author: ARttndbll

text:
    Appeals of TUNNEL RAILROAD OF ST. LOUIS and ST. LOUIS BRIDGE CO.
    Docket Nos. 2713, 2714.
    Decided July 30, 1926.
    1. Control by one corporation, through a long-term, lease, of the property and business of another corporation .does not constitute control of the stock of such other corporation.
    2. Authorization to vote stock by proxy does not effect a separation of the voting power from the ownership of the stock; neither does it constitute a relinquishment by the stockholder of any right of ownership or control of his stock.
    3. A corporation, as assignee of a long-term lease, controlled the entire properties of two other corporations; it owned only a part— not amounting to substantially all — of the voting stock of one of the lessors, and the remainder of the voting stock of the lessors was owned by strangers and voted by officers of the assignee through proxies. Held, that the lessor corporations were not entitled to affiliation with the assignee.

      T. M. Pierce, Esq., for the petitioners.

      Arthur J. Beaton, Esq., for the Commissioner.
    Before SteRnhagen, Lansdon, and Arundell.
    These petitioners appeal from the determination by the Commissioner of deficiencies of $2,051.20 and $1,694.88, respectively, in income taxes for the years 1917, 1918, and 1919, which deficiencies are entirely the result of the Commissioner’s holding that the petitioners were not, during the years in question, affiliated with the Terminal Railroad Association of St. Louis, under section 240 of the Revenue Act of 1918 and section 1331 of the Revenue Act of 1921.
    FINDINGS OF FACT.
    The St. Louis Bridge Co., hereinafter called the Bridge Company, and the Tunnel Railroad of St. Louis, hereinafter called the Tunnel Company, are Missouri corporations, both incorporated on December 18, 1878, for a period of 500 years. The Bridge Company and the Tunnel Company were organized for the purpose of owning and operating the Eads Bridge across the Mississippi River at St. Louis and the tunnel approach thereto in St. Louis.

      These companies, the petitioners, by an agreement dated July 1, 1881, leased all their properties to the Wabash, St. Louis & Pacific Railway Co. and the Missouri Pacific Railway Co. for the entire term of corporate existence of the petitioners and any renewals or extensions thereof.
    The lessees agreed to pay as the rental of these properties all taxes and assessments on the property, the Sum of $2,500 per year to cover corporate expenses of the petitioners, and to the holders of bonds the principal and interest thereon and to stockholders the dividends on the stock. These securities and the interest and dividends to be paid were as follows:

      St. Louis Bridge Co.:

    $5,000,000 mortgage bonds — 7 per cent interest rate_$350, 000 per annum
    2,490,000 first preferred stock — 6 per cent dividend rate- 149,400 “
    3,000,000 second preferred stock — 3 per cent dividend rate_ 90, 000 “

      Tunnel Railroad of St. Louis:

    $1,250,000 common stock — 6 per cent dividend rate_ 75, 000 “
    All of the dividends on the above stock were to be guaranteed by the lessees by endorsement on the stock certificates. The right of reentry was given the petitioners in case of default by the lessees, provided the default continued for 60 days. The common stock of the Bridge Company in the amount of $2,500,000 was to be placed by that company with a trustee, (quoting from the lease)—
    * * * to be field by it in trust, witfi power and authority so long as the said lessee companies shall perform their obligations under this lease, to vote in person or by proxy upon said stock at any and all meetings, special or stated, of the stockholders of said St. Louis Bridge Company, and upon any proposition submitted at such meeting, as shall be directed by the said lessee companies, not inconsistent with the preservation of this lease.
    The said common stock, subject to the above restriction as to the custody and control thereof, shall go and belong to the said lessee companies.
    The terms of this lease were carried out by the parties thereto.
    In 1889 the lease was assigned to the Terminal Railroad Association of St. Louis, hereinafter called the Terminal Association, a Missouri corporation composed of fourteen members or proprietary railroad companies whose lines operated in St. Louis. The Terminal Association operates the terminal and transfer facilities as a unit. The properties leased from the petitioners are an integral part of such terminal facilities and could not practically be operated separately. Under the assignment the Terminal Association agreed to perform the covenants and make the payments provided for in the lease.
    The officers of the Terminal Association, namely, the president, the vice president, the secretary-treasurer and the auditor, hold the same respective positions in the petitioner companies, to which they are elected annually by officers of the Terminal Association under proxies given them by holders of the stock of the petitioners.
    Since the execution of the lease, the petitioners have done no business. They draw no checks and declare no dividends. They pay no capital-stock tax. In the annual reports to the Interstate Commerce Commission the Terminal Association has always included the Bridge and Tunnel Companies as part of its own report. The Terminal Association treats its obligations under the lease as its own operating expenses, and on its tax returns it deducts the interest paid on the Bridge. Company’s bonds.
    For more than twenty years unrestricted proxies covering all the voting stock have been given to the president and vice president of the Terminal Association. These officials of the Terminal Association have voted all the stock of both corporations. No proxy has ever been refused or withheld from the Terminal Association. The only activity of either taxpayer corporation has been the annual election of officers. At such elections the officials of the Terminal Association have elected themselves as officers of the corporation.
   OPINION.

ARttndbll

: The facts may be briefly summarized. The Terminal Association leases and operates all the properties of the petitioners. As rent for these properties it pays to the petitioners a nominal sum to cover cost of maintaining their' corporate existence, agrees to discharge the bonded indebtedness of the .petitioners by payment of principal and interest direct to the bondholders, and agrees to pay direct to stockholders of the petitioners the dividends on their stock. The Terminal Association owns and votes all of the common stock of the Bridge Company in the amount of $2,500,000. The remainder of the capital stock of the Bridge Company, being first preferred in the amount of $2,490,000 and second preferred in the amount of $3,000,000, and the capital stock of the Tunnel Company, which is common stock in the amount of $1,250,000, is owned by persons other than the Terminal Association but is voted by officers of the Terminal Association under proxies given to it annually by the stockholders.

Under these facts, are the petitioners entitled to affiliation with the Terminal Association?

The petitioners say that the lease under which their properties are operated is tantamount to vesting title to the properties in the Terminal Association in fee. This contention seems immaterial for affiliation, under the statutes, is not based on ownership of corporate property — it must be based, if it exists, on ownership or control of stock.

As to the property being leased under an agreement which may amount to a lease in perpetuity, we have held in the Appeal of Old Colony R. R. Co., 1 B. T. A. 1067, and Appeal of Norwich & Worcester R. R. Co., 2 B. T. A. 215, that .the fact that one corporation operates the property of another by virtue of a long-term lease is not sufficient basis for affiliation, as we could not so far disregard the language of the statute as to hold that control of the pfoperty and business of the corporation is control of the stock.

The petitioners make no claim that affiliation rests on stock ownership. This is easily understood from the fact that the Terminal Association owned none of the Tunnel Company stock and owned only 25,000 of a total of 79,900 shares of the Bridge Company stock.

Thus by elimination we come to the proposition that, if affiliation exists, it must be by reason of stock control through proxies,, which over a period of twenty years have been given to officers of the Terminal Association by holders of all the preferred stock of the Bridge Company and all the common stock of the Tunnel Company, both classes of stock having voting rights. The proxies given in these cases were in the usual form of unrestricted proxies. The rights and duties generally of holders of proxies at stockholders’ meetings are too well known to require discussion here. Our concern is whether the proxies vested a sufficient control in the donees to bring -the companies here involved within the affiliation statutes.

The giving .of proxy is not a relinquishment by the donor' of any of the rights of ownership or control. It is merely a delegation of one of the incidents of ownership — the right to vote the stock — ■ and this delegation at the most makes the proxy holder an agent of the donor. And this agent must vote in accordance with the instructions given either openly or tacitly to him by the owner of the shares. Buche v. Central Leather Co., 78 N. J. Eq. 484; 81 Atl. 571. Nor can the giving of a proxy be regarded in fact as a separation of the voting power from the ownership of stock, since the property right remains in the stockholder. In Warren v. Pim, 66 N. J. Eq. 353; 59 Atl. 773, 784, it is said:

A proxy confers only a power upon the stockholder's deputy and not a right. The right still inheres in the stockholder.

Furthermore, the agency thus created is limited. A proxy to vote stock in the ordinary concerns of the corporation — and proxies are to be so construed unless their terms are special — is no authority to vote for the reorganization of the corporation, Farish v. Cieneguita Copper Co., 12 Ariz. 235; 100 Pac. 781; or its consolidation with another corporation, or for the sale of all of its property, Abbot v. American Hard Rubber Co., 33 Barb. (N. Y.) 578; or for a voluntary liquidation of its affairs. McKee v. Home Savings & Trust Co., 122 Iowa, 731; 98 N. W. 609.

The petitioners cite the case of Hyams v. Calumet & Hecla Mining Co., 221 Fed. 529, where it is said, at page 541:

A control purposely gained and exercised by a minority stockholder with the aid of proxies of other stockholders may have the same effect as a control by actual stock majority. See United States v. Union Pacific R. R. Co., 226 U. S. 61, 33 Sup. Ct. 53, 57 L. Ed. 124.

Thiá holding of the court is not open to dispute, for the principle set out therein is well known. It is simply that the holder of the voting rights of a majority of stock may control the corporation as fully as the owners of a majority. An even stronger case on this point is found in United States v. Union Pacific R. R. Co., 226 U. S. 61, where the Union Pacific owned 46 per cent of the stock of a competing railroad, but this 46 per cent ownership was by a compact, united body, while the remainder was distributed among many stockholders. Here the court reached “ the conclusion that the Union Pacific thus obtained control of a competing railroad system.” Neither of these cases are in point here, for they deal with corporate control by minority stockholders. The statute with which we have to deal requires ownership or control of substantially all the stoclc of another corporation. Plainly, to meet the terms of the statute it is not sufficient to show control of a corporation by minority stockholders; what must be shown is ownership or control of substantially all the stoclc. We have pointed out above that acquisition of voting power by proxy does not carry with it control of the stock.

