text:
    Houck Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8159.
    Promulgated July 14, 1927.
    1. Evidence insufficient to prove that debts charged off during the taxable year 1919 as worthless were in fact ascertained to have become worthless in that year.
    2. Under the Revenue Act of 1918 no deduction may be taken for a part of a debt charged off as worthless.
    <7. M. Pasquier, O. P. A., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the calendar year 1919 duly asserted by the respondent in the amount of $919.85. The petitioner alleges that the respondent has erred in determining the deficiency in the following particulars:
    1. In disallowing as a deduction from gross income for the year 1919, the amount of $1,883.12, representing bad debts which were ascertained to have become worthless and which were charged off in that year.
    2. In increasing the petitioner’s taxable income for the year 1919 by the amount of $577.56 which, it is alleged, represents recoveries in the year 1920 on account of bad debts charged off in the year 1919.

      FINDINGS OF FACT.
    The petitioner is a corporation organized and existing under the laws -of the State of Louisiana. It was during the years 1919 and 1920, and for several years prior thereto, engaged in a general merchandise business at Gibsland, La. It also bought and sold cotton.
    A considerable part of the sales made by the petitioner were made on credit. In keeping its accounts of the sales made on credit, the petitioner used two sets of books, one a bound ledger and one a loose-leaf ledger, and also charge tickets. The charge tickets were used for accounts which the petitioner* did not consider large enough to go into the books. At the end of each year all the books were submitted to J. H. Houck, secretary, treasurer and general manager of the petitioner, who perused all of the accounts and after checking one with another, would arrive at a fair estimate of the amount of the total credit accounts to be charged off as worthless. Each individual account was not considered by itself with respect to its worthlessness in order to determine whether it was at that time worthless in fact.
    On December 31, 1919, in accordance with the petitioner’s practice, the books of account were submitted to J. H. Houck, who, after checking over the accounts carried on the loose-leaf ledger, decided that 50 per cent of the total amount carried thereon, represented by numerous individual accounts, was the proper amount to charge off for the year 1919 on account of bad debts. Individual accounts, as such, were not considered and then charged off after it had been determined that they were in fact worthless at that time. The amount of $3,766.24 in credit accounts was carried on the loose-leaf ledger on December 31, 1919, and 50 per cent of that amount, or $1,883.12, was charged off at that time on account of bad debts.
    On December 31, 1919, the petitioner charged off in addition to the amount of $1,883.12 described above, the amount of $577.56 on account of bad debts. Of this amount $427.56 was represented by a debt owing to the petitioner by Milos Richardson who on January 26, 1920, executed and delivered to the petitioner a promissory note for that amount. The amount of this note was reported by the petitioner in its 1920 return for the purpose of taxation. Richardson has left the vicinity and the note has never been paid. Also, on December 31, 1919, the petitioner charged off as a bad debt the amount of $150 then owing to it by H. G. Harrell. On January 15, 1920, Harrell executed and delivered to the petitioner a promissory note for $275, which represented the amount of $150 charged off as a bad debt and also another note of Harrell’s in the amount of $125 held by the petitioner and which had not been charged off. When the note for $275 was received the petitioner restored the amount of $150 on its books as income from bad debts recovered and on December 31, 1920, the amount of $275 was charged off as worthless. In February, 1921, Harrell paid $75 on this note.
    The petitioner kept its books on the accrual basis.
    Upon audit of the petitioner’s return for the calendar year 1919, the Commissioner disallowed as a deduction from gross income for that year the amount of $1,883.12, representing 50 per cent of the accounts carried on the loose-leaf ledger, which was deducted on account of alleged bad debts, and he also determined that the amounts of $427.56 and $150 represented by the notes received in the year 1920 from Richardson and Harrell, respectively, should be included in taxable income for the year 1919.
   OPINION.

Love:

We will consider first the petitioner’s contention that the amount of $1,883.12 represented debts ascertained to be worthless and charged off within the taxable year 1919, and that for that reason the amount so charged is a proper deduction from gross income for that year.

The evidence presented in this proceeding clearly establishes the fact that the petitioner, in arriving at the amount of $1,883.12 taken as a deduction for bad debts, did not charge off particular accounts. The petitioner, however, estimated that 50 per cent of the accounts carried on the loose-leaf ledger were bad and accordingly deducted one-half of the total amount of those accounts.

