author: Smith: Murdock,

text:
    Frederick L. Watson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elbridge Watson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Arthur Watson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28475, 28476, 28477.
    Promulgated March 23, 1932.

      Arthur W. Blahemore, Esq., for the petitioners.

      E. B. Hunt, Esq., for the respondent.
   opinion. -

Smith:

Petitioners’ contention, that the statute of limitations bars assessment of this deficiency against them as transferees, requires little discussion. The corporate return for 1920, filed March 15,1921, was neither signed nor sworn to and was accordingly insufficient to start the running of the statute. Lucas v. Pilliod Lumber Co., 281 U. S. 245. It is indicated that an amended consolidated return was filed on April 21, 1924, and, assuming that such return was properly executed, the five-year period for assessment and collection from the taxpayer would not expire until April 21, 1929, or subsequent to the enactment of the Revenue Act of 1926. The applicable provision of that act is accordingly section 280 (b) (1), and the period of limitation in respect to assessment and collection against a transferee would not expire until long after the determination of the liabilities here in question and the appeals therefrom.

Respondent contends that petitioners are liable as transferees of assets of Watson Brothers, Inc. It is his contention that the acquisition of the assets by petitioners, its stockholders, on December 81, 1920, was for an inadequate consideration, leaving the corporation with insufficient assets to pay its debts, and that the transfer of these assets to petitioners was accordingly, to the extent of such excess value, a distribution of corporate property to them, as stockholders, in fraud of creditors. In the alternative, he charges that, if it be found that the acquisition of these assets was for a sufficient consideration, these petitioners are liable as transferees, by reason of the distribution to them, as stockholders, in 1923, of all of the assets of the corporation upon its liquidation, these assets consisting of three notes for $20,000 each.

Section 280 of the Revenue Act of 1926 provides, so far as material, as follows:

(a) Tlie amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title * * *:
(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The facts of record show that it was the intention of the stockholders on December 31, 1920, to dissolve the corporation, to take over its assets, and, from January 1, 1921, to carry on the business as partners. The petitioners offered to buy the assets of the corporation “ and to pay for the same the sum of $60,000, and as part of the consideration and purchase price, assume all outstanding debts and obligations and liabilities of the corporation as they shall appear upon the books of the corporation as at December 31, 1920.” The sum of $60,000 was to be paid by three negotiable promissory notes of $20,000 each, dated December 31, 1920, and payable six months after date, with interest at the rate of 6 per cent per annum. The resolution of acceptance of the oifer provided that the notes should be distributed pro rata among the stockholders in proportion to their holdings of capital stock. It thus appears that each petitioner had a right, from the date of the acceptance of the offer to purchase, to demand from the corporation the return of his note. In this situation it must be held that the giving of the notes was an act devoid of substance. The fact is that all the assets of the corporation were turned over to the petitioners as of December 81, 1920, and the petitioners paid not only the liabilities of the corporation, as shown by its books of account, but other liabilities as well. The petitioners must be held to be transferees of the assets of the corporation and, as such, liable for its debts to the extent of the value of the assets received, plus interest on the value of such assets at 6 per cent per annum, the legal rate in Massachusetts, from December 31, 1920, the date of distribution.

The next question is the value of the assets distributed to each of the petitioners. The balance sheet of the corporation at December 31,1920, shows assets in excess of liabilities, other than capital liabilities, of $237,067.60. The petitioners contend, however, that the inventory of mica on hand of $106,165.24 was in excess of the fair market value of the inventory at that date and that the actual market value of the mica was much below that figure. This issue is disposed of by the finding that the valuation used represents actual market value on that date. The figure represents the opinion of the petitioners as at the close of the calendar year 1920, which was cost less 25 per cent. Petitioners’ opinion, formed more than 10 years after that date, that the market value was at that time 50 per cent below cost, and the present opinion to the same effect of a witness introduced by them, can not be given the weight of their opinion in the determination of value made at the close of 1920 with knowledge of existing facts. This is especially true when it is taken into consideration that petitioners were mica experts, with exceptional knowledge and judgment as to market conditions.

The petitioners further contend that the good will of the corporation was without value. It is shown in the balance sheet as having a value of $150,000. It was arbitrarily set up on the books of the corporation in 1917. From a consideration of the entire record we are of the opinion that the good will of the corporation had no cash value and we agree with counsel for the petitioners that it should be eliminated for the purpose of determining the net value of the assets over the liabilities. Eliminating the book value of the good will from the assets, it is found that the assets had a value in excess of liabilities of $87,067.60.

Subsequent to January 1, 1921, the petitioners liquidated certain liabilities of the corporation which were not shown upon its books of account at December 81, 1920. Taxes had accrued against the corporation in the amount of $15,826.85, which the petitioners paid. The deduction of this amount from the $87,067.60, above referred to, leaves the net value of the assets received by the petitioners as $71,240.75.

The petitioners claim that following the acquisition of the assets they paid additional debts, totaling approximately $15,000, which represented liabilities of the corporation. But we are unable under the proof to verify such liabilities. It is true that the petitioners paid amounts for auditing the books of account either of the corporation or of the partnership, but we can not determine that these constituted any liabilities of the corporation on December 31, 1920. Upon the record it must be held that the petitioners received net assets of the corporation of $71,240.75 and that these assets belonged to the petitioners in equal shares. We are therefore of the- opinion that each petitioner is liable as a transferee of the assets of the corporation to the amount of $23,746.92, plus interest at 6 per cent per annum, the legal rate in Massachusetts, from December 31, 1920, the date of distribution.

In respect to respondent’s denial of the corporation’s claim of affiliation, petitioners contend that substantially all of the stock of the Renim Specialty Company and the Mica Condenser Company was owned or controlled by the same interests during the taxable year. We have set out in the findings of fact the ownership of this stock during that period as shown by petitioners’ proof. From this it will be seen that all of the stock of Watson Brothers, Inc., was owned equally by the three petitioners, that 80 per cent of the stock of the Renim Specialty Company was owned by two of the petitioners, the remaining 20 per cent standing in the names of F. G. Crowley and W. J. Barkeley, and 78 per cent of the stock of the Mica Condenser Company was owned by petitioners, the remaining 22 per cent standing in the names of C. E. Watson, F. G. Crowley, W. J. Barkeley and A. R. Goodwin, none of whom owned stock in Watson Brothers, Inc. No facts are proven showing control of the voting rights of the minority stock by petitioners. Proof that these minority stockholders were employees of Watson Brothers, Inc., does not establish such fact. The petition alleges that the stock issued these employees was bought and paid for by petitioners and issued to them merely as a method of guaranteeing a percentage of the profits, but with the understanding that the actual ownership and voting rights of the stock were to remain in petitioners, but this allegation was denied by the answer and the record contains no proof of such facts. The facts proven fail to show affiliation under section 240 (b) of the Revenue Act of 1918 of the taxpayer corporation with the Renim Specialty Company and the Mica Condenser Company. Handy & Harman v. Burnet, 284 U. S. 176; Ice Service Co. v. Commissioner, 30 Fed. (2d) 230; Commissioner v. Hirsch & Co., 30 Fed. (2d) 646; Black Diamond Coal Co., 25 B. T. A. 215; Conley Tin Foil Corporation, 17 B. T. A. 65.

In determining the deficiency for the year 1920 against the corporation, respondent disallowed a deduction of $52,843.96 taken by it as a debt ascertained to be worthless and charged off in that taxable year.

We have found that this amount was owing to the taxpayer from the Mica Condenser Company, that the debtor corporation was a total failure in that year, and that this indebtedness was charged off by the taxpayer at the close of the year to profit and loss. The taxpayer’s claim to affiliation has been denied, and no question can be raised as to this indebtedness being one arising from an intercom-pany transaction. We accordingly hold that respondent was in error in his disallowance of this item.

The remaining issue is upon respondent’s action in disallowing $120,000 of a total deduction taken by Watson Brothers, Inc., in the sum of $180,000 as representing salaries of $45,000 each, paid to petitioners and a brother employed by the taxpayer. Respondent has allowed a salary of $15,000 to each of these individuals as representing reasonable compensation for services rendered. The burden is accordingly upon petitioners to show that the amount disallowed in fact represented reasonable compensation to be paid for the services performed. Upon this question petitioners have introduced no proof of what would be a reasonable salary for such services. It is merely shown that these sums were voted by the corporation as salaries in January, 1920, and represented approximately 19 per cent of the net sales of the corporation for that year, and that payments in past years of executive salaries had averaged approximately this percentage. We do not think that this proof establishes the fact that the salaries paid were wholly for the services performed or represented only reasonable compensation for such services. The fact that petitioners were owners of all the stock of the corporation and the close relationship to them of C. E. Watson calls for a closer scrutiny of these payments than of salaries voted by corporate directors having no interest other than that of the corporation itself. In L. Schepp Co., 25 B. T. A. 419, we said:

* * * Eor the purpose of determining taxable net income, the deduction [for salaries] is limited to amounts which are reasonably commensurate with the personal services actually rendered and thus are no more than ordinary and necessary expenses of carrying on the business. Hence the directors’ duty to the corporation is no criterion of the Commissioner’s duty to limit the tax deduction within the statutory bounds, and the two are not in conflict. When the Commissioner has made a determination, the taxpayer who attacks it must prove by evidence of the services rendered and their value that a correct determination would exceed that of the Commissioner. Where the payments are to kinsfolk or to shareholders, the proof must also show that they were not influenced by family considerations and were not disguised distributions of profits. See Botany Worsted Mills v. United States, 278 U. S. 282; Becker Bros. v. United States, 7 Fed. (2d) 3; United States v. Philadelphia Knitting Mills, 273 Fed. 657; Benz Bros. Co., 20 B. T. A. 1214; C. S. Ferry & Sons, Inc., 18 B. T. A. 1261; Home Industry Iron Works, 8 B. T. A. 1267; Meyer Hecht, 2 B. T. A. 319; Gustafson Mfg. Co., 1 B. T. A. 508.

