of the trust for the purpose of computing the distributive shares of the beneficiaries by deducting from the total royalties received all proper expenses, etc., and exhaustion computed upon a valuation of $1,600,000 over the remaining life of the patent, of $227,066.56 for 1920, and $427,212.88 for 1921, and showed the distributive share of the petitioner to be of the net income so computed, or $8,787.47 for 1920. And for 1921, after computing the deduction for exhaustion, there was no net income of the trust and therefore the petitioner returned no taxable income.

The petitioner returned as income only her distributive share of the income from the royalties, after taking into consideration the deduction for exhaustion of the patent and the ordinary and necessary expenses of the trust. The Commissioner refused to approve this method of determining the net income of the beneficiary, and recomputed her income by eliminating the amount claimed for exhaustion of the patent.

We believe the Commissioner’s determination to be erroneous, for the reason that he has misconstrued the law relating to the situation in this proceeding.

Section 219(a) of the Revenue Acts of 1918 and 1921 provides that the tax imposed by sections 210 and 211 shall apply to the income of any kind of property held in’ trust, including income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals. Subsection (b) of section 219 of the Revenue Act of 1918 provides that the fiduciary shall be responsible for making the return of the income of the trust for which he acts, and that the net income of the trust shall be computed in the sarnie manner and on the same basis as provided in section 212, with certain exceptions not material here. Section 212 provides that the term “ net income ” means the gross income as defined in section 213, less the deductions allowed by section 214. Section 214 provides that in computing net income there ■shall be allowed as a deduction a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business. Subsection (d) of section 219 provides that, in cases where the income of the trust is to be distributed to the beneficiaries periodically, which was the situation in this proceeding, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the trust is computed, then his distributive share of the net income of the trust for any accounting period of such trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed.

In the Revenue Act of 1918, Congress ignored for taxing purposes the separate entity of the trust when the income is to be distributed periodically, but it retained the entity of such trust for the purpose of determining net income and the deductions allowed by section 214, for the purpose of determining the beneficiary’s distributive share of such net income upon which he should be taxed, whether distributed or not, precisely as it did in the case of partnerships and personal service corporations in section 218.

Congress recognized in section 219, subsections (a) (4), (b), and (cl) that the trust would have title to the property and that the income would, first be received or accrue to it before it became taxable income to the beneficiaries, and under these circumstances it was provided that the beneficiaries should be liable to tax only upon their distributive shares of the net income of the trust determined after deducting, among other items, exhaustion of the trust property. We are not concerned with the amount actually received by the beneficiary, but only with his distributive share determined as provided by the statute. . The beneficiary may actually receive $400,000 in his taxable year, but only that portion thereof which remains after the net income of the trust is computed under sections 212, 213, and 214, is taxable income to him. If, in determining the net income of the trust for the purpose of arriving at the beneficiary’s distributive share thereof, the deductions exceed the gross income of the trust, the beneficiary has no distributive share and is liable to no tax in respect of the income of the trust.

We conclude therefore that for the year 1920 petitioner was liable to tax only upon her distributive share of the net income of the trust determined by deducting therefrom exhaustion of the patent.

Section 219 of the Revenue Act of 1921 contains language different from that used in section 219 of the Revenue Act of 1918. It provides in (a) that the tax imposed by sections 210 and 211 shall apply to the income of any kind of property held in trust, including (4) income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals. Up to this point the statute says merely that such income shall be subject to the tax. Then subsection (b) states that the fiduciary shall be responsible for making the return of income for the trust for which he acts. That is, he must make a report of the gross amount received by him as trustee. Then it is provided that the net income of the trust shall be computed in the same manner and on the same basis as provided in section 212, which defines net income, except that contributions or gifts to institutions specified in section 214 (a) (11) may be deducted without limitation. This means that the trustee shall, in computing the net income of the trust, be entitled to the deductions specified in section 214, which include exhaustion, wear and tear of property.

Then follows a sentence which states that the fiduciary shall include in the return a statement of the income of the trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made. Subsection (c) declares that (1) in case of income received by estates of deceased persons during the period of administration or settlement of the estate, (2) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and (3) income held for future distribution under the terms of the will or trust, the tax shall be imposed upon the net income (computed in accordance with sections 212, 213, and 214) of the trust and shall be paid by the fiduciary. Subsection (e) provides that when the income of the trust consists both of income which is to be distributed periodically and other income, there shall be allowed as an additional deduction in computing the net income of the trust that part of its income which, pursuant to the instrument or' order governing the distribution, is distributable during the taxable year to the beneficiaries.

The foregoing provisions of the statute were intended only to govern the determination of net income and the payment of the tax thereon by estates and trusts and were not intended to change or modify any other provision relating to the determination of the net income of and deductions allowed individuals whether they be beneficiaries of such estate of trust or not.

Subsection (d) of section 219 provides that the fiduciary shall not pay the tax upon the income which is to be distributed periodically to the beneficiary but that, in computing the net income of each beneficiary, there shall be included that part of the income of the trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to him, whether distributed or not, or, if his taxable year is different from that of the trust, then there shall be included in computing his net income his distributive share of the income of the trust for its taxable year ending within his taxable year.

There is no language in this statute which says, or which by necessary implication may be construed to provide, that a beneficiary may not in any case claim a deduction for exhaustion of property from which the income upon which he is taxable was derived. The Commissioner relies upon the separate entities of fiduciary and beneficiary, but there is no reason .why Congress may not, if it so desires, ignore the fiduciary in respect to all. or a portion of the income of the trust. We think it intended to do so in cases of the character of the one before us. The statute directs that the income of the trust which is distributed periodically shall be excluded from the income of the trust and be taxed to the beneficiary to whom it belongs under the instrument creating the trust, and where it is shown, as it was here, that it was the beneficiary who created the trust for himself and that he is also the remainderman, we find no justification for the conclusion that he may not get the benefit of the allowance for the exhaustion of his property temporarily and for convenience only in the hands of a trustee to collect the income and pay it to him. We think in cases of this character the separate entity of fiduciary and beneficiary should be ignored and that the petitioner should be allowed a deduction for the exhaustion of her interest in the patent.

Judgment for the petitioner.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Appeal of E. O. WALGREN.
    Docket No. 6283.
    Decided September 27, 1926.

      Ralph H. Case, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the Commissioner.
   Littleton:

This appeal involves a deficiency of $1,328.32 for the calendar year 1922, arising from the denial of a deduction of $28,000, as a loss from the decline in the value of stock of the Schwenk-Barth Brewing Co. as a result of prohibition legislation.

FINDINGS OF FACT.

Petitioner is a resident and citizen of Yankton, S. Dak. In May, 1903, a corporation known as the Schwenk-Barth Brewing Co. was organized under the laws of South Dakota, for the purpose of manufacturing and selling beer. This business was carried on until the corporation was forced to discontinue operations on account of prohibition legislation, at which time, believing that it might some time in the future be permitted again to manufacture beer, it began the manufacture of cereal beverages. In the latter part of 1920, or in 1921, it ceased manufacturing operations and engaged in the sale of tobacco at wholesale. In January, 1922, it ceased operations altogether, and from that time on put forth every effort to dispose of its assets. About the effective date of prohibition, the corporation had outstanding stock of a par value of $248,100, of which petitioner was the largest holder, owning $50,000 par value. The corporation had a bond issue of $46,700 and undivided profits of $49,421.07. The operations of the company after it ceased to manufacture beer resulted in annual losses. The bond issue at the time operations were discontinued amounted to $45,000. It had bills payable of $3,000, and in addition, certain due and unpaid taxes. There was little demand for the machinery owned by the corporation, and its buildings were not suitable for other manufacturing purposes without considerable remodeling. Certain' of its machinery which had cost $50,000, was sold in 1922 for $4,500. The remainder of the machinery and buildings, having a market value of less than $75,000, were owned by the corporation on and after December 31, 1922, its efforts to dispose of this property at a satisfactory figure having-been unsuccessful.