We are accordingly of the opinion that the petitioners are not entitled to be considered as affiliated companies with the Terminal Railroad Association of St. Louis.

The deficiency for the years 1917, 1918 and 1919 in the case of the Tunnel Railroad of St. Lowis is $£,051.80, and in the case of the St. Louis Bridge Go. is $1,691.88. Order of re-determination will be entered accordingly.

Love and Steknhagen dissent.


source: Caselaw Access Project

author: ARttndell:

license: Public Domain

text:
    Appeal of FIRST BOND & MORTGAGE CO.
    Docket No. 6095.
    Decided July 30, 1926.
    1. Premiums received on the sale of capital stock held to constitute paid-in surplus and properly included in invested capital.
    2. Under the facts in this case, held, that notes given to cover unpaid balances on stock subscriptions may be included in invested capital.
    3. Where the Commissioner by his answer claims that invested capital should be reduced on account of - taxes for the previous year in an amount greater than that used in determining the deficiency, he must show that the amount of -such taxes used in his determination of the deficiency was not computed in accordance with the Regulations. Section 1207 of the Revenue Act of 1920.

      R. M. O'Hara, Esq., for the petitioner. .

      A. H. Murray, Esq., for the Commissioner.
    Before Abttndell and Lansdon.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $2,853.52 for the calendar year 1921. The petitioner alleges error on the part of the Commissioner in excluding from invested capital (1) premiums on the sale of stock, (2) the face value.of notes of subscribers to capital stock, and (3) expenses incurred in connection with sales of capital stock.
    The Commissioner by amendment to his answer avers that, whereas he reduced invested capital by prorating the tax for the prior year, he should have made a reduction in the full amount of the tax.
    FINDINGS OF FACT.
    The petitioner is a Delaware corporation with its principal office at Lansing, Mich. It was organized in November, 1919, and at that time took over the property of a Michigan corporation having the same name, issuing in exchange therefor $250,000 par value of its common stock.
    On November 26, 1919, the petitioner started a campaign to sell the remainder of its capital stock, which consisted of 50,000 shares of preferred stock and 25,000 shares of common stock, the shares in both classes having a par value of- $10 each. The stock was offered for sale in blocks of two shares of preferred and one share of common stock at a price of $35 per block. During the period November 26, 1919, to September 13, 1920, it sold, or received subscriptions for 24,554 shares of preferred and 12,217 shares of common stock of a total par value of $368,310, at a price of $415,696, or $47,386 in excess of par value. Of this latter amount the taxpayer transferred $10,000 to surplus, which was allowed by the Commissioner as an item of invested capital.
    The stock subscription agreement used by the taxpayer reads in part as follows:
    agreement between the first bond & mortgage company
    of Lansing, Michigan, hereinafter called “ Company ” and-_of_ hereinafter called “ Subscriber.”
    Witnesseth the Company agrees to sell to the Subscriber and the Subscriber agrees to purchase_shares of Preferred Stock and_shares of Common Stock of the Company, of the par value of Ten Dollars each full paid and non-assessable at and for the sum of-Dollars
    Purchase Price

      payable as follows:_Dollars in cash, receipt of which is hereby acknowledged and the balance in installments of-Dollars or more on the_day of each and every month'hereafter until the full purchase price shall have been paid.
    When the Subscriber has made all of the payments above specified the Company agrees that it will deliver to said Subscriber, his heirs or representatives, certificates of said Preferred or Common Stock and dividends on the Preferred Stock accumulated from the date of issue.
    If the Subscriber shall fail to pay any of said installments when due and said default shall continue for at least thirty days, then and in such case the Company may, at its option, while such default continues, terminate this agreement and all rights of the Subscriber thereunder; but in case of sickness actually preventing punctual payment, the Company will, if it receives prompt notice and satisfactory proof of such sickness, grant reasonable extensions on payments so prevented, but such extension taken together shail not exceed six months during the life of this contract.
    Subscription contracts are not subject to cancellation either wholly or in part.
    Agents are not authorized to make any alterations in the within agreement.
    The Co'mpany reserves the right to reject any or all subscriptions, to withdraw this offer and to increase the subscription price without notice.
    With every subscription the petitioner secured at least 10 per cent, of the subscription price in cash and for the balance obtained the subscribers’ promissory notes, which bore interest at the rate of 7 per cent. In each case where a note was given by a subscriber, an officer of the company made an investigation through banks and through the credit exchange to determine the solvency and the credit standing of the maker. In some cases the notes were rejected. Upon the acceptance of subscriptions, the petitioner executed certificates for the stock subscribed for but did not deliver them to the subscribers until full payment was made. Dividends which accrued on stock subscribed for, but held by the petitioner pending receipt of full payment, were paid to the subscribers.
    In carrying out the stock sales campaign during the period November 26, 1919, to September 13, 1920, the petitioner incurred the following expenses:
    Commissions on sales of stock. $25, 424. 56
    Salaries_ 2, 800.90
    Advertising-220. 66
    Rent- ' 185.00
    Stationery and books_ 393. 65
    Telegraph and telephone_ 9. 00
    - $29, 033. 77
    Miscellaneous-.- - 11,601 81
    Total- 40, 635. 5S
    In winding up the sales campaign during the remainder of 1920 and 1921, the taxpayer incurred expenses as follows:

      Commissions_ $1, 605. SO
    Salaries__ 519.93
    Advertising-,- 3. 92
    -• $2,129. 65.
    Miscellaneous_'- 8, 716. 97
    Total__ 10,846.62
    The expenses were carried in a journal used to record the daily-sales of stock, commissions, salaries, and other expenses incurred in connection with the sales of stock. They were not carried into the petitioner’s general books of account either asp an- expense or charge to any asset account, but were used merely as a reduction of the total amount received from stock subscriptions.
    In computing the deficiency here involved the Commissioner reduced the invested capital for 1920 in the amount of $416.65, representing a prorated portion of the income and profits tax of $985.91 for 1920.
   OiTNION.

ARttndell:

The-petitioner claims the right to include in invested capital the premiums on the sale of its capital stock. Of the total premiums received the petitioner transferred $10,000 to its surplus account, and this amount was included by the Commissioner in invested capital in his computation. The balance of the amount of premiums was not carried in the petitioner’s general books of account. Premiums received on the sale of capital stock constitute paid-in surplus and are properly included in invested capital. The invested capital of the petitioner in this case should accordingly be increased in the- amount of $37,386, representing the difference between the total premiums of $47,386 and the amount of $10,000 allowed by the Commissioner. This amount is not the same as that claimed by the petitioner, but it is the amount which has been determined to be correct after a great deal of checking on our part of the books and records placed in evidence.

With respect to the notes accepted by the petitioner to cover the unpaid balance on stock subscriptions, we find that the petitioner satisfied itself as to the solvency of the makers, issued the stock subscribed for, although it did not make delivery, and paid to the subscribers dividends that accrued during the time it held the stock. In view of these facts, we are of the opinion that the notes were bona ■fide paid in for stock and should be allowed as an item of invested capital. .The amount of the notes is not shown by the record. If the taxpayer can satisfy the Commissioner as to the amount of the notes, they may be allowed in invested capital.

The evidence shows, as set forth in the findings of fact, that in conducting a stock sales campaign the petitioner incurred expenses in 1919, 1920, and 1921, in the aggregate amount of $51,482.20. Of this amount, it identified as commissions, salaries, etc., amounts totaling $31,168.42. The items making up the amount under the heading “ Miscellaneous ” were not identified by the taxpayer, nor is any claim with respect thereto made in this appeal. The total of the amounts proA^ed by the taxpayer to have been spent as organization expenses is properly an item of invested capital. But in this case the organization expenses were paid out of the premiums receded on the sale of capital stock and thus the restoration to invested capital of the full amount of premiums on the sale of capital stock carries with it the inclusion in invested capital of the amount of organization expenses. To alloAv the inclusion of the full amount of the premiums and also the organization expenses would be to make a double alloAvance for the organization expenses.

The contention of the Commissioner with respect to reduction of surplus by the amount of the prior year’s taxes is now settled by section 1207 of the Revenue Act of 1926. Article 845 of Regulations 62 provides that, in reducing invested capital on account of taxes for prior years, such taxes shall be averaged for the proportionate part of the taxable year after the tax is due and payable. This does not give the Commissioner the right to reduce invested capital by the full amount of the tax for the previous year. No showing has been made by the Commissioner that the proration of the 1920 tax, as set forth'in his determination, was not in accordance with the Regulations, and his contention with respect thereto must be rejected.

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


author: Murdock

text:
    CHARLES N. BURCH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7164.
    Decided July 30, 1926.

      Held, that a loss due to the destruction of a pleasure automobile by collision is not such “ other casualty ” as is deductible from gross income under the Revenue Act of 1921, section 214 (a) (6), as amended;

      Clinton H. McKay, Esq., for the petitioner.

      J. K. Moyer, Esq., for the respondent.
    Before ARtjndell and Lansdon.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $75.56, which arose when the Commissioner disallowed a deduction for the loss due to the destruction of the taxpayer’s pleasure automobile in a collision. The case was submitted on stipulation.
    FINDINGS OF FACT.
    The taxpayer purchased an automobile on April 20, 1923, for $975.00. On September 12, 1923, it was totally destroyed by being driven into the supports of a railroad bridge on a public highway. The loss was not covered by insurance, the car was used entirely for pleasure, and the fair market value of the automobile on the date of its destruction was $775, which was the amount claimed as a deduction by the taxpayer.
   OPINION.

Murdock

: The question in this case has already been settled by the decisions of this Board. Appeal of Clinton Graham, 1 B. T. A. 775; Appeal of Fred J. Hughes, 1 B. T. A. 944; and Appeal of L. Oransky, 1 B. T. A. 1239. In those cases it was held that the rule of ejusdem generis must be applied to sections of the Revenue Acts identical in wording with the section of the Act of 1921 under which the taxpayer claims this deduction.