The evidence in the proceedings at bar is in our opinion insufficient to establish the fact that the payments to the four Watson brothers in the amount of $180,000 represented expenses reasonable and necessary in the carrying on of the business and the allowance of $15,000 in the case of each petitioner and of a like amount to the fourth brother, as made by the respondent, is approved.

The deficiency as determined against Watson Brothers, Inc., by respondent should be redetermined in accordance with this opinion.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Matthews concurs in the result.

GoodRIoh dissents.'

Murdock,

dissenting: In my opinion, these petitioners are liable for the full amount of any deficiency which may be due in this case.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    Rialto Mining Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48692, 56877.
    Promulgated March 25, 1932.

      Thomas F. Oarey, O. P. A., for the petitioner.

      Franlc B. Sehlosser, Esq., for the respondent.
   OPINION.

Lansdon :

In the original petition it is alleged that the respondent erroneously disallowed as ordinary and necessary expenses certain expenditures incurred for drilling in the years 1926 and 1927 in the respective amounts of $2,782.75 and $291.50. This allegation of error was abandoned at the hearing and accordingly the determination of the respondent is affirmed. Petitioner offered no evidence in support of its allegation at Docket No. 48692 that the cost of ores in transit at the close of 1925 was erroneously understated in the amount of $21,354.75 and now agrees that such cost was $37,683.38. An allegation at Docket No. 56877 that petitioner’s income from sales for the year 1927 was improperly increased was abandoned. The allegations of error as to cost of depreciable property have been settled by stipulation and the agreed facts are set out in our findings of fact above. The controversy over the application of the net loss provision of the Revenue Act of 1926 in computing the petitioner’s tax liability for 1927 is automatically decided by our conclusions in respect of the alleged errors discussed and decided hereinafter.

In respect of the petitioner’s claim for depletion and depreciation deductions not allowed by the respondent, two questions are involved, viz., (1) whether discovery value allowed a predecessor corporation is the proper basis for determining depletion for the petitioner in the taxable years, and (2) whether under the facts herein petitioner is entitled to the return of its capital investment through depletion and depreciation, free from tax, at June 12, 1927. The first question requires little discussion. The Oklahoma corporation made the discovery of ore in commercial quantities prior to January 1, 1926, when the property in question was acquired by the petitioner, which has made no discovery and therefore may not claim depletion on a value to which only the actual discoverer, its predecessor, was entitled under the law. The petitioner’s only basis for this claim is that the reorganization was no more than a change of name and that the two corporations were practically identical. This may be true, but the fact remains that there were two corporate entities, the second replacing the first for some reason that must have been advantageous to the interests in control, and we can not disregard this situation and permit a corporation that has risked nothing in exploring for mineral to enjoy the benefits of a statutory provision enacted for the benefit of actual discoverers.

Boucher-Cortright Coal Co., 7 B. T. A. 1; Darby-Lynde Co., 20 B. T. A. 522; affd., 51 Fed. (2d) 32.

The petitioner’s second contention as to depletion, which also applies to depreciation, is that it was entitled to recover its entire capital investment free from tax not later than June 12, 1927, when the last of the three leases under which the mining property in question was operated as a unit expired. There was no renewal clause in either of the leases, nor any extensions by written or oral agreement. The petitioner, however, continued to operate the property until December 31,1928, the last date here involved, and derived substantial income therefrom in the latter half of 1927 and in 1928. The respondent has allowed deductions for depreciation and depletion ratably over the period from January, 1926, to December 31, 1928, that have returned the entire capital of the petitioner as of the former date plus additions thereto made before the latter, and both dates are within the time covered by this appeal. If the petitioner’s contention as to this issue is in conformity with law, its income for the period from January 1, 1926, to June 12, 1927, should be decreased by the amount of its undepleted and undepreciated investment at the later date plus capital addition, if any, made prior to the former, and its income from June 12,1927, to December 31, 1928, is not subject to any deduction for depletion and depreciation unless additional capital costs were incurred in that period.

It is now well settled that the capital cost of a leasehold is deductible ratably over the term thereof. Duffy v. Central R. R. Co. of New Jersey, 268 U. S. 55; Newmarket Co., 2 B. T. A. 537; Opperman Coal Co., 6 B. T. A. 1215. The fact that the lessee remained in possession and operated the property after the lease expired is not material. It was there from June 12, 1927, to December 31, 1928, either as a trespasser or on sufferance and was entitled to all income from operation in that period, subject to an accounting to the owner of the lease for rents or royalties, but owned no interest subject to depletion or depreciation. Eugene C. Eppley, 25 B. T. A. 300. Even if continued possession and operation as a trespasser or by consent effected an implied renewal of the lease, as contended by the respondent, the situation is not changed. Where a lease contains a renewal clause its capital must nevertheless be amortized over the original term. Lenox Land Co., 5 B. T. A. 1206; Allen W. Hinkel Dry Goods Co., 10 B. T. A. 228. If the lease is renewed the date of renewal marks the beginning of a new period of amortization which from that time must be computed under the terms of the renewed lease on facts in existence at or after its renewal. Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381. On this question the determination of the respondent is reversed. '

In respect of the sales of ore made in December, 1925, for which payment was made in 1926, the petitioner contends that title passed to the purchaser at the date of the sale. The facts show that ores were sold f. o. b. the petitioner’s bins. The purchaser took possession, loaded out the ore and thereafter was the owner. All the evidence indicates that the parties intended a sale at the time a basic price was agreed to between vendor and vendee. Where there is actual delivery this is sufficient to effect transfer of title. Barde Steel Products Corporation v. Commissioner, 40 Fed. (2d) 412; Amalgamated Sugar Co., 4 B. T. A. 568; see also Adams-Roth Baking Co., 8 B. T. A. 458; White Oak Transportation Co., 24 B. T. A. 307. The fact that the basic price might later be adjusted to conform to assays of the ore is not controlling. Kirkham v. Fullerton & Son, 32 Okla. 461; 122 Pac. 652. The petitioner was on the accrual basis. The ores in question were sold and delivered in 1925 and the income derived therefrom is taxable in that year. The amount of $71,140.25 was not income in 1926 and should be deducted from the gross income of the petitioner for that year as determined by the respondent. It follows also that the cost of producing such ore allowed in 1926 in the amount of $37,683.38 must be added back to income in that year, with the result that the petitioner’s taxable income for 1926 is reduced by the amount of $33,456.87.

In 1927 petitioner expended $24,930.0.1 for exploration and development on certain mineral claims in Arizona which it alleges were held under lease with an option to purchase. The option agreement is not in evidence, but Hull, president of the petitioner and owner of the claims, testified that he gave the petitioner an option to purchase at any time before November 15, 1927, and received therefor $100,000 in cash, with the understanding that the petitioner would pay him an additional amount of $200,000 as and when it exercised the option. The petitioner discovered no mineral on the claims, but after December 15, 1927, continued to explore and develop the property, and for that purpose expended some $15,000 in 1928. We conclude, upon the meager facts that have been entrusted to us, that the expenditures here involved were made in connection with the survey and exploration of mining property which the petitioner owned or expected to own and that they were of a capital nature and not deductible from income in the taxable year. Seletha O. Thompson, 9 B. T. A. 1342; Jeferson Gas Coal Co., 16 B. T. A. 1135.

Upon the record it is clear that petitioner’s loss in 1926, if any, was sustained in the operation of a business regularly carried on. If the recomputation required by our conclusions above indicate a net loss in 1926, the amount thereof should be applied to the reduction of its tax liability in 1921, under the provisions of section 206 of the Revenue Act of 1926.

Decision will he entered under Bule 50.


author: Love:

text:
    Charles Tifft, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lewis E. Tifft, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31029, 31030, 33464, 33465, 42340, 42341, 45957, 45958.
    Promulgated March 25, 1932.

      John Enrietto, Esq., and Charles D. Hamel, Esq., for the petitioners.

      J. M. Morawshi, Esq., and T. M. Mather, Esq., for the respondent.
   OPINION.

Love:

The principal question to be determined in these proceedings is whether petitioners are taxable on the entire net income of the brokerage business, or on only one-half of such net income. Petitioners contend that the other one-half of such net income is taxable to their wives, on the ground that each of the wives owned a one-fourth interest in the business.

The respondent contends that under the laws of the Commonwealth of Massachusetts husbands and wives can not be partners in a business; that the understanding had between petitioners and their wives amounted to nothing more than an assignment by each petitioner of one-half of his share of future partnership profits to his wife; and that his determination that all of the profits are taxable first to petitioners finds support in Mitchel v. Bowers, 15 Fed. (2d) 287; and E. W. Battleson, 22 B. T. A. 455.