The petitioner was secretary and general manager of the corporation. He purchased the $56,000 par value of stock which he owned throughout the }mar 1922, at par in 1903 and 1906. On October 31. 1912, and October 31, 1913, the corporation had outstanding capital stock of $248,100 and undivided profits of $57,518.98 and $76,706.39, respectively. On December 31, 1922, the corporation was still in existence and owned assets of an undisclosed value, but which were then believed by its officers to be of a value somewhat in excess of the bonded and other indebtedness. During 1922, certain stock of the corporation was traded in connection with real estate sales, at 15 cents on the dollar. During the same year, petitioner offered his stock for sale, first at 25 per cent and later at 15 per cent, but found no purchasers at either price. In 1922, petitioner charged off on his books, $28,000 of the $56,000 par value stock owned by him in the corporation. When making his income-tax return for 1922, he deducted $28,000 from gross income as a loss. The Commissioner denied the deduction upon the ground, first, that the stock was not sold or disposed of within the taxable year, and secondly, that the statute does not permit the deduction of a loss based upon the decline of the value of property owned.

Judgment for the Commissioner.


text:
    CHURCH AND HOILES COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3526.
    Decided September 27, 1926.

      Laurence Graves, Esg., for the petitioner.

      W. II. Lawder, Esq., for the respondent.
   Littleton:

The Commissioner determined deficiencies of $617.88 for 1919, $1,791.73 for 1920, and $1,386.44 for 1921. Approximately $1,800 of the total of the deficiencies is in controversy by reason of petitioner’s claim that the deduction for exhaustion, wear and tear of its laundry building should have been computed at the rate of 5 per cent instead of 2 per cent per annum.

FINDINGS OF FACT.

Petitioner is an Illinois corporation, engaged in the manufacturing, renting, and laundering of linen, principally to butcher shops.

In 1912, it constructed, at a cost of $64,645.69, a two-story building, 125 ft. by 106 ft., of concrete foundation and brick walls, with light wood interior and roof, in which to carry on its operations. This cost was stipulated to be the fair market value of the building on March 1, 1913. The first and second floors each consisted of one large room containing various machines for laundering and manufacturing purposes. In the process of laundering soiled linen, chlorine gas is used to a considerable extent and to a much greater degree in bleaching the cloth used in the manufacture of new garments. All cloth is purchased in the unbleached state.

The first floor of the building was used for laundering purposes. Escaping lime and chlorine gas caused the parts of the building with which they came in contact to deteriorate more rapidly than would otherwise be the case. In addition, the moisture from the laundering process shortened the useful life of the interior woodwork. By reason of the effect of gas and moisture, petitioner has to date been required to replace at least one-half of the steel window casings once, and the skylight twice. In addition, it has been necessary to replace certain interior portions of the brick wall as a result of deterioration from gas. The joists were seriously affected but have not been replaced, due to the interruption which would be occasioned thereby. The building was especially constructed for laundry purposes, with slanting floors and built-in gutters, underground water pipes and sewers. It would not lend itself to the profitable operation of a different character of business. The building is now inadequate for petitioner’s needs and for some time consideration has been given to plans for the erection of a new and more modern structure. The probable useful life of the building in question in petitioner’s business was twenty-five j^ears. Depreciation was sustained at the rate of 4 per cent per annum.

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


text:
    S. D. SUTLIFF, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2786.
    Decided September 27, 1926.

      Helé, that a liquidating dividend was received in 1920 and not in 1919 as determined by the Commissioner.

      Charles F. Smith, Esq., for petitioner.

      A. H. Fast, Esq., for the respondent.
    The Commissioner determined a deficiency of $3,546.59 for the calendar year 1919, as a result of a liquidating dividend alleged to have been received during that year.
    FINDINGS OF FACT.
    Petitioner is a resident of Rhinelander, Wis.
    In 1908, a corporation known as the Rhinelander Lumber & Coal Co. was organized with a capital stock consisting of 100 shares of the par value of $100 each. On March 1, 1913, petitioner was the owner of 25-shares. On August 3, 1915, he purchased 25 additional shares at $300 a share and on January 3, 1916, he purchased 49 shares at $300 a share. On the last-mentioned date, he transferred one share to another to qualify the required number of directors, leaving the petitioner the owner of 98 of the 100 shares outstanding. There was no other change in the stock ownership prior to the dissolution of the corporation as hereinafter set forth.
    Regular directors’ meetings were held until 1914. Thereafter, no formal meetings were held until January, 1919, and no minutes of any action by the directors were recorded, the offices of the corporation being conducted by the petitioner as though it was his individual business. The directors formally declared a dividend in January,
    1919. In the latter part of 1919, petitioner concluded that inasmuch as he owned all of the capital stock, it was useless longer to carry on the business in corporate form and that he would experience less trouble if the corporation should be dissolved. Accordingly, on December 27, 1919, a special meeting of the stockholders was held at which the following resolution was adopted:
    Resolved, that the Rhinelander Lumber & Coal Company, a corporation organized under the laws of the State of Wisconsin, and located at Rhinelander, Wisconsin, be and the same is hereby dissolved.
    This resolution was duly certified and filed with the Secretary of the State of Wisconsin on December 29,1919. Thereafter, on December 30, 1919, the resolution, together with the certificate of the Secretary of State, was recorded in the office of the Register of Deeds of Oneida County, Wis. After the resolution of dissolution, business was continued as before, no change being made in the books of account prior to December 31, 1919. The corporation rendered a tax return for the calendar year 1919. From and after January 1, 1920, petitioner continued the business as theretofore carried on by the corporation, under the same name, without interruption. On January 1, 1920, he entered upon the records his personal assets and property. The former officers of the dissolved corporation proceeded forthwith after January 1, 1920, to have formal quitclaim deeds to real estate and transfers of mortgages executed by the corporation, transferring the corporation’s title to such property to the petitioner. The corporation, during January, 1920, paid over to the two stockholders owning one share each the amount to which they were entitled upon dissolution. In determining the amount which the two stockholders were entitled to receive upon dissolution, it was determined that by reason of the fact that accounts receivable totaling $40,000 -were not worth their face value, $450 a share for the stock represented a fair liquidation value, and this amount was paid. The deeds and transfers were executed and recorded on January 20, 1920. Thereafter, the remaining surplus and all assets were held bjr the petitioner, who assumed the liabilities of the dissolved corporation. The fair market value of the assets at December 31, 1919, and on January 20, 1920, was $45,000. The fair market value of the 25 shares of stock owned by petitioner on March 1, 1913, is not in question, nor is the cost of the 73 shares subsequently acquired. The Commissioner held that petitioner received a net gain upon liquidation in 1919 of $20,798.10 and computed the tax thereon at both normal and surtax rates.
   OPINION.

Littleton:

The statute provides that stockholders of a corporation shall pay a tax upon amounts received in liquidation of the corporation measured by the difference between the cost or March 1, 1913, value of their stock and the cash and value of the property received upon liquidation. The adoption by the stockholders of a resolution of dissolution is not in every case conclusive proof that they thereupon realize a gain or sustain a loss. They may or they may not receive a liquidating dividend on the date of the dissolution resolution, or when it is properly recorded. In most cases at least this is a question of fact. Appeal of S. B. Quigley, 2 B. T. A. 159.

The statutes of Wisconsin provide that a corporation shall remain in existence for three years for the purpose of winding up its affairs.

The facts in this proceeding show that upon the dissolution resolution, the officers of the corporation who were its stockholders made arrangements for distribution of assets in liquidation. The corporation continued its business and its accounts without change to the close of business on December 31, 1919. It made a return of income for the full calendar year and paid the tax shown to be due. Between January 1 and January 20, 1920, the corporation executed quitclaim deeds to its real property and transferred its mortgages to the petitioner and issued checks on January 20, 1920, for $45® to each of the two stockholders owning one share of stock. The petitioner then took over the business and assets and assumed the liabilities of the corporation. The stockholders and directors made a valuation of the assets and determined them to have a value equal to $450 a share on all of the outstanding capital stock, or a total value of $45,000. We believe this valuation to have been correct.