A loss due to the destruction of a pleasure automobile by collision is not such “ other casualty ” as is deductible from gross income under the Revenue Act of 1921, section 214(a) (6), as amended.

Judgment for the Commissioner.


author: Littleton:

text:
    Appeal of PARISH-WATSON & CO., INC.
    Docket No. 4894.
    Decided July 31, 1926.
    1. Upon incorporation of a joint venture, a portion of the property acquired by the corporation was transferred to it at cost to the joint venturers under a written agreement which provided that the net profits arising from the sale of such property, irrespective of any dividends upon the capital stock of such corporation resulting from other business, should be paid to the joint venturers. Held, that such net profits constituted taxable income of the individuals and not of the corporation.
    2. Upon the evidence submitted, held, that under the terms of an agreement entered into in July, 1920, between the taxpayer and a prospective purchaser of certain personal property specified therein, no sale was completed during the years 1920 or 1921, and no profit was realized from the agreement during those years.

      James H. Hayes, Esq., and Laurrenoe A. Baker, Esq., for the petitioner.

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

      Before Littleton, Smith, and Tiíussell.
    This proceeding involves the determination of deficiencies in income and profits tax for the calendar years 1920 and 1921 in the amounts of $59,807.68 and $393.97, respectively. The issues are (1) whether, under the terms of a contract between certain joint ven-turers and the petitioner, the profits derived from the sale of certain art objects constituted income to the taxpayer or to the joint venturers, and (2) whether an agreement to sell certain art objects during the year 1920 was a completed transaction in that year for the purpose of determining the profit upon the sale to the joint venturers, joint owners, and the petitioner, or, whether the transaction was one in which the profit accrued on the date of the last payment.
    FINDINGS OF FACT.
    The facts relating to the first issue, namely, whether the profits derived from the sale of certain art objects transferred to the petitioner, a New York corporation, by certain joint venturers under a contract dated October 17, 1917, constituted income to the corporation or to. the joint venturers, have heretofore been considered by the Board and are fully set forth in the findings of fact in the Appeal of Parish-Watson & Oo., 2 B. T. A. 851. The facts found bjr the Board in that appeal with reference to this issue are made a part of these findings of fact as fully as if set forth in detail herein. The agreement of October 17, 1917, was in effect during the taxable years 1920 and 1921.
    Early in December, 1918, M. Parish-Watson, president and treasurer of the petitioner, obtained permission from one John M. Willys to place in his residence 16 art objects with the view of interesting him in the purchase thereof. These art objects remained in Willys’ home until about June, 1919, when he left New York for Europe, at which time they were removed. Upon his return in the fall of 1919, with his permission, they were again placed in his residence. In December, 1919, M. Parish-Watson and Willys discussed the matter of the purchase by the latter of the art objects; also the terms of the sale. Willys indicated his willingness to enter into an agreement relating to purchase by him of the 16 art' objects, upon certain contingencies. The petitioner was desirous of entering into a contract the terms of which would postpone the payment of the sales tax until a further date. It had knowledge of a contract entered into between another art dealer and the vendee by the terms' of which the vendor retained legal title to the articles sold upon the deferred payment plan under which the Treasury Department had held that the sales tax became due when title passed to the purchaser.

      On January 24, 1920, the petitioner wrote to Willys as follows:
    Pardon my delay in not having sent to you sooner the hill covering the purchase of the porcelains, which I enclose herewith, together with memorandum of agreement which is acceptable to the Treasury Department for the deferred payment plan. This will put the final settlement of tax off until final payment of the account is made.
    If you have any better suggestion to make I shall be glad to discuss it with you.
    The three pieces of pottery you will note are not subject to tax as they come under the “ pottery ” classification.
    I also enclose a copy of a letter from the Treasury Department which shows us the authority for this ruling.
    Early next week I shall try to get in touch with you.
    With the above-mentioned letter there was transmitted the following memorandum:
    Memobandum of aokeement between Parish-Watson & Co., Inc., called the vendor, and J. A. Van Wie, called the purchaser:
    In consideration and as a condition of the vendor having agreed to sell and deliver to the purchaser the work of art described below upon terms of deferred payment, it is mutually understood and agreed that the title to such work of art is to remain in the vendor until it is fully paid for, and that it may be re-taken if not paid for as agreed.
    With this letter there was transmitted a list of the 16 articles and the price of each, totaling $299,800. Thereafter, verbal negotiations were carried on between the petitioner and Willys, and his agent J. A. Yan Wie, with the result that on July 16, 1920, the above-mentioned memorandum -agreement was signed by the, taxpayer and J. A. Yan. Wie, Willys’ agent, to which' was attached and made a part thereof a list of the art objects, as follows:
    D. J. 167_$58,500
    W. 176_ 48, Ó00
    810/6831_'_ 25,000
    P. 348_i._ 16, 000
    J. 303_ 36,000
    T. 1512/13_ 16, 000
    T. 440_ 6, 000
    D. J. 139___LJ_ 4,500
    D. J. 221_-__1_ 8,500
    S. 526_ 5, 000
    T. 407_ 7, 500
    N.Y.J.T. 25_ 12,000
    T. 432_ 17, 500
    T. 431_ 12, 500
    D. J. 39_ 12,500
    W. 197_ 14, 300
    ._ 299, 800 Total

      On July 23, 1920, Willys wrote the petitioner as follows:
    Referring to the Chinese porcelain and pottery purchased under a contract between yourselves and Mr. J. A. Van Wie dated July 16th, 1920, I wish to corroborate what you doubtless understood; that Mr. Van Wie personally has no interest in this purchase, but is acting as my agent.
    My reason for having Mr, Van Wie’s name used is that I think it just as well for the time being' that my name does not apear in the transaction.
    I understood as one of the conditions of this purchase that I am to have the privilege, up to date of final payment, to exchange any piece in this purchase for any other article or group of articles of a similar value which I may select from your collection.
    On the same elate J. A. Van Wie wrote the petitioner as follows:
    Referring to your Memorandum of Agreement this day entered into between your company and myself for the purchase and sale of certain works of art, described in said agreement, desire, in order that there shall be no misunderstanding, to record herein my understanding as to the price to be paid for said works of art and the terms of payment therefor.
    The purchase price was to be $299,800.00, payable $100,000.00 in cash (which was paid to you on July 10th, 1920), $50,000.00 to be paid November 10th, 1920, $114,000.00 to be paid January 10th, 1921 and $35,800.00 to be paid on January 10th, 1822. I am to have the privilege of anticipating any and all of said payments and when they are completed the title to said property is to vest in me.
    If the above is your understanding, kindly so indicate in writing and we will consider this letter, together with your acknowledgment, a part of said agreement.
    On August 3, 1920, the petitioner wrote J. A. Van Wie as follows:
    Referring to your favor of July 23rd regarding the agreement to purchase works, of art from this firm, it is understood that the purchase price is $299,800, payable $100,000 in cash (receipt of which we hereby acknowledge as of July 10th, 1920), $50,000 to be paid November 10th, 1920, $115,000 to be paid January 10th, 1921, and $35,800 to be paid on January 10th, 1922. It is further understood that you have the privilege of anticipating any and all of said payments, and when they are completed the title to said property is to vest in you.
    About the same time it was verbally agreed between the petitioner and Willys that he should have the right, at any time before the date fixed for the final payment, to return any or all of the articles and receive back any payments made, or to cancel the contract as to the remaining payments, less 10 per cent of the amount originally agreed upon as the price to be paid.
    On July 10, 1920, Willys paid $100,000 in cash. On November 20, 1920, he paid the next installment of $50,000. The remaining $149,800 was paid as follows: $25,000, January 18, 1921; $15,000, February 24, 1921; $10,000, July 14, 1921; $10,000, August 17, 1921; $10,000, September 21, 1921; $10,000, October 14, 1921; $10,000, March 9, 1922; $10,000, April 10, 1922; $10,000, May 10, 1922; $20,000, September 21, 1923; and $9,160, March 18, 1924.
    The 16 art objects sold to Willys were not all owned outright by petitioner. The profit upon the sale of certain of the articles belonged to the joint venturers — Perine, Parish-Watson, Michael Dreicer, and Jacob Dreicer, — under the terms of the agreement of October 17, 1917, set forth in detail in the Appeal of PaHsh-Watson dk Co., 2 B. T. A. 851. Certain of the other articles sold were owned by the joint venturers subject to the right of the petitioner to receive one-half of the profit on the sale thereof under the agreement of October 17, 1917. Certain of the articles were owned outright by the petitioner. In certain others it had a joint ownership with French & Co., of New York, H. A. E. Jaehne, of New York, and Frank Partridge, of London: Some of the articles were on consignment to the petitioners for the estate of Edward Gorer, of London, and the petitioner’s interest in the sale thereof was one-half of the net profits.
    The petitioner did not enter the transaction upon its books as 'a sale until the final payment was made in March, 1924, but as each payment on account was received it allocated the same against the purchase price of each object as listed in the agreement of sale in the order in which said article appeared on that list. After such allocation it set up in the running account which it kept for each of the four venturers and each of the four joint owners the amount due each joint venturer and joint owner. Only the estate of Edward Gorer drew against the credit thus set up. French Co. were indebted to the petitioner in sums in excess of the amount which they were entitled to receive as their share of the profits on the sale to Willys. Nothing could be determined as to H. A. E. Jaehne’s account until a final settlement of accounts was had. The joint venturers’ account was not settled until after final .payment by Willys in March, 1924. All of the interested parties understood that the determination of the profit to which each should be entitled was to be suspended until final payment. The articles sold were carried by the petitioner at its risk' under its general insurance policy until final payment was made on March 18, 1924.
    A commission of $8,000 was paid to H. Reinhardt for his services in connection with the sale. The total profit upon the sale of the articles mentioned, less the commission of $8,000, was $161,670.98, which belonged, and constituted income, to the following persons in the amounts specified:
    Frénela & Co-$12,637.67
    Gorer Estate-1_ 13, 689.62
    H. A. E. Jaehne___ 21,373.64
    Frank Partridge--:._• 6, 569. 78
    Joint venturers — Perine, Parish-Watson, Michael Dreicer, and Jacob
    Dreicer- 35, 815. 05
    Parish-Watson & Oo_ 71,585.17
    Total_ 161, 670. 93

      In addition to the profit of $161,670.93, the Commissioner included in the petitioner’s income the sum of $5,468.70, representing profit on the sale of art objects to persons other than Willys, which profit belonged, under the terms of the agreement of October 17, 1917, to the four joint venturers — Periné, Parish-Watson, Michael Dreicer, and Jacob Dreicer.
    The petitioner kept its books and rendered its returns upon the accrual basis.
    Upon examination of the returns for 1920 and 1921, the Commissioner denied a deduction of $8,000 as commission paid to Reinhardt, determined a profit of $169,670.93 upon the articles sold to Willys, and included this amount, together with a further profit of $5,468.70 upon articles sold by it under the terms of the contract of October 17, 1917, with the joint venturers, in the income of the petitioner for the calendar year 1920.
   OPINION.