We think the undisputed facts in these proceedings are governed by our decision in Warren MacPherson, 19 B. T. A. 651; and the decision of the United States Circuit Court of Appeals for the First Circuit in Hamilton v. Commissioner, 24 Fed. (2d) 668. Both these cases involved husbands and wives in Massachusetts.

In the MacPherson case a business was being conducted by a father and son, each owning a 50 per cent interest in the enterprise. In the. latter part of 1921 two employees each acquired an interest. About the same time the father gave the son’s wife a 20 per cent interest and thereafter there was an oral understanding that the business should be conducted with respective interests as follows:

Per cent
Isaac MacPherson (father)- 20
Warren MacPherson (son)_ 30
Elizabeth MacPherson (son’s wife)_ 20
George H. Rockwell (employee)_ 20
Ernest W. Dunbar (employee)_'_ 10

The respondent determined that the son was taxable on both his and his wife’s interest. We held in that case that the evidence showed very clearly that the wife owned a 20 per cent interest in the business; that under the laws and decisions of Massachusetts the husband’s control over his wife’s property had been reduced to a minimum; and as the son (the petitioner) only owned 30 per cent in the business he was taxable only on that proportion of the profits.

In Hamilton v. Commissioner, supra, a husband and wife were engaged in business together in Massachusetts. Prior to her marriage the wife had inherited the business from her father. Later she made a transfer to her husband. We found (7 B. T. A. 362) that she had transferred all of the business to her husband and that the latter was taxable on all of the income therefrom. The Circuit Court found that she had reserved 25 per cent of the profits for herself, and said:

* * * It is no part of the duty of this court to determine what legal rights, if any, Hamilton acquired in his wife’s property and business from their invalid agreement and his partial payment. For present purposes it is enough to hold that the 25 per cent of the 1922 profits, now taxed as the husband’s, never passed, or was intended to pass, to the petitioner.

This conclusion plainly establishes that if the wife has an interest, the fact that her husband also has an interest in the same business will not operate to make the wife’s income his income for tax purposes. For similar holdings see L. F. Sunlin, 6 B. T. A. 1232; Earle L. Crossman, 10 B. T. A. 248; Elmer Klise, 10 B. T. A. 1234; Albert Kahn, 14 B. T. A. 125; R. E. Wing, 17 B. T. A. 1028; and Albert G. Dickinson, 23 B. T. A. 1211.

It is true, as stated in our findings, that during the first four years in question the business was charged with an interest deduction of 6 per cent on the “ capital account.” If this charge had been limited to a percentage on only the amounts paid in by the wives instead of the entire capital account, and had been equally reported by the wives as income, it might appear as if the parties had treated the amounts paid in as loans. Notwithstanding the unexplained and apparently unexplainable actions on the part of petitioners in deducting the 6 per cent interest on the capital account for the years 1922 to 1925, inclusive, the undisputed testimony of all the parties involved clearly substantiates the fact that the wives did not lend the money to their respective husbands, or the partnership, but furnished it as a capital investment.

The facts in the E. W. Battleson case, supra, are substantially different from the facts in the instant proceedings. There, although joint funds were used, it was the husband who actually purchased the interest in the partnerships there in question, and we held the husband taxable on the income from such partnerships. Here it was the wives, who with their own separate funds, purchased for themselves individually an interest in their husbands’ business. The case is, therefore, not in point.

Neither did petitioners attempt to assign to their wives “ one-half of the profits which shall come to ” them as was the case in Mitchel v. Bowers, supra. In the instant proceedings both husbands and both wives unreservedly testified that it was the plain understanding between the four of them that the wives were purchasing a one-fourth interest each in the brokerage business, and that each of them was thereby entitled to a one-fourth interest in the profits. The husbands had lost their original capital and without additional capital they could not have continued the business. The arrangement with their wives was made in the utmost good faith on the part of all concerned.

In view of the foregoing, we hold that the respondent erred in including in petitioners’ income that which belonged to their wives. It thus becomes unnecessary to decide the additional issue raised at the hearing.

Judgment will be entered wider Rule 60.


author: Black : MuRdook,

text:
    Luke W. McCrory, Trustee, Estate of Luke F. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32444.
    Promulgated March 25, 1932.

      A. H. Britain, Esq., and Harry Weeks, Esq., for the petitioner.

      F. B. Shearer, Esq., for the respondent.
   OPINION.

Black :

The principal issue presented by this proceeding is whether the income of the trust is taxable to the fiduciary, who brings this proceeding, or whether it is taxable to the beneficiaries. The applicable statute is section 219 of the Revenue Act of 1924.

A correct decision of the issues in this proceeding depends upon a proper construction of the provisions of the trust deed itself. We do not think it is ambiguous. As we shall later point out, we think paragraph (e) of that part of the trust instrument labeled “ Burdens and Obligations of the Trust ” is decisive of the main issue before us.

Before entering upon a discussion of this particular provision of . the trust deed, however, we desire to consider and pass upon a contention made by petitioner in his brief, though not specifically set out in his petition. This contention is that the conveyance in the trust deed by the grantors, Luke F. Wilson and wife, to petitioner as trustee for the benefit of the designated beneficiaries, with power to lease, sell, invest, reinvest, and to ultimately distribute the trust corpus and income, was a mere irrevocable power of attorney such as we held we had before us in Trudie T. Munger, 16 B. T. A. 168, and that no separate taxable entity was created by the trust deed. Of course, if this contention is correct, then clearly the effort of the Commissioner to tax the fiduciary as a separate legal entity was wrong.

But we do not think it is correct. The trust deed contains on page 10 a provision which, we think, serves to distinguish it from the mere agency forms of trusts. The language referred to is as follows:

Said trustee shall at all times during the term hereof be entirely free from interference or molestation by each and all of the beneficiaries hereunder, and no beneficiary hereunder shall instigate or prosecute any suit in any of the courts of the country against the trustee or his successor, except for acts constituting fraud, embezzlement or willful breach of trust and no receiver of the trust estate shall in that event be appointed by any of the courts of the country, but should said trustee be found guilty of any such acts constituting fraud, embezzlement or willful breach of trust in any such suit, he shall be removed from said trust by any court having jurisdiction and the successor next provided for in the paragraph hereafter referring to successor or substitute trustee, shall thereupon succeed to such trust, but in the event the plaintiff should not prevail in said suit, then such beneficiary or beneficiaries so filing said suit, shall be charged with all of the attorney’s fees and expenses of the trustee in defending said suit, plus the sum of five thousand ($5,000) dollars, all of which shall be chargeable to such beneficiary or beneficiaries and deducted from the distributions next thereafter made, and the aforesaid $5,000 shall be distributed among the remaining beneficiaries hereunder, share and share alike.

Such a provision as we have quoted above and other provisions in the trust instrument are clearly inconsistent with a mere agency trust such as we held we had before us in Trudie T. Munger, supra, cf. N. H. Boynton, 11 B. T. A. 1352; Cleveland Trust Co., Executor, 24 B. T. A. 132; Stoddard v. Eaton, 22 Fed. (2d) 184. Petitioner’s contention on this point is denied.

Petitioner’s main contention is that the trust deed created a mandatory distributable trust; that all income for each and every year after the creation of the trust, including the year 1924, the year of the execution of the trust deed, was distributable by its very terms and that therefore the income was taxable to the beneficiaries and not to the fiduciary. Petitioner contends that, if he is wrong in the above contention, then the trust was a discretionary trust where the trustee might either accumulate income or pay or credit it to the beneficiaries within the taxable year and that the facts show that in the instant case the trustee credited to the beneficiaries, on December 31,1924, all of the income of the trust for the taxable period and that therefore the income is, by reason of section 219(b) (3), taxable to the beneficiaries and not to the trustee. We will now consider these respective contentions.

If the income was to be distributed currently by the fiduciary to the beneficiaries, then, under (b) (2) of section 219 of the ftevenue Act of 1924, the fiduciary would be entitled to take as an additional deduction all of the income so to be distributed and there would be nothing left in the hands of the fiduciary to tax. And this would be true whether the income was actually distributed or not. William E. Scripps, 1 B. T. A. 491; Estate of Henry Mayer, 16 B. T. A. 1164; Florence M. Smith, Executrix, 5 B. T. A. 225; Willcuts v. Ordway, 19 Fed. (2d) 917. On the other hand, if the income for the taxable period now before us was not to be distributed currently to the beneficiaries, there is no additional deduction under (b) (2) of section 219 and the tax must be paid by the fiduciary. John D. Rogers, 16 B. T. A. 368; Anna M. Chambers, 17 B. T. A. 820.

In determining just what the situation is which we have before us, it is necessary to examine those provisions of the trust deed which are found under the heading “ Burdens and Obligations of the Trust.” These have been set out in full in our findings of fact. An examination of them will show that there were certain obligations enumerated in paragraphs (a) (b) (c) and (d) thereof which the trustee was to assume and pay. How he was to pay them and what he was to do with the remainder of the trust corpus and income was set out in paragraph (e) thereof.

It seems clear to us that the provisions of paragraph (e), above referred to, made it mandatory upon the trustee to accumulate and set aside a fund sufficient to pay all the expenses and taxes enumerated' in paragraphs (a) (b) (c) and (d). It is true that by the provisions of paragraph (e) the trustee was given the discretion to accumulate the fund from which these expenses were to be paid out of either income or proceeds of the sale of the trust corpus, or both. But his duty to accumulate the fund was not discretionary, but mandatory. If the trustee, in the exercise of his discretion, had sold enough of the trust corpus to pay these expenses and had paid or credited all the income to the beneficiaries, we think no one could have complained and the income so paid or credited would have been taxable to the beneficiaries and not to the trust.