Under these circumstances, we are of the opinion that, the liquidating dividend which the Commissioner has included in the income of the petitioner for 1919 was not received by him until 1920. Accordingly, the Commissioner’s determination of a deficiency for 1919 in so far as it is predicated upon a dividend received upon the liquidation of the Rhinelander Lumber & Coal Co. was erroneous.

Judgment for the fetitioner. Order of rede-termination will be entered under Bule 50.


author: MoRRts :

text:
    LOUIS GASSNER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 4017.
    Decided September 27, 1926.
    Where an agreement exists between husband and wile domiciled in the State of California that the wife’s salary is to be her separate property, she may report that salary in a separate return.

      Frederick M. Shipper, Esq., for the petitioner.

      D. D. Shepard, Esq., and George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $529.71 in income tax for the calendar year 1921. The deficiency arises from the inclusion in petitioner’s income of salary earned by his wife.
    FINDINGS OK FACT.
    The petitioner and his wife were during 1921 domiciled and living together in California. Henrietta Gassner, the wife, was employed as buyer for Louis Gassner, Inc., and received during 1921 as compensation for services a salary of $3,000. Payment was made monthly by check drawn on the corporation, Louis Gassner, Inc., in favor of Henrietta Gassner. The checks were indorsed by her and deposited in her separate account, to which the petitioner had no access. The salary was spent exactly as she saw fit, without restriction, control or direction by the petitioner, who had agreed orally with his wife that her earnings were to be her separate property and under her own unrestricted control. Henrietta Gassner prior to her marriage was the owner of property. Her salary was deposited with the income from her separate property and handled in exactly the same way.
    She returned her salary as taxable income and paid the tax due thereon. The Commissioner included the salary of the wife in the taxable income of petitioner and asserted the present deficiency.
   OPINION.

MoRRts :

The sole question in this appeal is whether the wife may report in a separate return her individual salary. That question has already been answered affirmatively in the Appeal of Estate of George W. Randall, 4 B. T. A. 679.

There is an additional ground, however, for sustaining the position of the petitioner. Sections 162 and 163 of the Civil Code of California describe what constitutes the separate property of the wife and husband, among which is not included salaries earned by either after marriage. Section 164 provides that all other property acquired after marriage is community property. In Martin v. Southern Pacific Co., 62 Pac. 515, the Supreme Court of California held:

The services of the wife are a part of the earning power of the community, and the earnings received for her services constitute community property as much as do the earnings received for the services of the husband.

Husband and wife may, however, under the California law, enter into an agreement whereby the earnings of the wife will not fall into and become income of the community, and where such an agreement exists, the salary of the wife is her separate property. In Wren v. Wren, 34 Pac. 775, the court held:

There can be no doubt that a husband and wife may agree between themselves, * * * that money earned by the wife in performing any work or service which does not devolve upon her by reason of the marriage relation shall belong to her as her own, and, when money has been earned by the wife under such an understanding or agreement with the husband, it is her separate property.

See also Kaltschmidt v. Weber, 79 Pac. 272; Larson v. Larson, 115 Pac. 340; Cullen v. Bisbee, 144 Pac. 968; Smith v. Smith, 191 Pac. 60; Rayburn v. Rayburn, 200 Pac. 1064. It has been held that the courts 'will resort to circumstantial evidence furnished by the general conduct of the spouse with reference to their property in determining the existence or non-existence of a contract where the exact terms of the alleged agreement have escaped the memory of one or both of the parties to it. Perkins v. Sunset Telephone & Telegraph Co., 103 Pac. 190. The acts and conduct of the parties consistent with such an understanding are accepted as proof that such an understanding was in fact had.

The petitioner testified that there was an agreement between himself and wife that her salary was to be her separate property. The wife’s testimony was not as definite as that of her husband, but she stated — “ It was my money to do what I pleased with.” The receipt of the money by the wife and her subsequent handling thereof, considered in the light of the above decisions, lead us to the conclusion that the salary in question was her separate property, which she was entitled to report in her individual return.

Judgment'for the petitioner.


author: Moeris:

text:
    HARRY S. GOLDBERG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 5389.
    Decided September 27, 1926.

      Dan J. Ohapin, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies of $1,304.20 and $858.18 in income taxes for 1921 and 1923, respectively. The deficiencies result from the inclusion in petitioner’s taxable income of salaries earned by his wife.
    FINDINGS OF FACT.
    The petitioner and his wife are residents of California residing in Los Angeles. Petitioner during the taxable years was engaged in selling ladies’ wearing apparel, and was assisted at all times in his business by.his wife, Gertrude Goldberg. Prior to 1922 the business was operated by petitioner as an individual but in that year petitioner incorporated under the name of “ Sweldom.” In 1921 the petitioner paid his wife a salary of $4,950. In 1923 the corporation by a resolution of the directors vo$ed and paid to Gertrude Goldberg a salary of $6,200. Petitioner and his wife agreed orally that the salary of the wife was her separate property. At no time did he exercise any control over or interfere with her in the use of this money.
    The wife had a separate bank account subject only to her own checks in which she deposited her salary. Household expenses were borne by the petitioner, but the wife spent a considerable amount upon improvements and remodeling. Their home stood in the name of Gertrude Goldberg. The wife had a personal safe deposit box separate from that of her husband and that of the corporation. She had a key to the safe deposit box of the firm, but not a key for her husband’s personal safe deposit box, nor did he have a key for hers.
    The Commissioner included the salary of the wife in petitioner’s taxable income and determined the deficiencies here appealed from.
   OPINION.

Moeris:

The opinions of the Board in the Appeal of Estate of George W. Randall, 4 B. T. A. 679, and Appeal of Louis Gassner, 4 B. T. A. 1071, are controlling in the instant appeal.

Judgment for the petitioner.


author: MoRRis:

text:
    KARL STERN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 5807.
    Decided September 27, 1926.

      Ida May Adams for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $40.50, income tax for 1923, arising from the addition to the petitioner’s taxable income of an alleged salary of $600, received and reported by his wife in her separate return.
    BINDINGS OB BAOT.
    The petitioner and his wife, Matilda Stern, were residents of and domiciled in California during 1923. For that year they filed separate returns and paid the taxes due thereon. The Commissioner transferred an item of $600, reported as salary received by Matilda Stern in 1923, to Karl Stern and determined the present deficiency.
   OPINION.

MoRRis:

The Board’s decision in the Appeal of D. Cerruti, 4 B. T. A. 682, is determinative of the question presented in this appeal. The Commissioner correctly included the item of $600 in petitioner’s taxable income, since it was not shown that the amount represented separate earnings of the wife.

Judgment for the Commissioner.


text:
      A. T. SACKETT, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7577.
    Decided September 27, 1926.
    Salary earned prior to marriage may be reported by tbe wife in her separate return.

      A. T. Sackett pro se.

      A. Colder Mackay, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $90.16, income tax for 1923. The deficiency arises from the inclusion in the income of petitioner of the income of his wife prior to their marriage.

      FINDINGS OF FACT.
    Petitioner resides in Los Angeles, Calif. On July 17, 1923, he and Dorothy Thurston Sackett were married. Prior to her marriage, Dorothy Thurston Sackett received as salaries, wages, and commissions, $728.50 which were reported by her and added by the Commissioner to the petitioner’s taxable income.
   OPINION.

MoRRis:

We are of the opinion that the Commissioner erred in including the separate property of the wife as income of the husband. Prior to July 17, 1923, the petitioner had no control whatsoever over the income of Dorothy Thurston Sackett. The community status existed only from that date and affects only income received thereafter. If we had any doubts as to this amount being her separate property, the doubts would be removed by section 162 of the Civil Code of California, which expressly states that earnings and property of the wife before her marriage constitute and remain her separate property thereafter and are not subject to the incidents of the community property law.

Judgment for the 'petitioner.


text:
    GEORGE W. HAIGHT, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6141.
    Decided September 27, 1926.
    Under the Revenue Act of 1921, a wife in California was entitled to file a separate return and be taxed separately upon her separate earnings. Estate of George W. Randall, 4 B. T. A. 679.