Littleton:

The Board heretofore decided, in the Appeal of Parish-Watson & Co., 2 B. T. A. 851, that, under the terms of the agreement of October 17, 1917, the profit on the sale of the art objects belonging to the four joint venturers — W. D. N. Perine, M. Parish-Watson, Michael Dreicer and Jacob Dreicer — constituted income to them and not to the petitioner. That agreement was in force during the years 1920 and 1921, and the profit upon the sale of the art objects belonging to the joint venturers under the terms of this contract and sold to Willys, and others, by the petitioner was erroneously included by the Commissioner in its income. As to certain of the objects sold, persons other than the petitioner had a joint interest therein and were entitled to share in the profits of the sale. Without discussing the evidence in detail, the Board has set forth in the findings of fact the profit which each joint venturer, each joint owner, and the petitioner received upon the sale of the 16 articles, and, in determining the tax of this petitioner in accordance with this opinion, only $71,585.71 should be included as income to it from that source. The amount of $5,468.70, representing profit upon the sale during 1920 of certain art objects belonging to the joint venturers, constituted income to them and should not be included as income to the petitioner in that year.

In making its returns for 1920 and 1921, the petitioner did not include as income any amount on account of payments made by Willys, upon the ground that the transaction was not a completed sale until final payment was made and whatever profit accrued to it constituted income at that time.

The Commissioner contends that the parties intended that there should be and that there was, in fact, a sale in July, 1920, and that the profit thereon accrued at that time.

We can not agree with the Commissioner’s contention that there was a completed sale in 1920 on which the petitioner realized a profit or sustained a loss. The contract provided (1) that the purchase price to be paid should be $299,800, subject to certain conditions hereinafter mentioned, (2) that the articles sold remained in Willys’ hands, (3) that title should remain in the petitioner until paid for as provided in the contract and that petitioner should carry the insurance thereon, (4) that Willys should pay $100,000 in cash and $199,800 in installments, namely, $50,000 on November 10, 1920, $114,000 on January 10, 1921, and $35,800 on January 10, 1922, (5) that he might anticipate any or all of the deferred payments and thereby claim title to the article or articles, (6) that he might exchange before the time fixed for the final payment any of the listed articles for another or a group of similar articles in petitioner’s collection, and (7) that he might return any or all of the articles before the date fixed for the final payment and' receive back all payments made and cancel any remaining payments, less 10 per cent of the amount originally agreed upon as the price to be paid.

We are not here dealing with the ordinary case of a sale with an extension of time for making the payment and retention by the seller during that time of legal title as security for the unpaid purchase price. This contract was nothing more than a continuing offer of Parish-Watson & Co., Inc., to sell the 16 art objects for the price set forth in the list furnished, totaling $299,800. By it Willys had the option or privilege of accepting the offer and purchasing the articles or of refusing to purchase the same through the exercise of the option given him by the contract by forfeiting 10 per cent of the price agreed upon. Under these circumstances, it was not definitely known, during either of the years 1920 or 1921, by either party that Willys would purchase the articles. ' He had not exercised the option to cancel the contract, nor had he indicated that he would elect to purchase. He exercised one of the privileges given him by the contract and returned an article on which the profit would have been $25,000 for one on which a profit of only $16,000 inured to the petitioner.

An offer to buy or sell becomes completed and binding when the person to whom it is made accepts it and communicates his acceptance or performs some act in compliance with the terms of the offer upon which his acceptance, so as to bind him, may be implied. An offer, unless withdrawn, may be accepted within a time expressly limited, and where such time is given it is not a completed contract or a sale of property -until formal -acceptance or until the time expressly fixed at or after which the purchaser may, by word or action, indicate his acceptance. The parties stipulated that the purchaser should have the right to purchase the property or not, as he saw fit, within the time specified, namely, January 10, 1922. There was a valuable consideration for this option, since Willys agreed to pay 10 per .cent of the stipulated price if he should not purchase, without which the contract between the parties would have been void for lack of mutuality of engagement. Where- there is an option in a contract to rescind, if the time within which the option can be exercised is prescribed, such condition must be complied with and a failure to comply with it terminates the option and the sale becomes absolute and completed.

The Board is of the opinion that, under the terms of this contract and the evidence before it, this was not a completed sale in either of the years 1920 or 1921, resulting in the realization of a gain or the sustaining of a loss by the petitioner. And since the question of tax liability for j'-ears subsequent to 1921 is not before the Board it is not necessary to consider it, or to decide at what time subsequent to 1921 the transaction was completed for the purpose of computing the gain or loss.

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


author: MoRRis:

text:
    Appeal of YOUGH BREWING CO.
    Docket No. 2384.
    Decided July 31, 1926.
    1. The taxpayer filed with the Commissioner an appeal from a so-called 30-day letter and a claim in abatement of proposed additional tax for 1918. While the appeal was pending, it received a notice and demand for payment from a collector, and then offered for filing another claim in abatement for the same tax. Subsequently, and under date of August 25, 1924, it received a letter from the Commissioner stating that its claim on the appeal had been examined and, after setting forth the reasons, stating “ the claim will therefore be rejected.” Thereafter, the taxpayer received a formal notice of deficiency for 1919, dated January 9, 1925, which also referred to a claim in abatement for 1918, and stated that the claim could not be accepted and will therefore be rejected. There was no reconsideration by the Commissioner of the 1918 claim subsequent to August 25, 1924. Taxpayer appealed within 60 days from the letter of January 9, 1925. It eld, the Board has no jurisdiction of an appeal relating to the year 1918.
    2. As a portion of the taxpayer’s brewery plant was continued in use after 1919, although to a lesser extent, in making near-beer, an allowance for obsolescence can not be made for that year based on that portion becoming obsolete by the end of 1919.

      3. In the absence of a segregation of the depreciated costs of those assets, the use of which was discontinued, the Board is unable to determine a reasonable allowance for their obsolescence.

      Maynard Teall, Esq., for the petitioner.

      B. G. Simpioh, Esq:, for the Commissioner.
    ^Before Marquette and MoRRis.
    - This is an appeal from determinations of deficiencies in income and profits taxes of $17,015.29 for 1918 and $2,439.55 for 1919. The issues are (1) jurisdiction of the Board to hear and determine the appeal in so far as it relates to the year 1918, and (2) whether the taxpayer is entitled to deductions for alleged obsolescence of tangible assets resulting from prohibition legislation.'
    FINDINGS OF FACT.
    The taxpayer is a Pennsylvania corporation with its principal office in the City of Connellsville.
    1. On January 24, 1924, the Commissioner sent to the taxpayer a formal letter stating an additional tax liability for 1918 of $17,015.29 and informing the taxpayer of its right to appeal to the Commissioner within 30 days in accordance with the provisions of section 250 (d) of the Revenue Act of 1921. On February 18, 1924, the Commissioner wrote to the taxpayer relative to its tax liability fof 1917, as adjusted by the Bureau, and affirmed his earlier decision with respect to 1917. On March 6, 1924, a letter was sent by the Commissioner to the taxpayer stating that its tax liability for both. 1917 and 1918 had been determined and closed in accordance with office letters dated January 1,- \_sio] 1924, and February 18, 1924, “ since you did not avail yourself of the opportunity to file a formal appeal as required by Treasury Decision 3492.” On or about March 10, 1924, a formal appeal covering both 1917 and 1918 was filed, which was signed by an accountant as agent of the taxpayer. On March 11, 1924, a claim in abatement of the proposed additional taxes for both 1917 and 1918 was filed, which contained this statement “ We are making application for a hearing before the Committee on Appeals and Review, and for that reason we ask an abatement until we are granted a hearing before the above-mentioned Committee.” Nothing further happened until May 21, 1924, when the Commissioner wrote to the taxpayer referring to the appeal filed March 10, 1924, and stating that it would be necessary to submit a new appeal signed by a corporate officer of the taxpayer and conforming to Treasury Decision 3492. Whereupon, under date of May 29, 1924, the taxpayer filed another appeal, also relating to 1917 and 1918, signed by its treasurer. The receipt of this appeal was acknowledged by the Commissioner on June 3, 1924, and a conference was arranged to be held at the Bureau of Internal Revenue on June 26, 1924. The conference took place on. or about that date.
    On July 29, 1924, a notice and demand for payment of the additional tax for 1918 was sent to the taxpayer by the collector of internal revenue at Pittsburgh, Pa. On August 7, 1924, the taxpayer returned this notice to the collector, together with another claim in abatement for the 1918 tax, and at the same time wrote to the Commissioner as follows:
    We are in receipt of a bill from the Collector of Internal Revenue, Pittsburgh, Pa., for income and excess profits tax for the year 1918 in the amount of $17,016.29, which we believe is unjust and inequitable.
    In June we appeared at a hearing in Washington, D. C., but the representative of your Bureau explained under the rulings of your office, he could not allow any adjustment in our tax liability on account of adverse conditions caused in our business by prohibition legislation, but if the Committee of Appeals and Reviews saw the justice of our claim, relief could be granted. We understood from this that our case would be submitted to the Committee and no action would be taken in the assessment of additional taxes until it had handed down an opinion. But much to our surprise we receive a bill for $17,015.29 based on your office letter dated January 24, 1924, which would indicate that it had not been transmitted to the committee by the Audit Section with their recommendations. In our opinion this procedure is not in accord with a spirit of fairness and it is our belief that the Bureau does not aim to act so arbitrary.
    We respectfully request that you authorize the Collector of Internal Revenue at Pittsburgh, Pa., to accept the Claim for .Abatement, a copy of which is attached, we are submitting to him and that we be accorded the privilege of having our case reviewed by higher authorities in your Bureau. We understand that this procedure is regular and .are only asking for the same treatment as other taxpayers. If we have not made our contentions clear in the data previously submitted, we would like to combine all data pertinent to the case and submit it for consideration.
    On August 25, 1924, a letter reading as follows was sent by the Commissioner to the taxpayer:
    Your claim for refund of $19,700.94 income and profits taxes for the years, 1917 and 1918 has been examined.
    The claim is based upon the statement that the rates of depreciation allowed by the Revenue Agent are not just and that allowance should be made for loss of useful life on account of the Prohibition Amendment.
    An examination of the depreciation schedule discloses that the amounts allowed upon the depreciable assets are considered reasonable by this office.
    Since the company continued in the similar line of business, the loss of useful life as outlined in Article 143, Regulations 45, does not apply.
    The claim will, therefore, be rejected.
    The rejection will officially appear in the next schedule to be approved by the Commissioner.
    August 27, 1924, a letter was sent by the collector to the taxpayer returning the abatement claim for the year 1918 and containing the following paragraph:

      This office also holds your abatement claim of $17,015.2!) for' the year 1918. In this connection you are advised that this office has no authority to withhold the collection of this tax or to accept your claim for abatement unless authorized by the Commissioner at Washington to do so.
    On November 24, 1924, a so-called 30:day letter was sent to the taxpayer relating to the years 1919 and 1920, and stating “Reference is also made to yonr claim for the abatement of $17,015.29 additional income and profits tax for 1918,” and a statement attached to the letter contains the following:
    In reference to your claim for the abatement of $17,015.29 additional tax for 1918, you are advised that a claim for abatement can not be accepted since the provisions of section 250 (d) of the Revenue Act of 1918 have been complied with and your recourse lies in paying the tax and filing a claim for refund submitting therewith all the material facts relating to the claim in support of which they are offered and to the proper consideration of which they are essential.
    Tour claim will, therefore, be rejected pro forma.
    A reply to the letter of November 24, 1924, was sent by the taxpayer on December 19, 1924, which contained this paragraph:
    It is noted in paragraph 5, page 4 of your letter, that you state that our claim for abatement cannot be accepted since we were allowed the benefits of section 250 (d) of the Revenue Act of 1921. It is true we were granted the privilege of a verbal hearing on June 26, 1924, but we were not granted the privilege of an appeal from the decision of the Income Tax Unit, although your conferees at the hearing advised us that the ease would go to the Committee on Appeals and Review which was then functioning. It is our desire to have the year 1918 reopened and all three years considered at one time. We should be at least accorded the privilege of an appeal to the United States Board of Tax Appeals, and believe that the provisions of S. M. 2282 III-33-1733 gives us the right for the year 1918, and the claim for abatement for 1918 should be accepted.
    On January 9, 1925, a letter was sent by the Commissioner notifying the taxpayer of a deficiency for 1919 and an overassessment for 1920, and also containing the following:
    Reference is also made to your claim for the abatement of $17,015.29 additional income and profits tax for 1918.
    In the statement attached to the letter appears the following:
    In reference to your claim for 'the abatement ■ of $17,015.29 additional tax for 1918, you are advised that a claim for abatement cannot be accepted since the provisions of section 250 (d) of the revenue act of 1918 have been complied with and your recourse lies in paying the tax and filing a claim for refund submitting therewith all the material facts relating to the claim in support of which they are offered, and to the proper consideration of which they are essential.
    Tour claim will, therefore, be rejected.
    The taxpayer’s petition was filed with the Board on March 7, 1925.
    2. Up until the time National prohibition became effective the taxpayer was engaged in the business of making and selling beer. It owns buildings, machinery, and equipment which were designed and used for that purpose and also in part for manufacturing ice. The gross floor area of the buildings is 41,840 square feet, of which 3,811 square feet, or 9.1085 per cent, is occupied by the ice-making plant, and the balance by the brewery. About 58 per cent of the machinery and equipment belonged to the brewing plant and 42 per cent was devoted to refrigeration. Of the latter machinery and equipment, approximately 50 per cent was employed in supplying refrigeration for the brewery and the remaining 50 per cent in making ice prior to prohibition.
    For about ten years prior to 1919 the taxpayer manufactured and sold approximately 20,000 barrels of beer each year. In 1919 it began making near-beer and in that year made 5,000 barrels; in 1920 it made about 12,000 barrels. Since 1920 the quantity manufactured has decreased until, in 1924, it amounted to 200 barrels. The taxpayer also manufactured about 100 barrels of root beer each year since 1918. In 1918 and prior years most of the ice manufactured was furnished to saloon-keepers with beer and included in the pric.e charged for the beer, or used for icing refrigerator cars. About 20 per cent was sold otherwise to persons who would take delivery at the plant. Since 1918 the ice-making plant has been operated to about 50 per cent of its capacity in producing ice which is sold to the public.
    In the manufacture of near-beer the same machinery and equipment is used as was employed formerly in making real' beer, except that in 1920 only nine out of a total of twenty fermenting tubs were used in making 12,000 barrels of near-beer, and the number in use has decreased gradually until in 1924 only one tub was used; the racking room is not used, as the near-beer is not barreled but is racked into' tanks for bottling. Before prohibition there were three or four brews per week. The extent of use of the equipment has decreased gradually until in 1924 there were three brews during the year and the quantity in each brew was 65 or 70 barrels, as compared with 200 barrels before. The near-beer is left in chip tanks five or six days and is ■ ready for the market within ten days; the real beer was stored three months.
    Because of their location and character of construction and the local conditions existing in Connellsville, the buildings and plant could not be adapted economically to uses other than the manufacture of malt beverages and ice.
    The depreciated cost of the buildings on January 1,1918, was $99,-681.00, and that of the machinery and equipment was $105,270.47.
   OPINION.

MoRRis:

The taxpayer relies on the letter of January 9, 1925, as the notice of determination of a deficiency by the Commissioner which gives it the right to appeal to the Board as to the year 1918 as well as 1919, and argues that this was a notice of final determination by the Commissioner. A chronicle of the events preceding this letter is set forth fully in the findings of fact. The taxpayer was notified on. January 24, 1924, of a proposed deficiency and of its right to appeal to the Commissioner in accordance with the provisions of section 250 (d) of the Revenue Act of 1921, within 30 days. No appeal was filed until March 10, 1924, and on the following day a claim in abatement was filed. Nothing further happened until May 21st, when the appeal was returned to the taxpayer because it was not executed in conformity with Treasury Decision 3492. Thereupon, a corrected appeal was filed on May 29, 1924. The claim in abatement and the appeal related to both the years 1917 and 1918. On June 3, 1924, the taxpayer was informed a conference thereon had been arranged for June 26, 1924,’ and the conference was duly held. . By accepting the appeal after the expiration of 30 days from January 24, and considering the taxpayer’s claims thereon, the Commissioner waived the 30-day requirement. On July 29, 1924, the taxpayer received a notice and demand for payment of the 1918 deficiency from the collector and thereupon submitted another claim in abatement for 1918. It does not appear when the assessment was made. On August 25, 1924, the letter set out in full in the findings was sent by the Commissioner. It states that the claims for both 1917 and 1918 had been examined and rejected and the reasons for the rejection are given. This was a decision of the taxpayer’s appeal under section' 250 (d). It does not appear that the Commissioner reconsidered the claims after that date or made any new determination, so that decision stands as the determination of the ■ Commissioner. The letters of November 24, 1924 and January 9, 1925, not only fail to show that the Commissioner reconsidered the case or made a redetermination, but each one states that the taxpayer’s claim for abatement of the 1918 deficiency can not be accepted. These letters do not mention 1917 and obviously refer to the second abatement claim for 1918. The action of the Commissioner in informing the taxpayer that this claim could not be accepted can not be construed as evidence of a reconsideration of the taxpayer’s claims, or of a redetermination of the deficiency. We therefore hold that • the Board has no jurisdiction to hear and determine the appeal as to the year 1918.

Because of the approach of the effective date of prohibition, the taxpayer stopped brewing beer in 1919. It then commenced making near-beer. The testimony shows that thenceforth certain parts of the buildings and brewing plant were not used, but that in manufacturing near-beer the balance of the brewery was used in the same manner as before. The portion used, however, was operated in 1919 only to about 25 per cent of capacity, as measured by the quantity of beverage produced. In 1920, by the same measurement, such portion was operated to 60 per cent of capacity; but from then on the extent of use gradually diminished "until, in 1924, it was but a small fraction of the previous use. It is also shown that since 1918 thé ice-making plant has been used only to about 50 per cent of its capacity, owing to the fact that refrigeration is not required for near-beer as it was for real beer, and that the taxpayer could not sell to the public a quantity of ice greater than 50 per cent of the plant’s capacity.