After the payment of the burdens and obligations enumerated in paragraphs (a) (b) (c) and (d) thereof, the trust instrument undoubtedly required the trustee to make annual distribution of income. And this duty was not merely discretionary, it was mandatory. That fact is shown by the last clause of paragraph (e), which reads:

It being declared furthermore, to be the intention hereof that not only the income and revenues derived from said property shall he distributed, but likewise the proceeds of the sale of the property of the trust estate, and that each of the beneficiaries hereunder shall be liable for his or her own income taxes on all such distributions, and if the same shall be required to be paid by the fiduciary hereunder that the same shall be charged to the respective beneficiaries.

But the trustee, in the exercise of his discretion, did not sell enough of the corpus of the estate to pay these burdens and obligations of the trust enumerated in paragraphs (a) (b) (c) and (d), as he might have done. Manifestly he decided to pay them out of the income of the estate received in his hands between the period of June 10, 1924, and December 31, 1924.

True, he went through the form of crediting the 27 named beneficiaries of the estate on December 31, 1924, with all the net income of the estate after certain deductions had been taken. It is the contention of the petitioner (fiduciary that this crediting was a credit within the meaning of (b)(3), section 219 of the Eevenue Act of 1924, and hence represents an additional deduction to which petitioner is entitled within the meaning of said statute. We think this contention is correct in part and wrong in part.

It is wrong as to the part of the funds required to pay the burdens and obligations of the trust. Evidently there was no intention on the part of the trustee to ever distribute this part of the funds to the beneficiaries. As we said in John D. Rogers, Trustee, supra, concerning certain sums which the trustee had retained to operate the plantation during the following year, “ It is in no sense income of the beneficiaries. They are not entitled to it, and it is not distributable to them as such, nor was it actually so distributed.”

Of the $550,290.40 credited to the beneficiaries on December 31, 1924, $252,332.02 was actually used by the trustee in 1925 to pay burdens and obligations described in paragraphs (a) (b) (c) and (d) of the trust deed, such as the income tax of Luke F. Wilson, the gift tax due by Luke F. Wilson and wife, grantors in the trust deed, the income tax of Luke F. Wilson to the State of Missouri, etc. These amounts, as we have already endeavored to point out, were in no sense distributable to the beneficiaries, but were part of the burdens and obligations of the trust.

Petitioner is not entitled to take any part of this $252,332.02 as a deduction under (b) (3) of section 219 or any other section of the statute. He is entitled to take the remainder of the $550,290.40 credited to the beneficiaries on December 31, 1924, as an additional deduction under paragraph (b) of section 219 of the Revenue Act of 1924.

As was said in Willcuts v. Ordway, supra (speaking of a similar statute), “ Distributions as there used, does not necessarily mean passing into the uncontrolled possession and disposition of the beneficiary. It means separation and segregation from the trust estate, so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust. If this trust instrument authorizes such income to be so separated and segregated and they were so treated in fact, the Commissioner was in error and the trial court properly overruled the demurrer to this petition and entered judgment for the refund.” The remainder of the $550,290.40, after the deduction of the $252,332.02 used in paying the burdens and obligations described in paragraphs (a) (b) (c) and (d) of the trust deed, was not actually distributed to the beneficiaries until 1925 and 1926. One hundred and thirty-five thousand dollars thereof was distributed in 1925 and the balance in 1926. But even so, we think it was separated and segregated from the trust estate when credited to the beneficiaries on December 31, 1924, sufficiently that petitioner is entitled to take such sum as an additional deduction under the provision of the statute already referred to, and respondent should so treat it in recomputing the deficiency.

We sustain respondent in his disallowance of $25,637.08 taxes, state, county and municipal, paid by the trustee. These were not taxes which accrued against the property while in the'hands of the trustee, but were taxes which had accrued prior to the conveyance to the trustee and were not proper deductions from income by the taxpayer. Grand Hotel Co., 21 B. T. A. 890; John Hancock Mutual Life Insurance Co., 10 B. T. A. 736.

Respondent’s disallowance of $893.79 as excessive depreciation is also sustained. In fact we do not understand petitioner to contest the two last named adjustments in the event the trust income is held to be taxable.

Petitioner’s contention that he is entitled to deduct depletion on a discovery basis is denied except as to the one discovery made by the taxpayer after the creation of the trust. That amount has been stipulated to be $1,743.07. Magdaline McKinney, 16 B. T. A. 804; Darby-Lynde Co. 20 B. T. A. 522; affd., 51 Fed. (2d) 32.

Petitioner’s contention that he should be allowed the benefits of the capital gain provisions of the Revenue Act of 1924 is denied on the authority of William, Kempton Johnson, 17 B. T. A. 611; affirmed in 52 Fed. (2d) 727; Sydney Shoenberg et al., 19 B. T. A. 399; affirmed by the Court of Appeals, D. C., Dec. 28, 1931 (par. 9002 C. C. H.).

Petitioner had not held the land upon which the leases were sold during the taxable year for a period of more than two years. He could not add to the period of his own holding the period of holding of the grantors.

Beviewed by the Board.

Decision will be entered under Bule 60.

MuRdook,

dissenting: I dissent from the prevailing opinion in so far as it holds that the income for 1924 not needed to pay and discharge burdens and obligations of the trust mentioned in paragraphs (a), (b), (c), and (d) of the subdivision headed “Burdens and Obligations of the Trust ” was, under the provisions of the trust deed, income which was to be distributed currently by the fiduciary to the beneficiaries and, therefore, deductible under section 219 (b) (2) in determining the income taxable to the fiduciary. Any amount deductible in computing the net income of the trust must be included in computing the net income of the beneficiaries whether distributed to them or not. The phrase “ to be distributed currently ” appeared for the first time in the Revenue Act of 1924. The reports of the various committees do not mention the new words, but say only that section 219 has been rewritten for the sake of clarity and to prevent evasion of tax on the income of estates and trusts. The 1921 Act spoke of income of the taxable year “ to be distributed to the beneficiaries periodically, whether or not at regular intervals.” It was taxable to the estate or trust except where, under the instrument, it was distributable during the taxable year. I do not believe the 1924 Act made any change in the taxability of such income as is here involved. The intention in both acts was to prevent those interested from arbitrarily or otherwise shifting or reducing tax burdens through their control over the time and amount of actual payments. “ Currently ” must relate to the current year or some part thereof, and not to the indefinite future when for the first time the amount of the 1924 income to be distributed can be determined. Cf. Elizabeth S. Sprague, 8 B. T. A. 173. The present decision is contrary to the general scheme of the income-tax acts requiring income to be reported by annual periods on the basis of events fixed on or before the end of the year. In the case of John D. Rogers, Trustee, cited in the prevailing opinion, the trustee had the right, in his discretion, to set aside a fund sufficient to meet some anticipated obligations of the succeeding year. We held that the amount so set aside was taxable to the trust rather than to the beneficiaries, without considering whether the amount retained was more or less than the amount actually used in the succeeding year to meet the anticipated needs. The case, therefore, proves too much for the prevailing opinion and supports the view which I take. In Elizabeth S. Sprague, supra, we said: “ Unquestionably the duty to determine whether the retention of surplus income was necessary or unnecessary for that purpose rested upon the trustees, and until that duty was performed there was no distributable income.”

It is apparent that this trustee, acting with the advice of counsel, did everything in his power, before the end of the year 1924, to minimize the income-tax liability of the trust and of the beneficiaries under the trust for that year. Yet, he was unable to determine or even approximate within the year the amount of Federal gift tax due or the amount of taxes due to the State of Missouri. Furthermore, it does not appear that he was able to determine or approximate the amount of Wilson’s income-tax liability. No one suggests that he acted beyond his powers in retaining the full amount of the income for the year 1924 under the terms of the trust instrument. In his letter of May 29, 1925, he admitted that the burdens and obligations of the trust necessitated retention of the funds by him because it was impossible within the year to calculate the funds necessary to meet the obligations of the trust. He further stated that under the terms of the trust he believed it was within his discretion, and, indeed, his duty, to hold the funds in his possession in order that the liabilities and obligations could be met when they became definitely known. I agree that his interpretation, acquiesced in by the beneficiaries, was a fair one of the requirements of the trust. He further stated that the income of the trust for the fraction of the year 1924 was not subject to the demand of the beneficiaries as of December 31, 1924, and they-could not have obtained at that time actual possession of these funds. This situation, it seems to me, was within the fair intendment of the trust instrument so far as the income for that particular year is concerned. Other years might be quite different, because some large obligations were nonrecurring. I, therefore, agree with the Commissioner that the credit of the entire income to the beneficiaries did not permanently set aside any of this income for or make it available to the beneficiaries on or before December 31, 1924. To say that this particular income was “ to be distributed currently ” to them so as to render them liable for income tax upon it is a misuse of the quoted words. There was not within the year a separation or segregation of the income of the beneficiaries from the income of the trust so that the former no longer formed any part or portion of the trust property and ceased to be subject to the terms and control of that trust. Although under the terms of the trust instrument some income might have been so separated and segregated, none was in fact so treated. Therefore, under the decision in Willcuts v. Ordway, cited in the prevailing opinion, 8.11 of the income was taxable to the trust and none of it was taxable to the beneficiaries. Furthermore, the amount is not deductible under section 219 (b) (3), for the fiduciary exercised whatever discretion he had by retaining control over all of the income, and his so-called crediting was not a proper or true crediting, but a meaningless entry on the books which he never intended should be binding upon him nor effect a segregation of the funds from those of the trust.


author: McMahon: Trammell,

text:
    E. K. Wood Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 23605, 24156.
    Promulgated March 28, 1932.