Under the provisions of the Revenue Act of 1918, a so-called bad debt is an allowable deduction from gross income only when ascertained to be worthless and charged off within the taxable period. Appeal of Ed C. Lasater, 1 B. T. A. 956. The first prerequisite, then, in order that a debt may be charged off is that it be ascertained to- be worthless in fact. The petitioner, the evidence shows, did not ascertain any particular debt to be in fact worthless in the year 1919. The petitioner’s secretary, treasurer and general manager testified that he was familiar with all the circumstances surrounding the debtors; that he considered the debts worthless; that every effort had been made to collect the debts.

However, the petitioner faces another difficulty. Particular and specific debts were not charged off in 1919 but, on the contrary, 50 per cent of the total of certain accounts. In order to come within the provisions of the Revenue Act of 1918 authorizing the deduction on account of bad debts, a particular debt must be ascertained to be worthless and the entire amount thereof charged off. The Revenue Act of 1918 does not permit a taxpayer to charge off a debt in part. Appeal of Steele Cotton Mill Co., 1 B. T. A. 299. The petitioner, therefore, has not complied with the terms of the statute and for that reason the determination of the respondent in disallowing as a deduction from gross income for the year 1919 the amount of $1,883.12 on account of bad debts, is approved.

With respect to the contention advanced by the petitioner to the effect that the respondent has erroneously increased its taxable income for 1919 in the amount of $577.56, which it alleges represents recoveries in the year 1920 on account of bad debts charged off in 1919, we must hold that the respondent has erred.

The petitioner strongly urges that under no circumstances could the recoveries made in 1920 constitute income for the year 1919. That contention, of course, would not be sound if the propriety in charging off in 1919 the amounts in question on account of bad debts Avere in dispute. However, that is not the case.

The debts oAving to the petitioner by Richardson and Harrell >vere charged off in 1919 and it is not suggested anyAvhere that such action Avas not justified because the debts were not worthless. The issue squarely presented is whether the amount of $577.56 was recovered in the year 1919 or in 1920.

The evidence clearly shows, and we find it to be a fact, that the amount of $577.56 represented by the debts owing to the petitioner by Richardson and Harrell was charged off in 1919, and that in January, 1920, the petitioner received from Richardson and Harrell notes in the amount of $702.56, of which the amount of $577.56 had been charged off in 1919 as bad debts. The petitioner kept its books on an accrual basis and in the year 1920 set up the amount represented by the notes as income for the year. The respondent erred, therefore, in increasing the petitioner’s income for the year 1919 in the amount of $577.56 recovered in 1920.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by Littleton and Tkussell.


source: Caselaw Access Project

author: By the Board :

license: Public Domain

text:
    Automatic Sprinkler Company of America, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4987.
    Promulgated July 18, 1927.

      Ward Loveless, Esq., and F. 0. Graves, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OrdeR op Redetermination.

By the Board :

On April 23, 1925, the Commissioner mailed to the Automatic Sprinkler Company of America, 123 Williams Street, New York City, a notice of his determination of deficiencies of $32,802.85 for the calendar year 1918 and $7,800.80 for the calendar year 1919. On June 19, 1925, the Automatic Sprinkler Company of America, 123 Williams Street, New York City, New York, filed its petition appealing from the Commissioner’s notice of deficiencies and set forth that “ The taxpayer is a Delaware corporation with principal office at 123 Williams Street, New York City, New York. The deficiency letter (copy of which is attached) was mailed to the taxpayer on April 23, 1925. The taxes in controversy are profits taxes for the calendar years 1918 and 1919 and are less than Ten Thousand Dollars ($10,000), to wit, about Twenty-one Hundred Dollars ($2,100).” The petitioner then proceeded to assign as error of the Commissioner in his determination that he had allowed only $25,000 as invested capital of the petitioner, represented by patents and patent rights of the Sypho-Chemical Sprinkler Corporation, an affiliated company, whereas in determining the consolidated invested capital for said patents and patent rights he should have allowed a value of $50,000.

The question of the petitioner and the Sypho-Chemical Sprinkler Corporation being affiliated was not in issue, inasmuch as the Commissioner had made his determination upon the basis of the affiliation of these two corporations.