The taxpayer advances the proposition that such use as was made of the plant subsequent to cessation of beer manufacture was for the purpose of increasing the salvage, and it is entitled therefore to an allowance for obsolescence, over the period from February 1, 1918, to December 31,1919, of the difference between the depreciated cost and the value in such use, i. e., the alleged salvage value. It is argued,- further, that all breweries ipso facto became obsolete with prohibition. These propositions are based on assumptions of fact which we are not warranted in making. The question is not, what effect prohibition had on the business of manufacturing and selling beer. There is no doubt about that. What we have to decide is its effect on the utility and value of the physical assets. If they were not as a matter of fact capable of other uses, prohibition rendered them obsolete. But we can not assume all brewery plants are similarly circumstanced in respect of utility for purposes other than the manufacture of prohibited beverages. The facts must be established in each case.

Obsolescence is defined as the state of becoming obsolete. Webster’s New Int. Dict.; Appeal of Columbia Malting Co., 1 B. T. A., 999. Obsolete is defined as meaning “ no longer in use; disused; ■neglected.” Webster’s Diet. If property is continued in use for several years after 1919, as the evidence shows a portion of this brewery plant was, how can it be said that that portion became obsolete in that year? The part used required no alteration or reconstruction for such use; it apparently was as equally well adapted for making near-beer as it was for making the other kind. The fact that it was not operated to full capacity is not evidence that it was then obsolete. In 1920 it produced 60 per cent of the quantity of beverage formerly manufactured. It is urged that the taxpayer should not be made to suffer because it in effect attempted to increase the amount of salvage when it knew there was small chance of successful operation. This argument presupposes that the taxpayer was attempting only to realize salvage, a premise with which we do not agree. We must presume that the taxpayer’s officers were exercising their best business judgment and that in so doing they saw a reasonable prospect of a profitable business in near-beer. We can not credit them with power to prophesy in 1919 that the public would not take to near-beer. If that fact could have been foreseen, Would they have gone into the near-beer business? We think not. Because their expectations for profitable business were not realized, they can not now maintain that the plant was obsolete when they began making near-beer. In the Appeal of Columbia Malting Co., supra, we said:

In order that the taxpayer may be entitled to the obsolescence deduction in the years involved, there must have been substantial reasons for believing that the assets would become obsolete prior to the end of their ordinary useful life, and second, it must have been known, or believed to have been known, to a reasonable degree of certainty; under all the facts and circumstances, when that event would likely occur.

.Subsequent events may have demonstrated that the plant had become obsolete for near-beer manufacture, as well as for every other purpose, but we can not determine obsolescence in 1919 from what happened later. The evidence does not sustain the contention that the portion of the brewery used for making near-beer became obsolete at the close of 1919.

It appears that some parts of the brewery which were not used in making near-beer, such as the racking room, became obsolete in 1919, but there is not in evidence data which will enable us to find the amount of obsolescence of those parts.

The petition is dismissed as to the year 1918. The deficiency for 1919 is $2,1¡39.55. Order will be entered accordingly.


author: Teussell:

text:
    Appeal of F. W. GASKINS.
    Docket No. 4242.
    Decided July 31, 1926.
    1. Title or Land Acquired bt Gift. — The taxpayer made a grant in the nature of a gift by word of mouth of a definite tract of land to his son and another definite tract of land to his daughter, both of whom at the time had passed the. age of 21 years. The grantees immediately entered upon possession of their respective tracts; enclosed the same with fences; made farming improvements; built residences thereon and thereafter continued in open adverse and generally known possession thereof for a period of more than seven years prior to November, 1919. Held, that under the facts in this case, and the statutes of the State of Georgia, the said son and daughter were on the 26th day of November, 1919, the owners of their said respective tracts of land and of all the standing timber thereon, and properly accounted for their respective shares of the gains resulting from the sale of such timber in the year 1919.
    2. Value of Timbee on March 1, 1913. — The March 1, 1913 value of standing timber and turpentine rights held to be properly determinable from opinion evidence of persons qualified by experience and acquaintance with the property to testify concerning such values.
    3. Tear in Which Gain from Sale is Income. — Taxpayer sold standing timber and turpentine rights in the year 1919, at the same time granting the purchasers a period of seven years within which such timber could be cut, manufactured, and removed. Approximately one-half of the selling price was paid in the year 1919 and the balance in the year 1922. Under the evidence in this case, held, that the gain derived from the total selling price was gross income of the taxpayer in the year 1919.

      Frank Reagan, Esq., for the petitioner.

      T. P. Dudley, Jr., Esq., for the Commissioner.
    Before Tkussell, Littleton, and Smith.
    This proceeding has been brought for the redetermination of an asserted deficiency in income tax for the year 1919 in the amount of $8,212.67, and the taxpayer has alleged three specific errors on the part of the Commissioner, as follows:
    (1) That the Commissioner has charged this taxpayer with the receipt of gross income from the sale of timber, parts of which were owned by other persons who reported their proportionate parts of gains derived from the sale of such timber.
    (2) That the Commissioner determined the March 1, 1913, value of the timber to be $150,000, when its true value at that time was not less than $175,000.
    (3) That the gain derived from the sale should be apportioned between the years 1919 and 1922 when the taxpayer received payments of the selling price of the timber.
    FINDINGS OF FACT.
    Taxpayer is an individual residing in Berrien, Ga. He was one of the pioneers of Berrien County, and over a long period of years prior to 1911 he acquired numerous contiguous tracts of timber land aggregating 8,305 acres.
    Late in the year 1911, or early in the year 1912, he, by word of mouth, made a gift and grant of a certain definite portion of said tract, amounting to 1,066 acres, to his son, A. W. Gaskins, and at the same time, by word of mouth, made a gift and grant of another certain definite tract of said land of 980 acres to his daughter, Mrs. A. H. Giddens. Both son and daughter had at that time passed the age of 21 years. They each immediately accepted such gift and grant of land and entered into possession thereof, enclosed their respective grants with durable fences; cleared portions thereof for agricultural purposes; built homes and other building improvements; and thereupon established their respective residences on their several tracts so acquired. From that time on, without interruption, they continued to cultivate portions of said land; to return the same for state and local taxes in their individual names; and to pay such taxes out of their own funds and in every way to exercise the rights of ownership and dominion over their respective. tracts, and their ownership and claim of title to such tracts was a matter of common knowledge throughout the surrounding'neighborhood. At no time subsequent to the making of the gifts and grants above described did this taxpayer ever pretend to exercise any rights of ownership or dominion over the tracts of land granted to his son and daughter, respectively, and at no time after the receipt of such grant did the son or daughter ever disclaim the ownership and the responsibilities which accompany such ownership of such land or do any other act or thing which could have defeated their title thereto.
    On November 26, 1919, the taxpayer negotiated, with Norman & Willis a sale of all the standing merchantable timber and turpentine rights, standing and existing upon the entire tract of 8,305 acres, for a fixed selling price, including the privilege to the purchasers and their assigns of going upon the land, harvesting the turpentine, and cutting the merchantable timber, manufacturing it into lumber, and removing the same during a period of seven years from and after December 31, 1919. This sale was evidenced by a written instrument made by the taxpayer, the relevant portions of which are as follows:
    This indentuee made this the 26th clay of Nov. 1919 by and between IT. W. Gaskins, of the county of Berrien, State of Georgia, as party of the first part, and J. T. Norman, ,M. .D. Norman, V. F. Norman of Colquit County and G. H. Norman, W. H. Willis, Jr., of Lowndes .County and J. M. Willis of Irwin County, State of Georgia, as parties of second part.
    Witnesseth : That for and in consideration of the sum hereinafter mentioned the said party of the first part has granted, bargained, demised, sold, and' leased and by these presents does grant, bargain, sell and lease to the said parties of the second part their heirs and assigns, all and singular the alive, green growing, pine timber for saw mill and turpentme purposes or any other purpose and outside of the cultivated lands, and above the .size of fourteen inches in diameter and said timber to be measured two feet from the ground and to be cut as to saw mill purpose two feet from the ground. It is further understood that in determining the diameter of said timber two feet from the ground the parties of the second part are allowed the privilege of applying the gauge namely fourteen inches, from such angle as will insure the maximum size of the tree, on the following described lands, to wit: [Description]
    The said parties of the second part, paying to the party of the first part for the use and privilege of said timber the sum of Two I-Iundred Fifteen Thousand and no/100 Dollars, $215,000, receii>t of which is hereby acknowledged. And it is expressly understood and agreed by and between the parties hereto, as a part of the terms of said lease, that the said parties of the second part are to have the use and enjoyment of said timber for and during the term of seven years from December Thirty First, Nineteen Hundred Nineteen (December 31, 1919).

    Of the total selling price, the sum of $115,000 was paid in cash to the taxpayer at or about the date of the execution of the above-described instrument, and upon the receipt of said payment the taxpayer caused the amount so received to be divided between himself, his son, and his daughter in substantially the true proportion of acreage owned by each of them. The balance of the selling price, $100,000 with interest thereon, was [laid to the taxpayer during the year 1922, and he thereupon caused the sum so received to be divided between himself, his son, and his daughter in substantially the same proportion as the acreage owned by each of them.
    When the taxpayer made his income-tax return for the calendar year 1919, he computed his gross gain from the sale of such timber on the basis that the March 1, 1913, value of the entire tract was $175,000, and he reported his proportionate share of the gain estimated upon that basis as a part of his gross income for the year 1919, and his son and his daughter likewise reported their proportion of gains derived from the said sale. Shortly after the consummation of the sale above described, the taxpayer caused proper deeds of conveyance to be- made of the specific tracts of land given and granted to his son and daughter, respectively, more than seven years prior thereto.
    In auditing the taxpayer’s income-tax returns for the year 1919, the Commissioner charged him with the gross gain of all the timber sold standing upon the entire 8,305 acres, estimated the March 1, 1913, value thereof at $150,000 and considered the total gain derived from sale as gross income for the year 1919.
    Upon the record of this case the Board has found that the fair market value of the timber and rights pertaining to the entire tract of 8,305 acres sold in November, 1919, was on March 1, 1913, $175,000.
   OPINION-.

Teussell:

1. The grant of land by word of mouth and delivery of seisin without any written instrument is as old as the beginning of the English common law and in vogue for many centuries when the art of writing was little known. The making of written deeds of conveyance and the public record thereof are comparatively modern contrivances developed of necessity from the complexity of modern business conditions. A grant of land accompanied by delivery of possession is no less a grant than when evidenced by a deed of conveyance.