      Joseph Nievinslci, Esq., E. W. B. Taylor, Esq., and O. 8. Cowan, C. P. A., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

McMahon:

The petitioner has waived assignments of error numbered 2 and 3 under Docket No. 24156. The determination of the respondent on those points will therefore not be disturbed.

With regard to assignment of error numbered 4 under Docket No. 24156, the parties have stipulated that the respondent erroneously included in the petitioner’s income for 1918 the amount of $2,183, representing dividends, and the amount of $5,432.40, representing interest from United States obligations. In accordance with the stipulation, adjustment will be made under Bule 50.

The petitioner also waived assignments of error numbered 3, 4, 7 and 8 under Docket No. 23605. The respondent’s determination on those points is therefore approved.

With regard to assignment of error numbered 6 under Docket No. 23605, it was stipulated between the parties that the respondent erroneously included in the petitioner’s income for 1920 the amount of $1,841 representing dividends, and the amount of $267.37 repre-seting interest from United States obligations. Adjustment will be made accordingly under Bule 50.

With regard to assignment of error numbered 9 under Docket No. 23605, it was stipulated between the parties that the petitioner is entitled to -a deduction in the amount of $3,392.32 representing petitioner’s pro rata part of expenditures incurred in repairing the steamer Tamalpais. Adjustment will be made accordingly under Bule 50.

This leaves in controversy in Docket No. 24156 only assignment of error No. 1, which involves the Wilson Brothers & Company contract. There also remain for consideration under Docket No. 23605 assignment of error No. 1, involving the sale of timber to the Wynooche Timber Company and the sale to the Schafer Brothers Logging Company, assignment of error No. 2, involving the alleged sale of the Burrows Bay Mill site, and assignment of error No. 5, involving the inclusion in invested capital of 1920 of taxes overpaid for 1918.

The first question we will consider is whether the profit from the sale of the land and timber by petitioner to Wilson Bros. & Company (referred to as the partnership) is taxable in the year 1917 or 1918.

The petitioner and the partnership negotiated over a period of time for the sale to the partnership of land and timber owned by the petitioner. Finally on December 4, 1917, A. B. Johnson of the partnership and C. A. Thayer of the petitioner agreed orally upon the price and time of payment and transfer of property, and Thayer also agreed to permit the partnership to go upon the property for the purpose of beginning a survey for a railroad. It appears that a line was surveyed to and over the property in section 34 and another line surveyed to, but not upon, the property in section 28. Although additional men were employed to construct the railroad, there is no testimony from which we can determine to what distance or extent the railroad along the two lines was under construction or had been completed. The deed was acknowledged and delivered and the purchase price paid on January 2,1918.

The petitioner contends that the sale was complete on December 4, 1917, and that the parties intended that from that date the property should be the property of the partnership, whereas the respondent contends that the sale was completed in 1918. The question to be decided, therefore, is when the sale was consummated, in 1917 or 1918.

The statutes of the State of Washington require that all conveyances of real estate or of any interest therein, and all contracts creating or evidencing any encumbrances upon real estate shall be by deed and that all deeds and voluntary transfers of real estate or any interest therein shall be in writing, signed by the party bound thereby and acknowledged by the party making it before some person authorized by its laws to take acknowledgements of deeds. Sections 10550 and 10551, Eemington’s Compiled Statutes. These statutes are a part of the statute of frauds of Washington. Pacheco v. Mello, 247 Pac. (Wash.) 927; McKay v. Calderwood, 37 Wash. 194; 79 Pac. 629.

In the case of Hendry v. Bird, 132 Wash. 174; 237 Pac. 317; 240 Pac. 565, the court stated:

Our statute does not go to the question of the enforcement of a contract, but it affects the contract itself. * * *

It is stated in Brown v. Kausche, 98 Wash. 470; 167 Pac. 1075, that:

* * * An oral agreement to convey real property under the statute of frauds is void. Somers Co. v. Pits, 75 Wash. 233, 134 Pac. 932.

Previous to 1918 sufficient events had not occurred to satisfy the requirements of these statutes of Washington as construed by these decisions from that state.

As appears from our findings, negotiations for the sale of the timber lands in question were commenced by Wilson of the partnership and Kellogg of the petitioner and were continued by Johnson of the partnership and Thayer of the petitioner. On December 4, 1917, the latter orally agreed upon the purchase price of $136,000, which had been originally fixed at $180,000 by the petitioner. They then agreed, at the request of Johnson, that the partnership could enter upon the land for the purpose of making a survey for a railroad. This was followed by a discussion of the time of payment and it was agreed that it would be paid January 2, 1918.

At the request of Johnson, Thayer referred the matter by letter to Kellogg, who was to take up the matter further with Wilson of the partnership, who was to have the title examined and approve the form of deed.

It appears from the correspondence in evidence that the partnership expected to receive a warranty deed, whereas Thayer did not know what action the petitioner would take in this regard. (Petitioner’s Exhibits 25 and 28 and respondent’s Exhibits A, B, C, D and E.) This correspondence left the negotiations open. The petitioner did not definitely decide to execute a warranty deed until December 31, 1917, at which date the proper officers were authorized by the board of directors of petitioner to execute a warranty deed. This deed, though dated December 31, 1917, was acknowledged January 2, 1918. It was delivered January 2, 1918, to the partnership upon the payment of the full purchase price of $136,000 to the petitioner by the partnership; and the payment was credited on that date on the timber account in the books of account of petitioner, which were kept on an accrual basis.

In American Land & Inv. Co. v. Commissioner, 40 Fed. (2d) 336, the court stated:

* * * xiie courts have shown a strong tendency to take the view that “ the sale ” for revenue purposes takes place when the deed is executed and a substantial part of the purchase price is paid. This was the view taken by this court in Stieff v. Tait (D. C.) 26 F. (2d) 489, affirmed 31 F. (2d) 1920.
Likewise, the United States Supreme Court has taken the same view upon a case involving somewhat similar facts. See Lucas v. North Texas Lumber Co. 50 S. Ct. 184, 74 L. Ed. 668, filed Feb. 23, 1930. * * *

No part of the purchase price had been paid until January 2,1918, upon delivery of the deed to the partnership.

It seems to us that the conclusion is unescapable that at most a mere executory contract existed, under which the parties agreed to close the transaction on January 2, 1918; that the petitioner did not relinquish its possession, but merely permitted the partnership after December 4, 1917, to enter upon the property for the purpose of beginning a survey for a proposed railroad and no more. Although extra men were employed to construct a railroad, there is no evidence that the construction of the railroad was commenced on the land in question prior to January 2, 1918.

In any event, in our opinion, for the purpose of income and profits taxes, the sale of the land and timber by petitioner to Wilson Bros. & Company was not complete and consummated until January 2, 1918, and the determination of the respondent in this regard is approved.

Since the respondent included the profit realized on this sale in ineome for 1918 instead of 1917, he refused to allow the inclusion of such profit in invested capital for 1918. As we approve the determination of the respondent in including such profit in income for 1918 instead of 1917, we also approve the disallowance of such profit in invested capital for 1918. Current profits, or profits earned during taxable year, are not includable in invested capital for such year. Section 326 (a) (3), Revenue Act of 1918.

We will next consider the second assignment of error under Docket No. 23605, involving the sale of the Burrows Bay Mill site. A claimed loss upon the sale of this site was disallowed by the respondent as a deduction from petitioner’s gross income for 1920, on the ground that the transaction was “ deemed not to be a bona fide sale.”

The facts in this transaction, in brief, are that Fred J. Wood in January, 1919, sold to the petitioner the so-called Burrows Bay Mill site for what it cost him and received Liberty bonds of the par value of $60,000 in payment therefor. A deed was executed by Wood and his wife and delivered to the petitioner. Wood testified that he thought this deed was a warranty deed, although he was not positive about that. This deed was held in the San Francisco office of the petitioner and was not recorded. The lumber business was in good condition at that time, but this condition thereafter changed for the worse. Therefore, the petitioner decided not to build a mill on the site and desired to sell the same. The directors of petitioner, at a directors’ meeting held on December 27, 1920, voted to sell the site to Wood for $5,000, the resolution authorizing the sale stating that, inasmuch as the deed from Wood to the petitioner was never recorded, it be returned to Wood, it being unnecessary to prepare a new deed. The deed was returned to Wood, who kept it in his possession until about the forepart of February, 1923. Wood paid the taxes for 1920 and 1921. He treated the property as his own. In 1923 business conditions improved and the petitioner repurchased the site from Fred J. Wood for $5,000, plus $4,100.36 which was expended by Wood on the property between 1920 and 1923. Wood turned over the unrecorded deed to his attorneys for the purpose of preparing a quitclaim deed to reconvey the site to the petitioner. Neither Wood nor his attorneys know what became of the deed of 1919, and although search was made it was not found. Immediately after the transfer the petitioner began the construction of a mill on the site at a cost of approximately $1,000,000.