In his answer filed September 13,1925, the Commissioner admitted the allegations contained in the petition, that the taxpaj^er was a Delaware corporation with principal office in New York City, that the deficiency letter was mailed to it on April 23, 1925, and that the taxes in controversy were profits taxes for the calendar years 1918 and 1919. The Commissioner denied that he had erred in determining the value of the patents and patent rights to be included in the consolidated invested capital. Thereafter, on November 9, 1925, this proceeding came on for hearing before a division of the Board upon the issues raised and no others, at which hearing evidence was introduced in support of the taxpayer’s claim that the Commissioner had erred in his determination of the value of the patents and patent rights. Thereafter, on November 12, 1926, the Board rendered its findings of fact and decision finding that the patents and license agreements value, which for invested capital purposes was the only issue raised in the proceeding, was $50,000, and directed in its interlocutory decision that judgment should be entered redetermining the deficiencies upon the basis of the value of $50,000 of the patents and license agreements on 15 days’ notice under Rule 50. 5 B. T. A. 479.

On February 25, 1927, the Commissioner, pursuant to the Board’s interlocutory decision, filed his computations of tax liability of petitioner for the years 1918 and 1919. Thereafter, on April 7, 1927, counsel for the petitioner, the Automatic Sprinkler Company of America, who were not counsel of record before the Board for the petitioner in filing of the original petition and the trial of the case, filed an alternative computation of the deficiencies for the calendar years 1918 and 1919 in which it was claimed that the collection of deficiencies computed upon the basis of the Commissioner’s original deficiency notice and the Board’s decision was barred, and accompanied the said alternative computation with a motion • asking the Board to reconsider the original petition filed by this petitioner and to dismiss the petition insofar as it relates to the Automatic Sprinkler Company of America, a Delaware corporation, and hold that the taxes asserted by the Commissioner are barred by the statute of limitations as against the Automatic Sprinkler Company of America, a,New York corporation.

The motion of present counsel for the petitioner is an effort to raise entirely new issues that were not involved in the original proceeding, as instituted before the Board, and to have the Board dismiss the original petition and substitute an entirely different taxpayer from the one which was before the Board upon the original pleading and to have the Board consider an entirely new issue not raised by the original pleadings, to wit, the question whether the deficiencies are barred by the statute of limitations. The motion of counsel for the petitioner is not well taken. The Board in its decision promulgated November 12, 1926, decided the issues raised by the pleadings, and the matter of settlement of the amount of deficiencies in accordance with the Board’s decision under Rule 50 is not for the purpose of permitting new issues to be raised or new evidence to be introduced in further support of the issues originally raised or in support of new issues sought to be raised. The Board has heretofore held that it will not consider matters not set forth in assignments of error or in original petitions filed. Everett Knitting Works, 1 B. T. A. 5; Dixie Manufacturing Co., 1 B. T. A. 641; W. P. Weaver, and R. L. Dunn, 2 B. T. A. 709; Gilliam Manufacturing Co., 2 B. T. A. 272; S. L. Fowler, 6 B. T. A. 250; Excelsior Motor Manufacturing & Supply Co., 5 B. T. A. 582. The motion of counsel for the petitioner that the new issues be considered and decided by the Board under the provisions of Rule 50 is therefore denied, and it is

ORDERED, Adjudged and Decided that there are deficiencies in respect of the tax of petitioner of $27,970.46 for the calendar year 1918 and $6,938.95 for the calendar year 1919.


author: Love :

text:
    Novelty Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Climax Machinery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 13595, 6962.
    Promulgated July 21, 1927.
    In the circumstances, held, that the corporations involved were not affiliated in the years 1919 and 1920.

      Robert L. Ham, for the petitioner.