      W. G. Mather, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $283.74, income tax for 1922. The deficiency results from the inclusion of earnings of the wife in income of the husband. The appeal was submitted on the pleadings.
    FINDINGS OF FACT.
    George W. Haight, in 1922 and prior and subsequent thereto, was the head of a family and was domiciled with his wife in Los Angeles, Calif.

      During 1922 the petitioner’s wife received a salary of $2,705.89 representing her separate earnings. She filed a separate return for 1922 returning the salary as her income for that year. The Commissioner treated the separate earnings of the wife as income of the husband, increased the petitioner’s income for 1922 in that amount, and determined the deficiency here in question.
   OPINION.

MoRRis:

Since we have found as a fact that the earnings of the wife were separate and apart from that of the husband, it follows that in accordance with our opinion in the Appeal of Estate of George W. Randall, 4 B. T. A. 679, the determination of a deficiency against the petitioner is in error.

Judgment for the petitioner.


text:
    LAWRENCE SCHILLIG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 5638.
    Decided September 27, 1926.

      Lawrence Sehillig, Esg., pro se.

      A. Colder Mackay, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $443.35, income tax for 1922. The Commissioner computed the deficiency upon the basis that the husband is the owner of income under the community property laws of California.
    FINDINGS OP PACT.
    Petitioner is a practicing attorney, and during 1922 resided with his wife in Yuba City, Calif. Money received as fees and from investments was placed in a joint account and subject to the check of both husband and wife. For the year 1922, husband and wife made separate returns, dividing the income of the community in half. The wife paid her tax by check on the joint account. The Commissioner refused to allow separate returns to be filed, holding that the husband should be taxed for the income of the community, and determined the deficiency here presented.
   OPINION.

MoRRis:

In view of our decision in the Appeal of D. Cerruti, 4 B. T. A. 682, we are of the opinion that the determination of the Commissioner must be sustained.

Judgrmnt for the Commissioner.


author: SteRnhagen:

text:
    Appeals of S. T. HUNT and MRS. S. T. HUNT.
    Docket Nos. 6275, 6274.
    Decided September 27, 1926.

      S. T. Hunt for the petitioners.

      A. J. Seaton,, Esq., for the Commissioner.
    Deficiency of $1,702.18 income tax for 1921 against each petitioner arising from the Commissioner’s inclusion in the gross income of each petitioner of one-half of the amount received upon the sale of a certain interest in oil lands. The findings are based upon a stipulation and certain documents introduced by the Commissioner.
    FINDINGS OF FACT.
    During the calendar year 1921 the petitioners received $22,000 as representing the sale price of a certain one-sixteenth royalty interest in 120 acres off of the east side of section 16, township 23, range 8 west, in ivhat is known as the Haynesville Oil Field.
    The Commissioner has allowed the petitioners a unit rate of depletion of $0,595 per barrel for the year 1921, and a unit rate of $1.1145 per barrel subsequent to 1921 on the petitioners’ remaining interest in tracts contained in sections 8, 9, 16, and 17 of township 23, range 8 west.
    The petitioners purchased this property in fee prior to the date on which oil was discovered.
    Oil was first discovered in the Haynesville pool in March, 1921.
    This property, more particularly described as the 120 acres off of the east side of section 16, township 23, range 8 west, had no mineral value at the date of purchase or on March 1, 1913.
    The petitioners filed separate returns, each of which contained the same items as the other.
   OPINION.

SteRnhagen:

Notwithstanding the briefs filed by both parties discussing theories which might in a proper case require careful consideration, the facts which have been stipulated leave nothing for the petitioners to stand upon. Having, in 1921, sold for $22,000 something characterized as a royalty interest in 120 acres, which they purchased before 1921 and which on March 1, 1913, had no mineral value, the cost of which and the terms of conveyance of which are not in evidence, how can we do aught but affirm the Commissioner? There is no warrant for the petitioners to deduct simultaneously from this sale price an assumed amount of future depletion based on discovery value, or to use this alleged discovery value as the basis for determining gain or loss on sale. Discovery value is an extraordinary basis granted to taxpayers for computing the depletion deduction, and its significance ends in the deduction section of the statute,- however awkwardly this may work out.

The Commissioner is not content with such a result. He now wants the Board to hold that his determinations on the basis of separate returns were improper and that the deficiency against the husband should be increased by attributing to him all the income. This is a serious question. The record, however, lacks facts which are necessary premises to any conclusion in respect of Louisiana community property and we are therefore unable to decide it.

The Commissioner may have judgment for the amount of the deficiency.

Judgment for the Gommissioner.


author: LittletoN:

text:
    Appeal of H. S. SIMON.
    Docket No. 4912.
    Decided September 27, 1926.

      Albert L. Clothier, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
   LittletoN:

The Commissioner determined a deficiency of $623.08 for 1920 and an overassessment in the amount of $147.32 for the year 1921. He held that a partnership of which petitioner was a member was dissolved on November 30, 1920, and the business thereof conducted by him as an individual until February 1, 1921, and thereafter by a new partnership. Petitioner claims that the first partnership having a fiscal year ending November 30, was dissolved on January 17, 1921, and that settlement was made between the two parties on the basis of the books at the close of the fiscal year ending November 30, 1920, with the exception of the division of certain securities, and that he agreed to assume the losses of the partnership for December, 1920, and January, 1921, which amounted to $4,338.77, and that this amount should have been allowed as a deduction from his income for 1921, consisting of his distributive share of the net income of the new partnership for the period January 17, to November 30, 1921, resulting in a deficiency of $288.21 for 1920 and an overassessment of $300.61 for 1921.

FINDINGS OF FACT.

Petitioner is a resident of New York City. In 1910, he and A. Gershel formed a partnership known as A. Gershel & Co., to engage in the manufacture and sale of suits and coats, in which each owned a one-half interest. The partnership kept its books upon the basis of a fiscal year ending November 30. On January 17, 1921, there arose a disagreement between the partners and the partnership was forthwith dissolved. The petitioner at the same time purchased Ger-shel’s interest. The consideration was computed by taking one-half of the value of the inventory of the stock on hand November 30, 1920, as shown by the books, and one-half of the value of the Liberty bonds and other assets on hand January 17, 1921. The partnership of A. Gershel & Co. operated at a loss of $2,059.39 for December, 1920, and $2,279.38 for January, 1921. The petitioner assumed these losses. Immediately upon dissolution of the partnership of A. Ger-shel & Co., a new partnership, known as Horatio Simon & Co., was formed by the petitioner and his son, in which petitioner had a two-thirds interest, and his son a one-third interest.

Petitioner’s net income for the calendar year 1920, consisting of his proportion of the net income of A. Gershel & Co. for the year ended November 30, 1920, was $20,383.24.

The net income of Horatio Simon & Co. for the ten-month period February 1, to November 30, 1921, amounted to $28,557.74, two-thirds of which amount, or $19,038.49, represented petitioner’s distributive share.

Petitioner filed his return on the basis of a calendar year. He assumed the loss of A. Gershel & Co. for December, 1920, and January, 1921.

Order redetermining the deficiency for 1920 will be entered on 15 days’ notice, under Rule 50. The Board has no jurisdiction to determine the overassessment for 1921. Appeal of Cornelius Cotton Mills, f B. T. A. 255.


author: Smith:

text:
    ELIZABETH W. BATES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 10179.
    Decided September 27, 1926.
    Coupons payable January 1, 1923, and deposited in a bank for collection on December 23, 1922, constitute income of the owner for the year 1923 and not for the year 1922.

      Elizabeth W. Bates pro se.

      Henry Ravenel, Esgn for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $133.76. The question presented is whether the petitioner is liable to income tax for the year 1923 upon income returned by her for the year 1922.

      BINDINGS OP PACT.
    The petitioner is a resident of Atlanta, Ga. She filed an income-tax return for the year 1922 and included therein $1,115 of coupons on bonds payable on January 1, 1923. The coupons were deposited in the petitioner’s bank on December 23, 1922. The petitioner did not include this $1,115 in her income-tax return for the year 1923, since she had included it for the preceding year. The Commissioner added to the income reported for the year 1923 the $1,115 in question.
   OPINION.