Fred J. Wood and his relatives owned between 85 and 90 per cent of the stock of the petitioner during the years 1919 and 1920.

There is no evidence whatever in this proceeding that the sale was made to take a loss for income-tax purposes. In Budd v. Commissioner, 43 Fed. (2d) 509, the Board specifically found that the transfer of stock resulting in a loss of $90,000 was made with the purpose on the part of Budd of realizing a loss for the purpose of income taxes. Nevertheless, the court stated:

* * * There must be something more than mere suspicion that a perfectly legitimate transaction by men of high and unquestionable integrity was made for the sole purpose of committing a fraud by reducing taxes on account of a loss suffered in the depreciation of stock. “ If the device is carried out by means of legal forms it is subject to no legal censure.” United States v. Isham, 84 U. S. (17 Wall.) 496, 21 L. Ed. 728.

TJ. G. Richards, who was not related to F. J. Wood by blood or marriage and who is not now connected with the petitioner, but who was in the employ of the petitioner from 1909 until 1922 and served as manager, director and vice president, testified, in answer to the question whether anything was said with reference to creating a loss by the sale of the site to Wood for $5,000 so as to reduce the amount of taxes, that there was no discussion of that kind; that everything was done unanimously, without pressure; and that his vote and representations, and that of the minority stockholders were just as good as those of another, and that he never saw them deviate from that policy.

F. J. Wood testified that there was no discussion of the sale being made in order to take a loss for income-tax purposes and that there was no agreement, express or implied, that he would hold the property for the petitioner or that he was under any obligation to resell it to the petitioner.

From the evidence it seems to us that the purchase was actuated by an intention to build a mill on the site. When this became impracticable because of business conditions, the property was sold back to Wood. When conditions changed for the better, the property was repurchased and the construction of a mill was immediately commenced.

The respondent contends that transactions between a corporation and its stockholders are subject to special scrutiny, citing Frank E. Taplin et al., 12 B. T. A. 1264, in which case a corporation sold to its majority stockholders certain stock at less than one-fourth of its market value, and the Board held that the transaction was not bona fide. The Circuit Court of Appeals for the Sixth Circuit reversed the Board in that proceeding, and in its opinion, Taplin v. Commissioner, 41 Fed. (2d) 454, stated:

* * * The transfers to petitioners were in accordance with tbe arrangement between themselves. The transaction was never authorized or approved by any corporate action. The adverse corporate interest was not represented. Such a deal is subject to severe scrutiny. [Citing cases.] But it was valid until avoided, * * *

In this proceeding, the transfer of the property to Wood was authorized by corporate action.

We do not believe that a difference in cost and sale price resulting in a substantial loss standing alone, without other clear and convincing evidence, determines ipso facto a lack of bona fides. See Budd v. Commissioner, supra; Taplin v. Commissioner, supra; David Stewart, 17 B. T. A. 604; P. P. Griffin, 7 B. T. A. 1094.

All the witnesses for the petitioner testified frankly and to their best recollection with reference to this transaction. The respondent introduced no evidence. Subjecting all the evidence to special and severe scrutiny, we are of the opinion that the sale by the petitioner of this site to Wood was bona fide and that, therefore, the petitioner is entitled to deduct in 1920 any loss sustained upon this transaction.

Although the statute of frauds of the State of Washington, heretofore referred to, does not merely affect the remedy, but affects the obligation of the contract within such statute, yet, in our opinion, this transaction is taken out of such statute, since everything was done by the parties to the transaction to transfer possession, title and control except the execution and delivery of a new deed, the petitioner retaining at most the mere naked legal title. The statute operates on the agreement only while it is executory. 27 C. J. 312-313. See McKay v. Meyer, 103 Wash. 270; 174 Pac. 13; Hughes v. Eastern R., etc., Co., 93 Wash. 558; 161 Pac. 343; Gaisell v. Johnston, 68 Wash. 470; 123 Pac. 783; Horr v. Hollis, 20 Wash. 424; 55 Pac. 565.

This transaction is clearly distinguishable from the Wilson Brothers & Company transaction in that this transaction constituted an executed contract, while the transaction with Wilson Brothers & Company at most constituted merely an executory contract. In this transaction the parties by performance had put it without their power to avoid the contract or evade its obligations, while, in the former,- nothing was done except in a preliminary way to arrange for the closing and consummation of the .transaction.

Since the property sold cost the petitioner $60,000 par value of Liberty bonds, $30,000 of the third issue and $30,000 of the fourth issue, which issues had a fair market value at the time of the transfer of $95% and $94%, respectively, and was sold to Wood for $5,000, the loss upon the transaction is the difference between these amounts reduced by the amount of depreciation sustained during the time the property was owned by the petitioner.

While the second deed executed by Wood and his wife to the petitioner in 1923 did not contain the description of the personal property on the premises and although the evidence is not absolutely clear as to whether or not the unrecorded deed contained a description thereof, it is apparent from all the evidence that the personal property and real estate were purchased and sold together and that the consideration covered both. Such personal property, having cost F. J. Wood $3,251 and having a value in January, 1919, of $1,500, is listed in our findings of fact. From the evidence we can not determine the depreciation sustained upon this personal property during the time it was owned by the petitioner. We must, therefore, hold that in computing the loss upon the transaction the basis must be reduced by the full value of the personal property, or $1,500. The basis must be further reduced by the depreciation sustained upon the barn and two silos located thereon, which cost $4,000 in June, 1918, and had a useful life of 20 years. We have no evidence as to the depreciation sustained upon the small frame building and the old hotel building. We must, therefore, hold that the full value of these two buildings, $25 and $200, respectively, should be deducted from the basis in determining the loss sustained.

Assignment of error No. 1 under Docket No. 23605 involves the sale of land and timber to the Wynooche Timber Company and the sale of timber to the Schafer Bros. Logging Company. The petitioner contends that since, under the law of Washington as interpreted by its courts, upon a conditional sale in which there is a forfeiture provision the vendor retains the absolute legal title and no right, title or interest passes to the vendee, no taxable profit arose until the petitioner had recovered its capital investment in the property.

Although the Schafer Bros. Logging Company contract is for the sale of standing timber, and not land and timber as is the Wynooche Timber Company contract, this is immaterial, in the consideration of these two contracts together, as a sale of standing timber under the law of the State of Washington is a sale of an interest in land and “ partakes of the realty.” Beckman v. Brickely, 258 Pac. (Wash.) 488; France v. Deep River Logging Co., 79 Wash. 336; 140 Pac. 361.

These contracts, being for the sale of realty or an interest in realty situated in the State of Washington, are to be construed and interpreted according to the laws of that state. It is well recognized that rules governing descent, transfer, sale of property, and the rules which in any other way affect the title and the possession thereof are binding upon Federal courts. Kuhn v. Fairmont Coal Co., 215 U. S. 349; Burgess v. Seligman, 107 U. S. 20; 25 C. J. 839-84 and cases cited; Ferguson v. Commissioner, 45 Fed. (2d) 573; Poe v. Seaborn, 282 U. S. 101.

The decisions of the courts of the State of Washington with respect to contracts such as are involved in this proceeding, i. e., executory contracts for the sale of land or interest in land containing a forfeiture clause, or its equivalent, are clearly stated and unambiguous. A leading case is that of Schaefer v. Gregory Co., 112 Wash. 408; 192 Pac. 968. The court in its opinion states:

We come to the conclusion, therefore, that under the well-settled law of this state, the vendee in a forfeitable, executory contract of sale, has no legal or equitable interest in the property, the subject matter of the contract, and, although the contract may be of record, he is not one of the parties necessary to the condemnation proceedings.

Another leading case, which follows the Schaefer case, supra, is Ashford v. Reese, 132 Wash. 649; 233 Pac. 29. The Washington Supreme Court states as follows:

* * * In such jurisdictions it had been held that the executory contract of sale created some title or interest in the vendee, either legal or equitable, and that the loss must follow the title or interest; whereas we have consistently held in numerous cases that an executory contract of sale in this state conveys no title or interest, either legal or equitable, to the vendee, and the loss following the title, it must be borne by the vendor. * * *

See Peck v. Farmers National Bank, 137 Wash. 627; 243 Pac. 861; Surry v. Baker, 132 Wash. 188; 231 Pac. 791; Bank of California v. Clear Lake Lumber Co., 146 Wash. 543; 264 Pac. 705; and Florence A. Foster, 18 B. T. A. 819.

As in Florence A. Foster, supra, so in this proceeding, under the laws of the state in which the property is situated and the intention of the parties as expressed in the contracts themselves, such contracts are executory contracts for sale and not present sales or closed transactions.

In brief, then, under these contracts the petitioner retained control of the property, the vendees having a mere license thereunder to enter thereon to cut the timber. Bank of California v. Clear Lake Lumber Co., supra. The petitioner retained equitable title as well as legal title. If the timber were destroyed without fault of either party, the loss would fall upon the petitioner and the vendees could recover the purchase money paid on the ground of failure of consideration. All the burdens of ownership were retained by the vendor. Ashford v. Reese, supra.