      P. J. Rose, Esq., for the respondent.
    These proceedings are for the redetermination of deficiencies asserted by the respondent against the Novelty Manufacturing Co. in the amounts of $1,464.17 and $3,295.79 for the calendar years 1919 and 1920, respectively. The Novelty Manufacturing Co. alleges that during the calendar years 1919 and 1920 it was affiliated with the Climax Machinery Co. The Climax Machinery Co. filed a petition wherein it alleged that it was, during the calendar years 1919 and 1920, affiliated with the Novelty Manufacturing Co. The amount of the deficiencies asserted against the Climax Machinery Co. is not stated.
    The sole issue in the two proceedings being whether the petitioners were affiliated during the calendar years 1919 and 1920, the proceedings were consolidated for disposition. It was agreed between the parties hereto that the depositions taken in the appeal of Climax Machinery Co. and introduced as evidence therein are to be considered as evidence in the appeal of Novelty Manufacturing Co. subject to the same objections as offered in the appeal of Climax Machinery Co.
    FINDINGS OF FACT.
    The Novelty Manufacturing Co., hereinafter referred to as the Novelty Company, is a Maine corporation with principal offices at 30 Exchange Street, Portland, Me. The Climax Machinery Co., hereinafter referred to as the Climax Company, is a corporation with its principal offices at Indianapolis, Ind.
    Up to February 6, 1913, T. King owned 100 per cent of the common voting stock of the Climax Company. On February 6, 1913, T. King gave to E. K. Hood, the treasurer at that time, 200 shares of the common stock of the Climax Company as “ an inducement to create in him an additional interest and efficiency in the business, and to make the business a success.” During the latter part of 1919, E. K. Hood died and the 200 shares of common stock of the Climax Company were transferred to his wife. On February 26, 1921. the 200 shares of common stock held by the widow of' E. K. Hood were transferred to the Novelty Company in exchange for 6 shares of preferred stock.
    During the time that the widow of E. K. Hood held the 200 shares of common stock of the Climax Company, she always voted it in accordance with the wishes of T. King.
    Upon audit of the Novelty Company’s income-tax return for the years 1919 and 1920, the Commissioner ruled that the Novelty Company and the Climax Company were not affiliated during those years.
   OPINION.

Love :

Section 240 (b) of the Revenue Act of 1918 reads as follows:

Sec. 240. (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

The petitioners herein have failed to prove that they were affiliated during the years 1919 and 1920.

The record is silent as to the stock ownership of the Novelty Company. Likewise it is silent concerning the ownership of the stock of the Climax Company, other than the 200 shares held by E. K. Hood and later by his widow, during the years in question. Nowhere is it shown that one of the corporations owned or controlled substantially all of the stock of the other; nowhere is it shown that substantially all of the stock in both corporations was owned or controlled by the same interests.

The burden being on the petitioners to prove by competent evidence that they were during the years in question affiliated under the terms of the statute, and having failed to meet that burden, we can only approve the respondent’s determination.

Judgment will be entered on 15 days’ notice, v/ndev Rule 50.

Considered by Teusbell and Littleton.


author: Love:

text:
    W. H. Kaye and Katie C. Lewis, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6226.
    Promulgated July 21, 1927.
    Where the Commissioner determined a deficiency for the year 1919 and an overassessment for the year 1920, such overassessment not arising from the denial of a claim for abatement of a deficiency, and the petition alleges error as to the year 1919, for which a deficiency was determined, held,, that the Board has no jurisdiction to determine the deductibility of an alleged loss with respect to the year 1920 for which an overassessment was determined.

      William Marshall Bullitt, Esq., for the petitioners.

      Thomas M. Wilkins, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income-tax duly asserted by the respondent against W. H. Kaye in the amounts of $690.93 and $37.87 for the calendar years 1919 and 1921, respectively, and against Katie C. Lewis for the calendar year 1919 in the amount of $41.75.
    The deficiency notices sent to the petitioners and which constitute the basis for this proceeding set forth deficiencies and overassess-ments as follows:

    The petitioners alleged no errors and offered no evidence with respect to any year or any item other than the disallowance of $4,750 taken as a deduction by each in 1919 by reason of the demolition of certain buildings as set forth in the findings of fact.
    FINDINGS OF FACT.
    Katie O. Lewis is the aunt of W. H. Kaye. They reside in Louisville, Ky., and for many years prior to 1907 lived in a residence located upon what is now one of the principal streets of that city. The residence in which the petitioners lived was owned jointly by them, each having a one-half interest therein.