Smith:

It is the contention of the petitioner that she received income of $1,115 when she deposited coupons of that face value in her bank on December 23, 1922; that the amount was made available to her at that time and constituted taxable income for 1922. The Commissioner, on the other hand, contends that the debtor corporations did not pay the interest until on or after January 1, 1923, and that if the petitioner was given credit for the coupons by her bank the bank simply advanced the amount of them as a loan.

There is no evidence before this Board that the petitioner sold her coupons to the bank. So far as appears from the record, title to the coupons was in the petitioner until they were redeemed by the debtor corporation. We must therefore hold from the evidence that the income from the coupons was received by the petitioner in 1923.

Judgment for the Commissioner.


author: Lansdon:

text:
    ALAMEDA STEAM LAUNDRY ASSOCIATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2938.
    Decided September 27, 1926.

      D. A. Sargent, C. P. A., for the petitioner.

      George E. Adams, Esq., for the respondent.
   Lansdon:

The Commissioner asserts a deficiency in income and profits taxes for the year 1921 in the amount of $338.14. The controversy arises from the action of the Commissioner in adding certain inventory and expense amounts to the income of the petitioner for the taxable year.

bindings op pact.

The petitioner is a California corporation engaged in the laundry business at Alameda. Prior to the taxable year its accounts were kept and income and profits-tax returns were made on the cash receipts and disbursements basis. In the taxable year it changed to the accrual basis, and kept its accounts and made its income and profits-tax return for that year on such basis.

Prior to January 1, 1921, the petitioner acquired certain shop supplies and insurance policies, paying cash therefor, which it charged to operating expense. Upon opening its books on the accrual basis in 1921, the inventory of stock supplies on hand, and the cost of unexpired insurance were taken into surplus, but not included in gross income for that year. Upon audit of the petitioner’s income and profits-tax return for the taxable year, the Commissioner added to gross income the amount of the inventory of shop supplies, $761.84, and the cost of the unexpired insurance in the total amount of $375.81, to income, and on March 9, 1925, mailed the notice of deficiency, which is the basis of this proceeding. On the authority of the Board’s decisions in Appeal of John G. Barbas, 1 B. T. A. 589, and Appeal of Gardner Printing Co., 4 B. T. A. 37

Judgment for the Commissioner.

Smith, dissenting: The petitioner made its income-tax return for 1921 on the basis of its books of account kept upon the accrual basis. In prior years it made its returns upon a cash basis. There is no suggestion in this case that the income account of the petitioner’s books for 1921 did not accurately reflect income. Section 212(d), Revenue Act of 1918. The Commissioner has assumed, however, that, inasmuch as the petitioner made its returns for prior years upon a cash basis, it got the benefit of some deduction in prior years which it would not have gotten if it had made returns upon an accrual basis. Pie has, therefore, added to the petitioner’s correct net income for the year 1921 the amount of certain payments made in prior years for merchandise. I see no basis in the taxing statute for such a distortion of the 1921 income. By a parity of reasoning the Commissioner should allow the petitioner to deduct from gross income of 1921 accounts payable set up when the books of account were placed upon an accrual basis as of January 1, 1921.


text:
    KRIEG TANNING COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3318.
    Decided September 27, 1926.
    1. A bookkeeper without authority from directors credited net earnings of a corporation to personal accounts of shareholders. Such earnings remained in the business and were not drawn against by the stockholders. At July 29 of the taxable year credit balances in stockholders’ accounts were carried to a newly opened corporation surplus account. Held, such net earnings were earned surplus and invested capital for the entire taxable year.
    2. On the evidence, held, that the petitioner is not entitled to relief under section 210 of the Revenue Act of 1917.

      Neil E. Larkin, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts a deficiency in income and profits taxes for the year 1917 in the amount of $2,961.43. The petitioner contends' (1) that its invested capital was incorrectly computed for such year, and (2) that its tax liability should have been computed under the provisions of section 210 of the Revenue Act of 1917.
    BINDINGS 03? FACT.
    The petitioner is a California corporation with its principal office at San Francisco. During the taxable year its issued capital stock, in the amount of $200,000, was owned in equal parts by William McKay and John R. Russell, who were the executives of the corporation and received yearly salaries in the respective amounts of $7,000 and $4,000.
    Prior to July 27, 1917, the books of the petitioner were kept as if the corporation was a partnership. Prior to July 1, 1917, personal accounts of the two shareholders were credited with amounts from time to ¿ime that represented the net earnings of the business, and that, in the course of usual corporation accounting, would have been credited to a surplus account. On July 27, 1917, the personal accounts of the stockholders were closed into a corporation surplus account opened as of that date, and credited with the amount of $163,329.65, which had theretofore stood credited to the two stockholders in equal amounts.
    In the computation of its invested capital in its income and profits tax return for the year 1917, the petitioner included the amount of $163,329.65 for the entire year. Upon audit of such return, the Commissioner prorated such amount for that portion of such year remaining after the surplus account was opened, which resulted in an addition to invested capital for the year in the amount of $68,-932.14. The Commissioner now admits a slight error in his computation, and asserts that the correct amount of such addition should have been $69,810.25, and that the taxpayer’s total invested capital for the year was $269,810.25.
   OPINION.

Lansdon:

The main issue to be determined here is whether the petitioner is entitled to have an earned surplus of $163,325.65 in-eluded in its invested capital for the entire taxable year. The evidence is conclusive that this amount represents the accumulated net earnings of the taxpayer at January 1, 1917; that it was not distributed to the accounts of the stockholders as a result of corporate action; that it was used in and at risk in the business for the entire year; and that the bookkeeping entries that credited such amount to the personal accounts of the stockholders were made by an accountant without consideration of any resulting effect on the tax liability.

It is well established that tax liability may not be determined by mere bookkeeping entries. Erroneous accounting does not increase or decrease income or invested capital. Douglas v. Edwards, 298 Fed. 229, 234; Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460; Appeal of Huning Mercantile Co., 1 B. T. A. 130. It is evident from the record that the Commissioner bases both his inclusion of the prorated amount of $69,810.25 in the taxpayer’s invested capital and his exclusion of the remainder of the surplus on the simple fact that certain bookkeeping entries were made on July 27, 1917. Such entries, conceded as correct, were merely a revised record of a fact then in existence, and, in this proceeding, clearly proved to have been in existence at January 1, 1917. The amount disallowed, in truth and in fact, was as much a part of the taxpayer’s invested capital prior to July 27, 1917, as it was after that date. We are of the opinion, therefore, that the petitioner properly included the amount of $163,329.65 as earned surplus in its invested capital for the taxable year.

The petitioner adduced no persuasive evidence in support of its request for the computation of its tax liability for the year 1917, under the provisions of section 210 of the Revenue Act of 1917. Appeal of United Shoe Stores Co., 2 B. T. A. 73. We find against the petitioner on this point.

Order of redetermination will be entered on W days' notice, under Bule 50.


author: LittletoN :

text:
    Appeal of ARTHUR B. CHIVERS.
    Docket No. 5396.
    Decided September 27, 1926.

      Arthur B. Chirers pro se.

      Ellis W. Manning, Esq., for the Commissioner.
   LittletoN :

The petitioner claims that the determination of a deficiency of $366.57 for the calendar year 1924 was erroneous, for the reason that the Commissioner should have allowed him a deduction for exhaustion, wear and tear and the expense of the operation and upkeep of an automobile, and a loss on the sale of same; also a deduction for amounts expended for club dues.

FINDINGS OF FACT.