By the express terms of the contracts and/or the interpretation of and construction placed upon such contracts by the courts of the State of Washington, no title passed to the _vendees and would not pass until the purchase price in full had been paid as provided in the contracts. No deed or other conveyance was executed and by the terms of the contract the vendor was not required to execute and deliver a deed or other conveyance until the purchase price had been paid in full in accordance with the terms of the contract. In the event the contract should be rescinded by the vendor upon default in payment of any of the deferred payments, it is obvious that the vendor could not recover the balance due on the notes and it is so stated in the Wynooche contract.

The payment of a part of the purchase price does not take such contract out of the category of executory contracts. See R. J. Darnell, Inc., 18 B. T. A. 125; Biscayne Bay Island Co., 23 B. T. A. 731.

At the hearing counsel for petitioner stated that he was unable to procure the original notes, and the originals of the notes as executed and delivered were not offered in evidence. In the photostatic copy of the minutes of the meeting of the petitioner’s board of directors of July 12, 1920, there is a copy of a form of promissory note, marked “sample note,” which contains the following:

This note is given as an evidence of indebtedness for the unpaid balance due on a land purchase contract dated-between the E. K. Wood Lumber Company and the Wynooche Timber Company and is subject to all the terms and conditions as regards payment expressed within said contract.

Upon objection being made by counsel for the respondent to the admissibility of this form of “sample note,” counsel for the petitioner and the respondent stipulated that, for the purposes of this case only, the notes may be considered as not having this condition upon them.

It is elementary that when separate writings are executed between the same parties at the same time, in the course and as parts of the same transaction, they are to be construed as one and the same instrument, and a note and contract, being contemporaneous instruments relating to.the same subject matter, should be construed together to determine the liability of the maker of the note. Davis v. Brown, 94 U. S. 423; 24 L. Ed. 204; Nichols v. Lane, 192 N. Y. S. 362; People's Bank of Ara v. Rankin, 282 S. W. (Mo.) 91; Farmers Equity Coop. Ass'n of Dresden v. Tice, 122 Kan. 127; 251 Pac. 421; Williams v. Kessler, 295 S. W. (Mo. App.) 482; Seaman v. McNaman, 180 Wis. 609; 193 N. W. 377.

Both contracts provide that the notes are to be given merely in evidence of the deferred payments. The Wynooche contract provides that the notes are to be payable to the order of the petitioner at its office in Hoquiam, Washington, while the Schafer contract provides that the notes are to be payable to the petitioner. If the latter notes were drafted in accordance with the terms of the contract, and there is no evidence that they were not, they would have been nonnegotiable notes because not payable “ to the order of ” or to “bearer.” Two of the ten Wynooche Timber Company notes and one of the five notes of the Schafer Bros. Logging Company were paid in 1920 and all the remaining notes were paid in 1921 and 1922, as shown in our findings of fact. There is no evidence that the notes or any of them under either contract were ever negotiated.

Since the contracts are executory contracts merely and the transactions were not present completed sales, it is obvious that it is immaterial whether the notes were negotiable or not.

It is not necessary, therefore, for us to determine the realizable market value of those notes in 1920. Were the transactions under these contracts completed sales or closed transactions, it would be necessary so to do, but not in view of our holding. In Bedell v. Commissioner, 30 Fed. (2d) 622, the court stated:

* * * Of course, it is true that an obligation, even a conditional obligation, is in some sense property, and, like anything else that can be transferred, may be said to have a value, but nevertheless payment is made in exchange for title, and will never be made if it is not conveyed. To speak of the profit as resulting because its amount can be presently ascertained, though performance remains uncertain, seems to us a perversion of language.

Under the laws of the State of Washington the vendor may not realize the profits anticipated under such a contract. Although the petitioner received payments on the contracts it does not necessarily follow that such receipts are income or profit for income-tax purposes. See Burnet v. Logan, 283 U. S. 404.

We therefore hold that the respondent erred in holding that petitioner derived in 1920 any taxable income from either the Wynooche Timber Company contract or the Schafer Bros. Logging Company contract.

With respect to error No. 5 under Docket No. 2B605, since recom-putation of the 1918 tax will result in a deficiency, though less in amount than heretofore determined by the respondent, and as the petitioner has only paid the tax as originally assessed for that year, we approve the action of the respondent assigned therein as error.

Reviewed by the Board.

Judgment will be entered wider Rule 50.

Smith concurs in the result.

StekNhageN dissents.

Trammell,

dissenting: I am unable to agree with the reasoning which sustains the loss on the Burrows Bay Mill site. While a corporation may legitimately distribute or sell any asset to its stockholders, I do not believe that it can take a loss on account of selling an asset to a stockholder in control of the corporation, unless it sells it at a fair market value. Otherwise, a corporation might sell an asset to its stockholders for $10,000 which cost it $100,000, although it had a market value even in excess of cost, and take a loss. The record in my opinion is not sufficient to show that the market value was considered in the sale to Woods. If this principle is not followed there is nothing to prevent a corporation whose stock is closely held from taking mere arbitrary losses at will. The real question is where the burden of proof lies. My view is that the burden is on the taxpayer to show that it is entitled to the deduction and that this burden did not shift to the respondent when evidence of the sale was introduced. The testimony in the record is not sufficient.


author: Seawell :

text:
    Patent Royalties Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51092.
    Promulgated March 28, 1932.

      L. A. Tanzer, Esq., M. Finkelstein, Esq., and J. G. Peacock, Esq., for the petitioner.

      J. E. Marshall, Esq., and W. E. Davis, Esq., for the respondent.
   OPINION.

Seawell :

The contention of the Commissioner is that since Holed-Tite Packing, Inc., a corporation affiliated with the petitioner within the meaning of section 240 (d) of the Revenue Act of 1926, filed a separate return for the fiscal year ended July 31, 1927, which was within the first year of the affiliated status, such action constitutes an election to file separate returns and therefore both corporations must file separate returns for 1927 and subsequent years unless permission to change is granted by the Commissioner. On the other hand, the petitioner contends that the two corporations intended and desired to file on a consolidated basis for 1927 and that their acts must be construed as having accomplished that purpose, or at least that their acts should not be considered as an election to file their returns on a separate basis. The controlling provision of the statute is section 240 (a), which reads as follows:

Corporations wbicb are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

We think it clear and well established that the two corporations had the right under the foregoing provision to elect the basis upon which they would file returns for 1927, that is, whether on a separate or a consolidated basis, and that if they had desired to file on the latter basis the proper course would have been for Holed-Tite Packing, Inc., to have filed a return for the remaining five months of its fiscal year in the calendar year 1926 when it was not affiliated with the petitioner and then for the two corporations to have filed a consolidated return for the calendar year 1927 in which would have been included the income and deductions of both corporations for the entire year. Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984; certiorari denied, 282 U. S. 883; Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; Automatic Fire Alarm Co., 13 B. T. A. 1195; B. B. Bathing Park, Inc., 17 B. T. A. 748; and Apartment Corporation, 17 B. T. A. 876. See also article 634 of Regulations 69.

It is obvious, however, that the parties did not proceed in the manner indicated above, but, on the contrary, in a manner which makes necessary the conclusion that a return on a consolidated basis may not be permitted for the year ended December 31, 1927. While it may be true, and this is conceded by the Commissioner, that what the two corporations desired and intended was that the two corporations should report their income on a consolidated basis, we can not determine tax liability on the basis of desires and intentions; we must proceed on the basis of what was actually done, and a given taxpayer must be held to the consequences of its own acts. The statute specifically provides that, “ If return is made on either of such bases [that is, separate or consolidated], all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.” And when we come to consider the returns filed by the corporations for the year in question (1927), we find that Holed-Tite Packing, Inc., filed a separate return for the fiscal year ended July 31, 1927, which was the first return filed during the period of affiliation. When one member of an affiliated group files a separate return, the remainder of the group must likewise file separate returns. Duke Power Co. v. Commissioner, supra, and Apartment Corporation, supra. It therefore follows that at least for the period from January 1, 1927, to July 31, 1927, the petitioner would not have been permitted to file a consolidated return. However, even after that date we do not find that the corporations sought permission to change from a separate to a consolidated basis for the remainder of 1927, but rather for permission for a change in the accounting period of Holed-Tite Packing, Inc., in order that that corporation might file a separate return for the five-month period ended December 31, 1927, which would place it on the same accounting-period basis as the petitioner, namely, a calendar year. The permission requested was granted, but instead of following the course of procedure for which such permission was granted, a so-called consolidated return was filed for the calendar year 1927, which included the income of the petitioner for the entire year and that of Holed-Tite Packing, Inc., for the last five months of the year. Whatever may have been the effect of the granting of permission in so far as years subsequent to 1927 are concerned, we are of the opinion that it could not be interpreted as permitting the filing of a consolidated return for 1927, and since a separate return was filed by Holed-Tite Packing, Inc., for the fiscal year ended July 31, 1927, a consolidated return of the two corporations for the calendar year ended December 31, 1927, may not be permitted.

Judgment will he entered for the respondent.


author: GoodkiCH:

text:
    Lewis E. Smoot, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32758.
    Promulgated March 30, 1932.

      William M. Williams, Esq., and H. P. Gately, Esq., for the petitioner.

      Maxwell M. Mahaney, Esq., for the respondent.
   OPINION.

GoodkiCH:

We have previously held that where no petition is filed with this Board appealing from a deficiency notice issued by the Commissioner in accordance with section 274 of the Revenue Act of 1926, a second deficiency notice for the same taxable period may be issued. Gilbert B. Goff, 18 B. T. A. 283. Following that decision, we hold that respondent did not err in issuing the deficiency notice of October 8,1927, that the notice was valid, and appeal therefrom lies to this Board.