      Some time prior to the year 1907 the residence, as such, was abandoned and operated as a boarding house. In the year 1907 the residence was torn down and on the lot small buildings were erected at the cost of $14,000. These buildings remained there and were used for business purposes until the year 1920, at which time they were razed. The buildings erected in the year 1907 had a life of 20 years.
    In the year 1919 the value of the land upon which the buildings had been erected in 1907 had increased materially and the petitioners desired to obtain revenue therefrom commensurate with the increased value. Accordingly, on September 12, 1919, a lease was entered into by W. II. Kaye and his wife, for themselves and as agents for Katie G. Lewis, with the Majestic Theatre Co., whereby among other things it was agreed and provided that the Majestic Theatre Co. would demolish the buildings then situated upon the petitioners’ land and that the lessee would erect thereon a theatre, the cost of which was to be not less than $100,000. The lease was to run for a period of 50 years and it further provided for the payment of rent, under certain conditions, based upon the value of the land exclusive of the improvements thereon. It was further provided that at the expiration of the lease, and under certain other circumstances, the lessee could remove the theatre building erected by it from the land.
    Pursuant to the terms of the lease the Majestic Theatre Co. in the j^ear 1920 demolished the buildings situated on the petitioners’ land and erected thereon a theatre building. The depreciated cost of the buildings demolished was, at the time of their demolition, $5,600.
    In their returns for the year 1919, each of the petitioners deducted from gross income for that year the amount of $4,750 representing one-half of an alleged loss of $9,500 on account of the demolition of the buildings owned by them and demolished under the circumstances set out above. Upon the audit of the returns for the year 1919, the Commissioner disallowed as a deduction the amount of $4,750 taken by each, and determined that the depreciated cost of' the buildings demolished represented the cost to them of the lease and should be exhausted over the 50-year term of the lease.
   OPINION.

Love:

The buildings in question were not demolished until some time during the year 1920. For that year the Commissioner has determined an overassessment of the tax shown by the petitioners upon their returns and the Board is without jurisdiction to make any determination for that year. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. Upon the facts we think the Commissioner correctly held that there was no basis for a claim for loss on account of the demolition of these buildings in 1919 because no loss, if one was sustained, could have occurred on this' account until the buildings were demolished.

In the petitions the petitioners claimed that they sustained the loss of $4,750 in the year 1919. In the brief filed on their behalf it is contended that the loss was sustained in the year 1920 and is deductible in that year and, in explanation of this contention, petitioners point out that the deductions were taken in the year 1919 by mistake.

Judgment will be entered for the respondent.

Considered by Tedssell and Littleton.


author: Love;

text:
    G. F. Coshland & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 214.
    Promulgated July 21, 1927.
    1. The value, if any, of intangible assets acquired for stock held not established by the evidence.
    2. Petitioner would not be entitled to any allowance for obsolescence of good will on account of prohibition legislation, even if the existence of good will and its cost or March 1, 1913, value had been established. Appeal of Manhattan Brewing Go., 6 B. T. A. 932; Appeal of Olt Bros. Brewing Go., 6 B. T. A. 974.

      Walter J. Hilborn, Esq., for the petitioner.

      D. H. Green, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits tax for the calendar year 1918 in the amount of $5,669.39.
    There are two issues presented. First, whether the petitioner may include in its invested capital the amount of $35,000 alleged to represent good will. Second, whether the petitioner may take a deduction from gross income for the year 1918 on account of obsolescence of alleged good will due to prohibition legislation.
    FINDINGS OF FACT.
    The petitioner, a New York corporation, was organized in June, 1907, for the purpose of taking over the business of G. F. Coshland & Co., a copartnership, dealers in whiskey and gin. The copartnership of G. F. Coshland & Co., prior to June, 1907, had been in business as liquor dealers for many years. Upon the organization of the petitioner the following resolution was adopted:
    Whereas this corporation was incorporated under the laws of the State of New York for the purposes set forth in the certificate of incorporation; and