Petitioner is now a resident of New York City. During the calendar year 1924, he resided in Atlanta Ga., where he was employed by a corporation engaged in publishing a daily newspaper at that place. In March, 1923, he purchased an automobile for $2,950. On February 1, 1924, he traded this car for a new one of the same make, and received a credit of $1,973, as a result of which he claimed a loss of $977. The new automobile cost him $3,925.50, upon which he computed exhaustion, wear and tear of $785.10, at the rate of 20 per cent per annum, and claimed 60 per cent of same, or $471.06 as a deduction for 1924. During the taxable year 1924, petitioner expended the following amounts for the upkeep and operation of the automobile—

Gasoline_ $181.45

Insurance_ 24G. 00

Repairs_ 66. 50

Chauffeur's salary- 1, 040.00

Chauffeur’s uniform_ 61. 00

Total- 1, 595.04

Of this total, he deducted $957.03, being 60 per cent thereof.

Petitioner during 1924 also expended $110 for membership dues to the Good Hill Country Club and $137.50 for dues to the Atlanta City Club. In addition, he made gifts to club employees, totaling $15, and these amounts he deducted from gross income as business expense.

During the years 1923 and 1924, 60 per cent of the use of petitioner’s personal automobile was for the convenience of visitors to Atlanta and in entertaining them with the view of maintaining and increasing the good will of the newspaper published by the corporation by which he was employed. At practically all times during the day, his automobile and chauffeur were held in readiness for use by friends of the newspaper on such occasions and to such an extent as in the opinion of petitioner would tend to increase the good will of the newspaper in which he was interested.

. The memberships in the Good Hill and City Clubs were for petitioner’s personal convenience and pleasure, and also for the purpose of enabling him to entertain friends of the newspaper and visitors.

Judgment for the Oommissioner. Appeal of Franhlin M. MagiTl, J¡, B. T. A. $7®.

Phillips dissents.


author: Green:

text:
    Appeal of POPE SANATORIUM COMPANY.
    Docket No. 4148.
    Decided September 27, 1926.
    1. Depeeciation. — Value and life of buildings determined. As to other assets, proof held insufficient.
    2. Invested capital. — Funds of the taxpayer were distributed to its two stockholders who immediately paid the amounts so distributed to an affiliated corporation. Held, that the amounts so distributed were not loans by the taxpayer to the corporation with which it is affiliated and that the invested capital of the taxpayer was properly reduced by the amount of the distribution.

      Gamden B. MeAtee, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1918 in the amount of $2,548.28. The errors assigned are:
    (1) The disallowance of depreciation in the amount of $2,231.70 upon the physical assets of the Pope Sanatorium for the year 1918.
    (2) The disallowance of depreciation in the amount of $1,552.82 for 1918 upon the capital development account of the Pope Mining Co.
    (3) The disallowance as to the Pope Sanatorium and exclusion from invested capital for 1918 of (a) $2,001.96, being the cost of tangible property not carried on the books and which cost was determined by appraisal, and (b) $14,179.68, being accounts receivable evidencing surplus funds loaned to the Pope Mining Co. but erroneously charged on the books of the Pope Sanatorium as dividends to Curran Pope and A. T. Pope.
    FINDINGS OF FACT.
    The taxpayer is a Kentucky corporation with its principal offices at Louisville. It operates the Pope Sanatorium, an institution devoted to the treatment of persons suffering from nervous diseases. It uses in its business two buildings situated on one of the principal streets. The first of these buildings is three stories in height. The foundations of the building are of vitrified brick and cement. The front is built of pressed brick with stone trimmings and the first two stories are of hard brick and have concrete floors and ceilings. The building contains approximately 25 rooms and is heated with a steam heating plant. In the rear of this building is another of brick veneer construction erected upon foundations similar to those in the building just mentioned. It contains a kitchen, a dining room for the hospital staff, storage room, a dining room, recreation room, and 15 or 16 sleeping rooms. It also is equipped with a steam heating plant. On March 1,1913, these buildings had a fair market value of $20,000, and had a life of 45 years.
    The sanatorium was completely equipped. There is evidence in the record as to the nature of this equipment but it is unnecessary, for reasons set forth in the opinion, to describe it in detail.
    The Pope Mining Co. is a Kentucky corporation engaged in the business of fluorspar mining in the central part of the State of Kentucky. In the year in question it owned in fee three pieces of mineral property. Curran Pope and A. T. Pope were the owners in equal parts of the stock of the Pope Sanatorium Co. and the Pope Mining Co. and were the active officers managing each. This company, by reason of this stock ownership, has been held to be affiliated with the petitioner.
    The banking account of the Pope Sanatorium and the individual banking accounts of the two stockholders, Curran Pope and A. T. Pope, were maintained in the National Bank of Kentucky. The bank account of the Pope Mining Co. was maintained in the Kentucky Title and Trust Bank. The Pope Sanatorium made payments in individual checks to its two stockholders, Curran Pope and A. T. Pope, in the sum of $14,119.68 up to and including the year 1918, which checks were cashed by Curran Pope and A. T. Pope and the proceeds were deposited by the payees of the checks in the Kentucky Title and Trust Co! to the account of the Pope Mining Co.
   OPINION.

Green:

The first issue in this appeal relates to the disallowance of depreciation in the amount of $2,231.70 for the year 1918 upon the physical assets of the Pope Sanatorium. In the petition it is alleged that the depreciation claimed by the taxpayer was entirely disallowed for the j^ear in question and that its books have been readjusted to show the following valuation and depreciation deductions:

We have heretofore found that the buildings had a value of $20,000 and a life of 45 years. This results in an annual depreciation deduction of $444.44. The evidence as to the value of the remainder of the assets upon which depreciation was claimed was limited entirely to the March 1, 1913, value thereof and there is no evidence of the cost of additions thereto. From the evidence introduced by the taxpayer, it is clear that the depreciation upon the last three classes of assets set forth in the tabulation is more or less rapid, and that it is quite probable that in 1918 the taxpayer had on hand only a small portion of the assets on hand on March 1, 1913. The proof is wholly insufficient to serve as a basis for the computation of an allowance for depreciation for the year 1918. For this reason it was deemed unnecessary to itemize the assets which the proof showed to be on hand on March 1,1913.

The second issue relates to the disallowance of depreciation in the amount of $1,552.82 for 1918 upon the capital development account of the Pope Mining Co. There is no evidence before us as to the items, values, or March 1, 1913, value for depreciation purposes of the items comprising the capital development account, and in the absence of such proof the determination of the Commissioner must be sustained.

The third issue relates to the exclusion of $20,001.96 from invested capital of the Pope Sanatorium, it being contended that the same represents the cost of tangible property not carried on the books and which cost was determined by appraisal. No evidence was introduced from which we could determine whether the exclusion was proper or improper. No appraisal was admitted in evidence, no values proven, and in the absence of evidence to support the position of the taxpayer, the determination of the Commissioner is approved.

As a part of the third assignment of error, the taxpayer submits that the Commissioner has improperly computed the invested capital of the Pope Sanatorium by disallowing therefrom $14,179.68, being accounts receivable evidencing surplus loaned to the Pope Mining Co. The evidence established the fact that the sum of $14,179.68 represents a payment by check on the part of the Pope Sanatorium to its two stockholders, Curran Pope and A. T. Pope, and that the latter cashed such checks. Curran Pope and A. T. Pope, with the' proceeds of the checks which they had received from the1 Pope Sanatorium, caused to be placed to the credit of the Pope Mining Co. the sum of $14,179.68. There is no evidence before us from which we could determine that the $14,179.68 in question represented the surplus of the Pope Sanatorium which had been loaned by it to the Pope Mining Co. There may have been oral understandings to that effect, but the record merely discloses payment to the two stockholders of the Pope Sanatorium, which they of their own volition and in their individual capacities caused to be credited to the bank account of the Pope Mining Co.

Order of redetermination will he entered on 10 days’ notice, under Rule 50.


text:
    Appeal of THE HENDERSON OVERLAND COMPANY.
    Docket No. 4776.
    Decided September 27, 1926.
    In the case of property acquired in exchange for stock prior to March 3, 1917, if the value thereof is clearly and substantially in excess of the par value of the stock exchanged, such excess may be treated as paid-in surplus in the computation of invested capital.
    Value of property acquired, determined.
    The petitioner acquired a lot of the value of $165,000. The lot was acquired as a site for a garage building. It was subsequently sold pursuant to a decree issued in a condemnation proceeding and a portion of the proceeds of the sale within 60 days after receipt was expended in the purchase of the stock of a corporation owning similar property. Held, that to the extent such proceeds were expended in the acquisition of a similar site, the petitioner is entitled to relief under the provisions of section 234(a) (14).