The United States Supreme Court clearly stated the law in the case of Neale v. Neales, 9 Wall. 1, 9, where the court said:

Equity protects a parol gift of land, equally with a parol agreement to sell it, if accompanied by possession, and the donee, induced by the promise to give it, has made valuable improvements on the property.

This is the common-law rule enunciated in 1869 and has not since become less favorable to the donees. Riggles v. Erney, 154 U. S. 244, 254; Townsend v. Vanderwerker, 160 U. S. 171. The donees in the Gaskins case have complied with this rule, and more.

The land involved is in the State of Georgia. The law of that State governs the devolution of land between private individuals there. The decisions of its courts are in accord with the views above stated. In Harrell v. Nicholson, 119 Ga. 458; 46 S. E. 623, 624, the court said:

Our code, which is but a codification of the common law on the subject, states the rule thus: “To constitute a valid gift, there must be the intention to give by the donor, acceptance by the donee, and delivery of the article given, or some act accepted by the law in lieu thereof.” Civ. Code 1895, § 3564.

In the case of Hadaway v. Smedley, 119 Ga. 264; 46 S. E. 96, the syllabus written by the court said:

1. Where a father in possession of land under a bond for titles, a part of the purchase money being paid, makes a parol gift of the land to a son, and the latter goes into possession, and, on the faith of the gift, makes valuable improvements on the land, and subsequently the father acquires the legal title by a conveyance from the maker of the bond for titles, the title thus acquired by the father passes, by the statute of uses, into the son, and inures to his benefit, in preference to one to whom the father conveyed after he had acquired the legal title.
2. Under such a state of facts, when the son has been ousted from the possession he is entitled to maintain an equitable petition for specific performance by the father, and to have the deeds made by the father canceled, after proving that the purchasers bought with notice of the son’s equity, as' evidenced by his possession.

The parties to this appeal have brought themselves clearly within the requirements here stated.

Walker v. Neil, 117 Ga. 733; 45 S. E. 387, was a suit in equity brought by Mrs. Neil and involved her title to a dwelling house and lot. Her father had made an unconditional parol gift of the property to her and placed her in possession, since when she had been “in the open, notorious, continuous, exclusive, and adverse possession of the same under claim of title, occupying the dwelling house as a residence.” He frequently stated that he would deed the property to her but died without having done so. Seven years after his death the executor of his will sold the property and accepted as consideration a debt due the grantee from the father’s estate and executed a deed in her favor. The court held in favor of Mrs. Neil that the grantee under the deed took nothing.

In further support of the taxpayer’s position it is found that the State of Georgia, within which this taxpayer resides and within which his and his children’s property is located, has in its statutory law the following provision (Georgia Code, 1910, vol. I, p. 1019, section 4151):

Presumption” op Gift. The exclusive possession by a child of lands belonging originally to the father, without payment of rent, for the space of seven years, shall create conclusive presumption of a gift, and convey title to the child, unless there is evidence of a loan, or of a claim of dominion by the father acknowledged by the child, or of a disclaimer of title on the part of the child.

We are thus led to the conclusion that on November 26, 1919, the taxpayer’s son, A. W. Gaskins, and his daughter, Mrs. A. H. Gid-dens, were each the owners of tracts of land of 1,066 and 980 acres, respectively, and that they were then the owners of the timber standing on said lands and all the rights pertaining thereto. The fact that they did not join in the execution of the instrument of sale of such timber can not have the effect of defeating their title to the timber, their right to participate in the distribution of the selling price thereof, and their duty to account under the income-tax laws of the United States for their share of the gains derived from the sale of such timber. And the taxpayer herein can not be charged with a greater portion of the gains derived from such sale than the proportion of his retained acreage was to the acreage of'the entire tract belonging to himself and to his son and daughter.

, 2. Ten witnesses, all , of whom qualified by virtue of their experience and knowledge of the properties here in question, gave opinion testimony concerning the value of the projaerty and rights here in question as of March 1, 1913. Each of these witnesses gave independently his opinion as to the March 1, 1913, value of this timber. The lowest estimate was $171,000 and the highest $210,000. One of the witnesses testified that either in 1913 or 1914 Norman & Willis, who finally bought this timber in 1919, authorized him to negotiate for the purchase of the same properties at that time and fixed the maximum amount which they were willing to pay at $181,000. In view of this testimony, we are convinced that on March 1, 1913, the timber and property rights, sold in 1919, had a value of $175,000, and we have, therefore,- found the said amount to be the fair market value of the properties on March 1, 1913.

3. It appears from the record of this case that the parties to the selling and purchasing transaction all regarded it as a completed deal in the year 1919 and regarded the deferred payment in the light of an extension of credit on the part of the vendors to the vendees; that the taxpayer as well as his son and daughter, in making their income-tax returns for the year 1919 computed their gross gain on the basis of a completed transaction; and, although there is no evidence of any bookkeeping or accounting on their part, we are of the opinion that upon the evidence in this case the taxpayer is properly chargeable with gross income for the year 1919 in the amount of all of his proportion of the gain realized from the sale, although a portion of it was not actually received in money until a later year.

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


author: Littleton

text:
    PIKE COUNTY COAL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7189.
    Decided July 31, 1926.
    1. Value of leases and options acquired for stock determined for tiie purpose of computing the annual deduction on account of the exhaustion thereof.
    2. Upon the evidence, held, that a loss through damage to certain machinery by fire was a proper deduction for 1919.

      Robert E. McGlevey and Jos. L. Daly for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
    Before Steenfiagen, Littleton, and Tetjssell.
    This proceeding involves a deficiency in income and profits tax in the amount of $4,393.82 for the calendar year 1919. It is claimed that the Commissioner erred in refusing to allow a deduction of $4,000 for the exhaustion of the cost of certain leases and options; also a deduction of $11,063.68, the cost of repairing certain machinery damaged by fire in October, 1918.
    FINDINGS OF FACT.
    Petitioner is an Indiana corporation, organized in 1911, and engaged in mining and selling coal, its mines being at Petersburg and its offices at Chicago, Ill. Its capital stock consisted of 500 shares of the par value of $100 each. In May, 1917, 100 shares were sold for cash at par and 400 shares were issued to one Donald R. Lindley in payment for certain leases and options owned by him on approximately 200 acres of coal lands, for which leases and options he had theretofore paid $27,500. The coal underlying the land covered by these leases and options was known to be of good quality, and the amount of coal recoverable was estimated at 1,800,000 tons. The probable life of the mine in May, 1917, was ten years. The leases acquired for stock and those obtained through the exercise of the options provided for royalties ranging from 3% cents to 6% cents'a ton. On the date the petitioner acquired the leases and options it also acquired the equipment of the mine which had been in operation upon the property for about five years.
    In December, 1917, 125 shares of petitioner’s stock were sold for $17,500 in cash, and in April, 1917, 250 shares were sold for $60,000 .in cash: The petitioner was allowed a deduction of $4,000 from gross income for each of the years 1917 and 1918, as exhaustion of its leases.
    The actual cash value of the leases and options at the time acquired for stock was $40,000.
    On October 18, 1918, a fire occurred at petitioner’s mine, resulting in the destruction of certain buildings and equipment. In addition to the property destroyed, certain machinery, consisting of motor generators, electric switchboards, electrical hoist apparatus, etc., was damaged by the fire. The extent of the damage to this machinery could not be determined by the petitioner until the machinery had been returned to the manufacturers and repaired. Immediately after the fire and prior to December 31, 1918, petitioner reconstructed- and replaced the equipment, which had been- completely destroyed, at a cost of $22,698. It credited against this amount the insurance collected, in the sum of $14,872.49, and deducted the difference of $7,825.51 from gross income as a loss sustained in the year 1918. This deduction was allowed by the Commissioner. Within the first six months of 1919, the machinery which had been returned to the manufacturers for repairs was repaired and returned to the petitioner at a cost of $14,872.49. This amount the petitioner deducted from gross income for 1919 as a loss sustained in that year. The deduction was .denied .by the Commissioner upon the ground that it should have been claimed for the year 1918.
   OPINION.

Littleton

: Dpon the evidence, which shows that the coal underlying the land covered by the leases and options acquired for stock was of a high quality and amounted to at least 9,0.00 tons an acre, and that the petitioner’s stock at the time of the incorporation sold at par for cash, and a short time thereafter at $240 a share, we are convinced that the actual cash value of the leases was $40,000 as claimed. The petitioner is, therefore, entitled to a deduction of $4,000 for 1919, representing the exhaustion of thé cost of the leases over the life of the mine of ten years.

Section 234 (a) (4) of the Revenue Act of 1918 provides that, in computing the net income, there shall be allowed as deductions losses sustained during the taxable , year and not compensated by insurance or otherwise. After the fire on October 8, 1918, the petitioner found that certain of its machinéiy had been damaged. To what extent, it did not know. It had no way of ascertaining the amount of the damage, except by returning the machinery to the manufacturer and having it repaired. Most of the machinery consisted of electrical apparatus and the evidence shows that the petitioner was not in a position during 1918 to judge with any' degree of accuracy, or to establish from any information in its possession, the amount of the damage caused to it.

The statute contemplates that a deduction shall be allowed when a loss has in fact and in truth been sustained, and the establishment of the loss is a question of fact in each case and. may not always depend upon the happening' of any particular event. In order to have been in a position to claim a deduction in 1918, the taxpayer would have been required to justify, with at least some degree of accuracy, the amount of the loss; otherwise the deduction from gross income for 1918 would have represented a mere guess, in all probability, unjust either to the Government or to itself. It is evident, therefore, that whatever amount the petitioner might have computed, with no more information than it had, would have been conjectural, because it was not in possession of information necessary to enable it to make such computation.