The remaining issues, which in reality are one and the same, present greater difficulty'. Respondent contends that petitioner is entitled to no deduction whatever from gross income on account of depletion. He asserts that under the Maryland statute whatever right petitioner may have acquired by the lease expired four days after its execution upon the conveyance of the property by Coleman to Rhodes, and that thereafter petitioner in carrying out his dredging operations was no more than a trespasser. He urges, moreover, that, even had the lease continued in effect during its full term, petitioner acquired by it no depletable interest in the deposits-, but merely a license giving him a bare right to operate, which right or privilege could be terminated without his consent either by a conveyance of the property by the then owner or by legislative enactment.

The Maryland courts have long recognized that the state is the fee owner of the beds of navigable streams and that riparian owners have no exclusive right to such lands lying below high-water mark and can obtain no exclusive right to the use of the same except by express grant from the state. Day v. Day, 22 Md. 530 (1865). Under the common law no doubt the state could maintain an action for trespass against any one removing sand and gravel from the bed of navigable streams. By a series of legislative' enactments, the last of which was in 1906, such trespass was declared to be criminal and certain penalties were imposed upon any person who should:

* * * dig, dredge, take or carry away any sand, gravel or other material from the bed of any of the navigable rivers, creeks or branches of this State * * * provided, however, that it shall be lawful for any riparian owner of lands bordering on said rivers, creeks or branches, or for any person or corporation with whom such owner shall have a contract in writing for the purpose, or for the agents, servants, or employees of such person or corporation, to dig, dredge, take and carry away sand, gravel, or other material from the bed of said river opposite said lands from high water mark on the shore bordering on said lands to the outer line of the channel nearest said shore * * *. [Section 433, Art. 27, Oode 1914, Maryland.]

It is conceded that the Potomac River at the place where petitioner carried on his operations was a navigable river and the lands embraced by this lease were lands bordering on such river within the meaning of this statute, and that it therefore is applicable to this case.

In 1924 the Court of Appeals of Maryland handed down its decision in the case of Smoot Sand & Gravel Corporation v. Columbia Granite & Dredging Corporation, 146 Md. 384, by which it determined the nature of the right possessed by the riparian owner or his lessee under this section of the statute. The court held that the act made no grant of title to the bed of the river, or to the sand and gravel resting thereon, but that the right conferred was in the nature of a license or privilege revocable at any time by the legislature and was possessed only by the riparian owner, or those with whom he had contracted in writing.

Before considering respondent’s contention that such a right of license or privilege is incapable of supporting an allowance for exhaustion of value, let us inquire as to the circumstances under which petitioner claims to be entitled to that right. The statute provides, and the court held, that sand and gravel may be recovered only by a riparian owner or by some person or corporation “ with whom such owner shall have a contract in writing for the purpose.” Here the contract of lease was executed by petitioner and Coleman, who was then the owner of the property. Within a few days thereafter, Coleman conveyed it to Rhodes, who was thereafter the owner.

Respondent contends that this conveyance nullified the lease, that thereafter Smoot had no contract with the owner of the property, and therefore had no right to continue his dredging operations for the recovery of the sand and gravel contiguous to the property. With this we can not agree, for we think the evidence shows clearly that Rhodes, by his conduct, ratified the contract and adopted it as his own. Consequently, we consider the lease contract valid and binding upon Rhodes as the owner of the land, and as sufficient to meet the requirements of the Maryland statute. Moreover, we think Rhodes was estopped from denying his privity to the contract.

In Wiggins Ferry Co. v. O. & M. Ry. Co., 142 U. S. 396, the court said, citing 2 Pom. Eq. Juris 965; Chicago & Alton R. R. v. Chicago etc. Coal Co., 79 Ill. 121:

It is not necessary that a party should formally agree to he hound by the terms of a contract to which lie is a stranger, if, having knowledge of such contract, he deliberately enters into relations with one of the parties, which are only consistent with the adoption of such contract. If a person conducts himself in such manner as to lead the other party to believe that he has made a contract his own, and his acts are only explicable upon that theory, he will not be permitted afterwards to repudiate any of its obligations.

This principle is applicable here. Rhodes, before the property was conveyed to him, had full knowledge of this lease. He was present when it was executed, as is evidenced by the fact he signed it as a witness. Rhodes received the consideration paid for its procurement — he got the entire benefit of the contract to the land owner. He permitted Smoot to operate under the lease for the full term thereof without question or objection, and during that time acknowledged that it granted to Smoot the exclusive right to remove the sand and gravel and served to prevent him from selling the fast land of the property to any one else, since such a conveyance would, by operation of law, terminate Smoot’s rights. Beyond doubt, Rhodes’ conduct discloses an adoption of this contract by him as his own, for he, having the right to accept or reject the contract when the property was conveyed to him, took and retained the benefits thereunder, thus ratifying the transaction and becoming bound by it beyond his power to avoid its effect. Drakely v. Gregg, 8 Wall. 242. Cf. Winslow v. B. & O., 188 U. S. 646. And it has been repeatedly held that, by the acceptance of benefits thereunder, one may be estopped from questioning the existence, validity and effect of a contract. Eareckson v. Rogers, 112 Md. 160; Read etc. Co. v. Nattans, 130 Md. 465; Manning v. Kansas Coal Co., 81 S. W. 140; Maryland Casualty Co. v. Gates, 290 Fed. 65, citing Horn v. Cole, 51 N. H. 287. This rule has been applied where it was objected that there was a noncompliance with the legal formalities relative to the contract. Flower v. Barnckopf, 11 L. R. A. 149, and cases there cited, and it here serves to prevent Rhodes from successfully denying his adoption of the contract and the existence of Smoot’s rights thereunder. We" conclude therefore that, in carrying on his dredging operations during the term of the lease, petitioner was not a trespasser, but was acting under a valid and effective contract between himself and the owner of the riparian property, as by statute required, and possessed the right of privilege or license conferred by such a contract.

We are supported further in this view by the well established rule that, where a contract has been adhered to and fully performed by the parties thereto, even though voidable as between them, its validity may not be attacked by a third person who is not a privy nor a successor in interest to one of the parties. Cf. United States v. Andrews, 207 U. S. 229; Martin v. Pritchard, 199 Pac. 846; Williston on Contracts, ¶¶529, 530; National City Bank of Seattle, 1 B. T. A. 139; Denholm & McKay Co., 2 B. T. A. 444; The Hub, Inc., 3 B. T. A. 1259; Independent Aetna Sprinkler Co., 15 B. T. A. 521.

Bespondent is in nowise a party to this contract. His attack is a collateral incident to a proceeding to determine the income-tax liabilitjr of one of the parties several years after the rights there-, under have been fully exercised and the contractual obligations fully performed. We think he is precluded from questioning the validity of the contract.

As to petitioner’s right to a depletion allowance, it is clear that he may not have an allowance for the value of the deposits themselves, for he had no property interest therein. Under the statute he had only the right of license or privilege to remove the deposits. But that right was property; it was of value, and both the right itself and the value thereof were subject to exhaustion, the one by the passing of time, since the right was granted for a definite period; the other by the removal of the deposit which gave rise to value. Under that right he could carry on his operations, remove and sell deposits of sand and gravel and thus realize a profit through its exercise. True, the right could be revoked at any time by means beyond his power to control — by a conveyance of the property to a new owner who did not assume the contract, or by legislative enactment. But neither of those contingencies affected the character of the right which, while it existed., was an exclusive one. They are material only in determining the value of the right. The parties have stipulated that the fair market value of an exclusive right for a period of nine years from February 6, 1913, to remove sand and gravel from this property was $122,303.24. In the absence of any evidence in the record before us tending to prove erroneous that determination of value, we must adopt it and assume that, in so stipulating, respondent, by his counsel, considered the elements of uncertainty pointed out which would have a bearing on the value of petitioner’s license.

The Bevenue Act of 1921 provides that, in computing net income, there shall be allowed as a deduction:

Seo. 214. (a) (8) A reasonable allowance for the exhaustion * * * of property used in the trade or business * * *. In the ease of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market value as of March 1, 1913.

This section of the Act of 1918 does not contain the provision making the value as of March 1, 1913, the basis for the deduction in the case of property acquired before that date, but that this basis shall be used has been established by the courts and by this Board in decisions so numerous that citation is unnecessary.

Petitioner is entitled to an annual deduction representing the exhaustion of his contract which was used in connection with his trade or business, based on its value as of March 1, 1913, either prorated over its term, or gauged by the rate of removal of the deposits which the contract gave him the right to recover. The parties apparently have agreed that the exhaustion sustained can be measured accurately by removals, and have stipulated the amounts allowable on that basis during the years here involved. These amounts were stipulated as the deductions to be allowed as depletion in the event we decided petitioner was entitled to depletion. We are not allowing depletion of the deposits, but are allowing a deduction on account of exhaustion of the value of the right arising under the contract of lease. However, since we have adopted the stipulated basic value of that right upon which was based the computation of exhaustion sustained as made by the parties, and since neither objects to the suggested basis nor contends for any other, we approve the determination of the allowances upon the removal basis and the amount thereof as stipulated.

Judgment will be entered under Rule 50.