      Held, that the value of certain demand notes given by the stockholders to the petitioner may not be included in invested capital.

      Andrew M. Henderson, Esq., and Arthur L. Jones, O. P. A., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1919 and 1920 in the amount of $15,808.77. The petitioner alleges the following errors:
    1. That the Commissioner has refused to permit the petitioner to include tangible property, acquired for stock prior to March 3, 1917, in invested capital at its actual value at the time paid in.
    2. That the Commissioner has erred in determining the profits from the sale of property through condemnation proceedings.
    3. That the Commissioner has refused to permit the petitioner to include promissory notes of stockholders, received upon subscriptions to stock, as invested capital.
    FINDINGS OF FACT.
    The petitioner is an Ohio corporation with its principal offices at Walnut and Boardman Streets, Youngstown.
    From 1910 to August, 1916, James A. Henderson, as an individual, engaged in the sale of automobiles in Youngstown, Ohio, having the agency, for a restricted territory, for the sale of Overland and Willys-Knight automobiles. In 1916 the manufacturers of Overland and Willys-Knight automombiles offered to Henderson a distributing agency for five or six counties for the sale of their automobiles, provided, be acquired or caused to be acquired for bis use an improved, enlarged and more centrally located place of business. During the early part of the year 1916, Henderson, after securing the approval of the representative of the manufacturers, decided upon Lot No. 417 in the City of Youngstown as fulfilling his requirements.
    This lot was the property of Mahoning County and had been several times offered for sale. In August of 1916 Henderson submitted to the board of county commissioners a proposal to purchase. it for $100,000. This offer was accepted by the commissioners and a contract was entered into detailing the terms of purchase.
    The lot is situated on the southeast corner of the intersection of Wick Avenue and Wood Street and has a frontage of 150 feet on each street. It had been previously used by the county as a site for a courthouse and the old abandoned building still remained on the property at the time of the purchase. This building had no value in excess of the cost of removal. The location of the property and its general contour made it particularly adaptable to the business requirements of Henderson.
    The petitioner corporation was organized on August 16, 1916, for the purpose of taking over from Henderson the automobile agency above referred to, the contract with Mahoning County, and all of the inventory and equipment used by Henderson in the operation of his business, and stock of the corporation was issued in exchange for all of such assets. Shortly thereafter the petitioner completed its plans for the erection of a modern automobile sales building and let contracts for the erection thereof. The work on the excavations was begun immediately, and as soon as practicable the foundations were laid. At this stage it was necessary to suspend operations because of the restrictions placed upon construction work shortly after the-entry of the United States into the World War.
    In October, 1919, the Erie Land & Improvement Co. instituted a condemnation proceeding wherein they sought to acquire the property which the petitioner had purchased from the county. On March 26,1920, the court approved and affirmed an award of $250,000 fixed as the value of the land appropriated and $30,000 as the value of the improvements thereon. On October 22, 1920, the Improvement Company and the petitioner entered into a contract for the purchase and sale of the lot at an agreed consideration of $280,000 and this amount was subsequently paid to the petitioner.
    The value of the lot ón the date of its acquisition by the petitioner was $165,000 and thereafter there was expended $50,984.56 for improvements and $11,282.46 for legal expenses, the expenditure of the last two items being conceded by the Commissioner. The Corn-missioner in his computation placed upon the lot a value of $100,000 but allowed a deduction of $20,984.56 as a loss on sale of improvements.
    Having been thus forced to dispose of Lot No. 417, the petitioner found itself again without a suitable location. for its business and it proceeded immediately to investigate the various properties that were both suitable and available. It was finally determined that a lot and building owned by the Youngstown Carriage Co., a corporation, was suitable, and on December 24, 1920, the petitioner purchased all of the outstanding stock of that company for the sum of $194,000. Of this amount $73,845.34 represented the cost of the-land acquired.
    In or about the month of May, 1919, the petitioner decided to increase its authorized capital stock from $100,000 to $350,000 and on June 9,1919, accepted notes from its stockholders in exchange for capital stock in the amount of $100,100, holding the stock as collateral security for the notes. Said notes were non-interest bearing and non-negotiable. No demand has ever been made for payment of the notes and no sum has ever been paid on account of the notes. The notes were not used as collateral security by the petitioner.
   OPINION.

Green:

The first issue relates to the value for invested capital purposes of Lot No. 417, City of Youngstown, State of Ohio, which the petitioner acquired for stock. The answer avers that the property for invested capital purposes should be taken at its cost to the transferror as provided in section 331 of the Revenue Act of 1918. This position is not well founded for the reason that the petitioner acquired the property prior to March 3, 1917. If the actual cash value of tangible property at the time paid in for stock is shown to have been clearly and substantially in excess of the par value of the stock issued therefor, such excess shall be treated as paid-in surplus for the purposes of invested capital. See section 326 of the Revenue Act of 1918. Applying the law to this issue — if the actual cash value of Lot No. 417 was clearly in excess of the par value of the stock issued therefor, the excess shall be treated as paid-in surplus. We are satisfied that the actual cash value of the lot was in excess of the par value of the stock issued therefor. A careful examination of the record convinces us that, apart from improvements, the lot had an actual cash value at the time paid in.of $165,000, and such value should be used for invested capital purposes.

The second issue relates to the alleged profit which the Commissioner has assigned to the forced sale of the lot in 1920. The value of tbe lot (the property condemned) has been found to be $165,000, and were it not for the provisions of section 234(a) (14) of the Revenue Act of 1921, the computation of the profit resulting from the forced sale would be a mere matter of mathematics. The petitioner avers that it is entitled to the benefits of the section of the statute just cited, which reads as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * * * * * *
(14) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall he allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

The findings of fact show that in order to obtain the valuable distributing agency for the sale of Overland and Willys-Knight automobiles, it was necessary to acquire a suitable building lot, and that Lot No. 417 was admirably located as a site for a building to be used for the increased business of the petitioner. As soon as Lot No. 417 was transferred to the corporation, contracts were let for the erection of the building, excavation work was begun, and foundations were laid. The advent of the World War caused a cessation of building operations and, as soon as peace-time construction was permitted, petitioner found itself in the position where its property was about to be condemned. The findings of fact outline the facts in relation to the condemnation. Within approximately 60 days after petitioner had received payment for its property from the railroad company, it entered into a contract for the purchase of all of the outstanding capital stock of the Youngstown Carriage Co., which company owned land and other real estate well adapted for the business of the petitioner. The petitioner contends that in so far as it used the proceeds from the condemnation sale to purchase property of a character similar or related in service or use to the property condemned, it is entitled to the benefits of section 234(a) (14) of the Revenue Act of 1921. The Commissioner states that no provision is found in the Revenue Act of 1918 for the relief' which the petitioner seeks. Here again consideration has not been given to the retroactive provisions of section 234(a) (14) of the Revenue Act of 1921. The Commissioner, in his brief, contends that the petitioner purchased the stoek of the Youngstown Carriage Co. and that stock is not property of a character similar or related in service or use to the property condemned. We do not think this argument well founded for the statute itself makes specific provision for the purchase or acquisition of 80 per centum or more of stock or shares of a corporation owning such property purchased.

The real question to determine is whether the petitioner with the proceeds of the condemnation sale proceeded forthwith in good faith to expend the same in acquiring other property similar in character or related in service or use to the property condemned. We think the petitioner proceeded forthwith, since the purchase of the property was consummated within sixty days after the receipt of the money from the condemnation sale and the good faith of the petitioner- has not been challenged. The statute does not prescribe that the property acquired shall be absolutely identical in all respects with the property condemned. Here the petitioner had a lot with certain excavations and foundations for a building and he acquired a lot with certain buildings thereon. The two lots were similar in character and certainly were related in service or use, and we are of the opinion that in so far as the two lots are concerned, the petitioner is entitled to the benefits of the relief provisions of section 234(a) (14).