The petitioner, believing that the machinery would not be a total loss, proceeded in good faith to determine the loss which it had actually sustained by returning it to those who were in a position best to judge the extent of the damage. By so doing, it determined, during 1919, that the actual loss sustained oh account of damage to the machinery was $14,872.49.

The facts in this proceeding distinguish it from the issue involved in the Appeal of Producers Fuel Co., 1 B. T. A., 202, in that the Pror., ducers Fuel Co. was in possession of information which enabled it to determine, at least approximately, the amount of its loss, and it made such a determination.

From the facts presented in this proceeding, we are of the opinion that the loss of $14,872.49 was sustained in the year 1919 and constituted a proper deduction from gross income in that year.

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


text:
    Appeal of NEW JERSEY MACHINERY EXCHANGE.
    Docket No. 5936.
    Decided July 31, 1926.

      A. E. Puder, G. P. A., for the petitioner.

      F. 0. Graves, Esq., for the Commissioner.
    Before Littleton, Smith, and Tiiussell.
    On June 3, 1925, the Commissioner determined a deficiency of $1,671.78 for the calendar year 1919. He held that petitioner and A. W. Faber, Inc., were affiliated and should have filed a consolidated return. Petitioner claims that the two corporations were not affiliated within the meaning of the statute.
    FINDINGS OF FACT.
    Petitioner corporation, organized on December 16, 1913, is engaged in the sale of new and used machinery, with principal office at Newark, N. J. A. W. Faber, Inc., is also a New Jersey corporation, organized February 27, 1919, and is engaged in the manufacture and sale of rubber bands. The outstanding capital stock of the petitioner during 1919 consisted of 82 shares and was owned as follows:
    Shares.
    Theodore Freideberg, president-40
    Clara Freideberg- 1
    Robert J. Metzler, manager and treasurer_40
    Gertrude R. Metzler_ 1
    Total_82
    The outstanding capital stock of A. W. Faber, Inc., during 1919 consisted of 1,500 shares and was owned as follows:
    Shares.
    New Jersey Machinery Exchange-1, 347
    Nathan Bilder, vice president- 75
    David Bilder- 75
    Robert J. Metzler, treasurer- 1
    Theodore Friedeberg, president- 1
    Henry Fera, secretary and general manager_ 1
    Total_'_1,500
    The Commissioner, upon the evidence before him, held that the New Jersey Machinery Exchange and A. W. Faber, Inc., were affiliated during 1919, and computed the net income and invested capital upon the basis of a consolidated return.
   OPINION.

Littleton:

This proceeding was called in due course on February 15, 1926, on the day calendar for hearing upon the merits, after due notice to counsel for both parties on September 14, 1925. When the proceeding was called for trial no one appeared on behalf of the petitioner and the proceeding was taken under submission upon such of the allegations of the petitions as had been admitted in the answer.

Section 240 of the Revenue Act of 1918 provides that two or more domestic corporations shall be deemed affiliated if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all of the stock of the other or others, or if substantially all of the stock of two or more corporations is owned or controlled by the same interests. The question whether one corporations owns directly or controls through closely affiliated interests or by nominees substantially all of the 'stock of the other, or whether the stock of two corporations is owned or controlled by the same interests is a question of fact which must be established by competent evidence. The Commissioner held that the petitioner and A. W. Faber, Inc., were affiliated within the meaning of the statute and the evidence before us consisting of certain allegations in the petition admitted by the Commissioner in his answer does not establish that the Commissioner’s determination was erroneous. The allegations in the petition which are denied by the Commissioner and unsupported by proper proof can not be accepted by the Board for the purpose of deciding whether the deficiency should be modified.

Judgment for thé 0ommdssioner.


text:
    F. C. WEST CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6872.
    Decided July 31, 1926.
    1. Personal service classification denied.
    2. Upon the evidence, held, that $7,500 was reasonable compensation of petitioner’s president for 1920.

      F. G. West for the petitioner.

      L. G. Mitehell, Esq., for the respondent.
    Before Steenhagen, Littleton, and Trttssell.
    The petitioner claims that the Commissioner erred in refusing to classify it as a personal service corporation and determining accordingly a deficiency of $1,012.19 for the calendar year 1920. The alternative claim is made that should it be held that petitioner ■ is not entitled to classification as a personal service corporation, -the deduction for compensation of its president, as allowed by the Commissioner, should be increased.

      FINDINGS OF FACT.
    The petitioner is an Illinois corporation with principal office at Chicago, its business being that of general sales agent for various manufacturers of automobile accessories on the commission basis.
    Since the time of its organization in November, 1918, its outstanding capital stock has consisted of 57 shares of the par value of $100 each. During the year 1920, F. C. West, president and treasurer, owned 55 shares; M. F. Chase, vice president, 1 share; and C. H. Scribner, secretary, 1 share. At the time of incorporation and throughout the taxable year, it was provided, by contract between the corporation and its stockholders, that the net commission received should be divided between the three stockholders upon the percentage basis. The percentages during the year 1920 were as follows: F. C. West, 50 per cent; M. F. Chase, 25 per cent; C. H. Scribner, 25 per cent. The Commissioner allowed a deduction of $6,257.82 as reasonable compensation for- each of the three officers.
    As general sales agent for various manufacturers, the petitioner made sales throughout the United States. Its three stockholders were regularly engaged in the active conduct of its business. They each acted as salesman and spent the greater portion of their time on the road. F. C. West controlled the policies of the corporation and had charge of all of its affairs. He supervised the work performed by other salesmen and secured all contracts in which the company was to act as sales agent. He also selected various local salesmen and made contracts with them as to their territory and the commission which they were to receive on sales made in such territory. The three stockholders did not coniine their activities entirely to any particular territory but spent considerable' time working with and assisting local salesmen. They were not, however, credited by the corporation with any commissions received on sales made in any territory in which the company had a local agent. In addition to making sales throughout the territory covered by contracts with manufacturers, F. C. West devoted a great deal of time working with local agents and instructing them in the matter of making sales.
    During the year 1920, the petitioner had sales agreements with eleven local salesmen, which agreements, for the most part, provided that such salesmen should receive a commission of 6 per cent on all sales in the territory covered by such contract. The.usual commission received by the petitioner from manufacturers for which-it acted as agent was 12 per cent. During the year commissions in the amount of $20,860.15 were credited to local salesmen. Occasionally, small advances were made to certain of the local salesmen and charged against their commissions as earned.

      The gross income and deductions, as shown by the return for the taxable year, were as follows:
    Commissions---$49,768.49
    Income from other sources_ 260. 40
    Total_' 50,023.89
    Ordinary and necessary expenses-$24, 882. 52
    Exhaustion, wear and tear_ 110. 09
    - 24, 992. 61
    Net income- 25, 031. 28
    The balance sheets at the beginning and end of the year were as follows:
    BALANCE SHEET.
    E. C. West Corporation.
    Assets: January 1, 1920.
    Current assets—
    Cash in bank_ $962. .31,
    Cash' on hand_ 23.19
    , Commissions due and receivable_1_ 14,606. 90
    - $15, 592.40
    Fixed assets — ■
    Furniture and fixtures_$S47. 29
    Less: Allowance for depreciation_ 72.44
    774. 85
    Samples-219.00
    Contracts (paid in for stock) 3,000. 00
    -. 3, 993.85
    Deferred charges to expense—
    Advanced commissions_ 3,397.02
    22, 983. 27
    Liabilities : ~
    Current liabilities—
    Notes payable (borrowed money)_ 3,600.00
    Accrued payroll_,_ 54. 50
    Accrued interest_._ 48. 75 ■
    Commissions payable_ 99.34
    - 3, 702. 59
    Deferred credits to income—
    Advance payments on commissions receivable_ 2,469.40
    Capital—
    Capital stock_$10, 000. 00
    Less: Unissued stock_ 4, 300. 00
    5, 700. 00

      Liabilities — Continued.

      Brought forward_ $6, 700.00 $6,171. 99
    Stockholders accounts_$4, 250. 58
    Deficit__ 1, 307. 31
    ■-- 5, 557. 89
    •- $142. 11
    Undivided profits_ 16, 669. 17
    - 16, 811. 28
    22, 983. 27
    BALANCE SHEET.
    F. C. West Coepoeation.
    December 31, 1920.
    Assets :
    Current assets—
    Cash in bank_ $706. 03
    Cash on hand__ 50. 00
    Commissions due and receivable_ 19, 814. 37
    Notes receivable less_$7, 650. 20
    Notes receivable discounted___ 3, 298. 65
    4, 351. 55
    Samples_ 369. 67
    Thomas-Andrews Corp. Escro Acct. 626. 26
    $25, 917. 88
    Fixed assets — •
    Furniture ánd fixtures_$1, 376. 53 less,
    Allowance for depreciation_ 182. 53
    - 1, 194. 00
    Contracts_ 3, 000. 00
    Deferred charges to expense— 4, 194. 00
    Advance commissions_ 6, 397. 96
    Stockholders accounts_ 4, 758. 42
    41, 268. 26
    Liabilities :
    Current liabilities—
    Accounts payable_ $5, 725. 10
    Commissions payable. 756. 13
    Notes payable plus_ $3,800.00 -:- 6, 481. 23
    Accrued interest_ 255. 75
    Capital— 4, 055. 75 4, 055. 75
    Capital stock less_ 10, 000. 00
    Unissued stock_ 4, 300. 00
    5, 700. 00 5, 700. 00
    Undivided profits 25, 031. 28 25, 031. 28
    41, 268. 26
    Fifty per cent of’ petitioner’s income was derived from sales by its three stockholders in territory in which it had no local salesmen, and 80 per cent represented sales made by its stockholders in the territory covered by contracts with manufacturers, including the territory in which there were local salesmen.
   OPINION.

Littleton:

In view of the evidence, petitioner’s income can not be ascribed primarily to the activities of the stockholders. We are of the opinion, however, from the evidence, that the petitioner should have been allowed a deduction of $7,500 as reasonable compensation for F. C. West, president.

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