The third issue relates to the promissory demand notes which the petitioner received from its stockholders in payment for capital stock. The petitioner, seeks to take the notes in the amount of $100,100 into its vested capital. The notes bore no interest and were non-negotiable. No payments have ever been demanded on the notes nor have any payments been made. The record is silent as to the solvency or financial responsibility of the makers of the notes. The determination of the Commissioner as concerns this issue is approved.

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


author: Milliken:

text:
    Appeal of WALL & OCHS, INC.
    Docket No. 3857.
    Decided September 27, 1926.
    The record cards of a corporation engaged in business as a dispensing optician, upon which cards there is written or drawn specific data and measurements from which new lenses and frames may be made, are tangible property, and the value thereof may be included in invested capital.

      William, M. Williams, Esq., Earl B. Breeding, Esq., and Charles S. Edmunds, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This petition is from the determination of a deficiency in income and profits taxes for the year 1918 in the sum of $4,835.36. The errors alleged are:
    1. The Commissioner has improperly classified for invested capital purposes certain record cards as intangible property.
    2. The Commissioner has disallowed certain increases of salaries paid in 1917 to the employees of the petitioner for the year 1917, aggregating $14,300, which should be allowed as a deduction for the year 1918.
    FINDINGS OF FACT.
    Petitioner is a corporation organized under the laws of the Commonwealth of Pennsylvania. Prior to the year 1903 Charles F. Wall was engaged in the business of a dispensing optician. He owned certain assets which he used in his business, including machinery, merchandise, tools, patents, and record cards.
    In 1903 Charles F. Wall decided to incorporate his business and on January 23, 1906, he transferred his business, including machinery, merchandise, tools, patents, and record cards, to the corporation of Wall & Ochs, Inc., and received in payment therefor its total authorized capital stock of $100,000, consisting of 1,000 shares of the par value of $100 each.
    The record cards transferred to the corporation were 62,810 in number and were of light cardboard, and thereon were the facial measurements of each patient who brought a prescription to be filled. Such facial measurements included the inter-pupillary distance for far and near use, the shape of the nose, the height at which lenses are to be set, the distance in or out, the length and a diagram of spectacle temples, and the size and shape of lenses. The cards also carried a copy of the original prescription which had been furnished to the patient by the physician-oculist. These facial measurements of the patient are made by employees or officers of the petitioner with specially constructed instruments. There is also indicated on the cards the patient’s credit standing. These record cards are maintained as a permanent record of the petitioner and are used by him in filling additional orders for the same glasses, or the facial measurements are used for filling prescriptions requiring the same frames but other lenses. The actual cash value of these record cards when paid in to the corporation for stock was not less than $62,000.
    During the year 1917 the three officers and only directors of the taxpayer were Charles F. Wall, William L. Wall, and J. Harry Bowers, and they were also the only stockholders. During the year j 917 they met and discussed the question of salaries for each of them for 1917 and subsequent years, and during 1917 determined at a meeting at which all three were present that their compensation for 1917 and subsequent years should be as follows: Charles F. Wall, $11,000; William L. Wall, $8,500; and J. Harry Bowers, $8,000. The petitioner during 1917 credited and made available to its officers the following salaries: Charles F. Wall, $11,000; William F. Wall, $8,500; and J. Harry Bowers, $8,000. Each of the officers accounted for the sums of $11,000, $8,500, and $8,000, respectively, in their individual tax returns for the years 1917 and 1918. The books of account of the petitioner were kept and maintained upon the accrual basis. The petitioner, by formal resolution on January 29, 1918, adopted and ratified the payment of salaries to the three officers for the year 1917.
   OPINION.

Milliken:

The first issue relates to the computation of invested capital for the calendar year 1918. The asset in question is the permanent record card used by the petitioner in its business. The record evidences no dispute as to the fact that the record cards are and have been the property of the petitioner since 1906 and that the stock of the corporation was specifically issued therefor. The Commissioner has classified the record cards as intangible property and allowed the value of the cards for invested capital purposes subject to the statutory limitation. The petitioner contends that the record cards are tangible property and should be subjected to no limitation for invested capital purposes. The question to be determined by us, therefore, is whether the record cards are tangible or intangible property. Apparently, there is no dispute as to the value of the asset, but if there be such, the testimony of the experts qualified to pass upon their value convinces us that the cards had a value of not less than $62,000.

The business of the petitioner is the filling of the prescriptions of . the oculists as brought to them by the patient. It does not test the eyes. It carries no stock. Its business is to make to order glasses ( conforming to the individual requirements of each customer. The lenses are ground in strict conformity with the prescription of the oculists. It is the duty of the petitioner to make such special adjustments of the frames as best suits the facial measurements and requirements of each customer. The petitioner preserves by means of the record cards, full data and history relating to each customer and files these cards for safe keeping in a vault. As customers come to them for additional services the record card is used for the purpose of supplying the measurements necessary for giving the service. The evidence abundantly proves their value and continued use in the business.

The terms “ tangible property ” and “ intangible property ” have so many different meanings and shades of meaning that their significance can be gathered, for the purposes of this inquiry, only from the statute itself. Congress, in section 325(a) of the Revenue Act of 1918, has laid down certain specific definitions. The asset here in question does not fall into any of the specific definitions enumerated. The Commissioner contends that the asset in question is intangible property. It seems to us the term “ intangible property ” as used in the statute should be construed to mean property of a character similar to patents, good will, and the specific kinds of property enumerated in the same clause. With respect'to property not clearly of such a character, it is our duty to decide whether it is tangible or intangible.

The record cards are not similar in character to patents, copyrights, secret processes and formulae, trade-marks, trade-brands, or franchises. It is the insistence of the Commissioner that the cards are good will. The good will of the business does not ordinarily attach to a physical asset. Good will usually results from and is built up from the transactions which the customer has with the merchant, the excellence of the article manufactured and sold, the integrity and courtesy of the merchant and the good opinion which the customer has of the merchant and his wares. The record cards can not be measured exclusively by the last-mentioned standards. The article sold may not have been satisfactory, or the integrity of the merchant may have been questioned, in which event the record cards would not supply the good will that would have been lacking. The cards remained as a continuing and permanent asset, regardless of the good will of the business, and could possibly have been used by another oculist meriting more fully the good will of his customers, with a resultant larger profit from the optical business, or perchance, with the reverse situation obtaining. The cards were fixed assets, while the good will of the firm owning them depended upon the factors hereinbefore mentioned. Indeed, the record cards served a purpose similar to the patterns and drawings of the manufacturer. The record cards contained the minute specifications and details from which additional glasses could be and were supplied. Such being the case, we must hold that the cards in question were tangible property.

The second issue relates to salaries, or additional compensation which the petitioner seeks to deduct for the calendar year 1918. During the year 1917 the three officers, directors and stockholders had a meeting and determined that the salaries for the year 1917, which they deemed to be reasonable, should be as follows: Charles F. Wall, $11,000; William L. Wall, $8,500; and J. Harry Bowers, $8,000. The corporation credited the salaries of the individuals named and they reported the same in their individual tax returns for the year 1917. The petitioner maintained its books of account and reported its income on the accrual basis. It is claimed, although the record is silent as to the reason, that the Commissioner disallowed the deductions for 1917, whereupon the petitioner seeks the deduction in the return filed for the calendar year 1918. It is also in evidence that the petitioner claimed, and was allowed, for the calendar year 1918, salary deductions for that year in the amount of $27,500, representing salary to Charles F. Wall of $11,000; William L. Wall of $8,500; and J. Harry Bowers of $8,000. We are of the opinion that the taxpayer is not entitled to the additional deduction claimed. The deductions pertain to the calendar year 1917. However, we have before us only the year 1918 and make no specific findings other than as concerns the deduction for the year 1918. The determination of the Commissioner relative to the second issue is approved.

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

LaNSdoN, Marquette, and SteeNhageN dissent.