      Whereas it was the intention o-f the incorporators, and was one of the purposes set forth in the certificate of incorporation, among other things, to purchase, take over and carry on the business now being carried on by Gilbert I’. Coshland and Leopold B. Coshland as copartners under the firm name of G. IT. Coshland & Co., at 206 Water Street, in the Borough of Manhattan, City, County and State of New York; and
    Whereas, the purchase of said business and the assets thereof, is authorized by the certificate of incorporation of this corporation and is necessary for the use and lawful purpose of said corporation, and
    Whereas, the said Gilbert F. Coshland and Leopold B. Coshland, copartners as aforesaid, have made a proposition in writing for the sale and transfer on their part, and the purchase on the part of this corporation, of the said business as a going concern, including all the assets of said business, whether tangible or intangible except certain accounts, the said transfer to be made on the 1st day of July, 1907, upon certain terms and conditions as more fully appear in the aforesaid proposal and offer which has just been read and spread upon these minutes; and
    Whereas it appears after due consideration and investigation, that it is necessary and advantageous for the best interests of this corporation, that it acquire and purchase the said business and the assets thereof and take over and carry on the said business; and
    Whereas in the judgment of this Board of Directors, after careful examination and fair appraisement, this Board is unanimously convinced that the said property is necessary and advantageous for the business of this corporation, and the fair value thereof is the consideration mentioned in the said proposition reckoning the stock of this corporation at par.
    Now, Therefore be it Resolved, subject to ratification by the stockholders of this corporation,
    That this Board do accept the aforesaid proposal and offer of Gilbert F. Coshland and Leopold B. Coshland, and do purchase of them, the said business now conducted at 206 Water Street, in said Borough of Manhattan, City, County and State of New York, under the firm name of G. F. Coshland & Co., specified in said proposal, and pay for the same the sum of one hundred ninety thousand five hundred sixty 7/100 Dollars, to be paid over as follows:
    Forty-nine thousand five hundred dollars ($49,500) by the issuance of four hundred and ninety-five (495) shares of full paid non-assessable common capital stock of this corporation at the par value of one hundred dollars ($100) per share;
    Seventy-five thousand dollars ($75,000)' by the issuance of seven hundred and fifty (750) shares of full paid non-assessable preferred capital stock of this corporation at the par value of one hundred dollars ($100) per share;
    Three notes of this corporation bearing interest at six per cent (6%) for the sum of Three thousand five hundred and fourteen and 50/100 Dollars ($3,514.50) each; one of said notes to run for the term of one year from date, one of said notes to run for the term of two years from date, and the third of said notes to run for the term of three years from date, all payable to Leopold B. Coshland. And three notes of this corporation bearing interest at six per cent (6%) for the sum of Ten thousand one hundred seventy-two and 19/100 Dollars ($10,172.19) each; one of said notes to run for the term of one year from date, one of said notes to run for the term of two years from date, and the third of said notes to run for the term of three years from date, payable to Gilbert F. Coshland. And of your corporation assuming all obligations of said copartnership existing July 1st, 1907, not exceeding the sum of Twenty-five thousand dollars ($25,000). All of said notes are to bear interest from July 1st, 1907;
    And that the said stock and the said notes be issued and delivered on July 1st, 1907, to the said Gilbert F. Coshland and Leopold B. Ooshland, copartners under the firm name of G. F. Coshland & Co., as set forth in said offer, upon the receipt of said corporation of said bill of sale, the transfer to take effect on the 1st day of July 1907.
    And the President and Treasurer of this corporation, or either of them, are hereby authorized, empowered and directed upon the execution and delivery of the proper legal instrument or instruments necessary to convey and transfer said property as set forth in said proposition and offer, to issue and deliver in accordance with this resolution, the stock and notes therein specified.
    And the President and Treasurer are hereby authorized and directed to deliver said certificates of stock and said notes at once to David J. Gallert, Esq., in escrow to be by him delivered to said Gilbert F. Coshland and Leopold B. Coshland on July 1st, 1907, on receipt by them of satisfactory proof that said bill of sale from said copartnership has likewise been delivered to said David J. Gallert in escrow, by him to be delivered to the said corporation on July 1st, 1907, and provided the said David J. Gallert acknowledges in writing that he holds said certificates of stock and said notes and said bill of sale to be by him delivered as herein provided on July 1st, 1907.
    Pursuant to the terms oí this resolution, all of the assets of the copartnership of G. F. Coshland & Co., were on July 1, 1907, transferred to the petitioner, which continued the business of dealer in whiskey and gin until June 1, 1919, at which time due to prohibition legislation it discontinued the business.
    At the time of taking over the assets of the copartnership, the petitioner set up on its books the amount of $35,000, as representing good will and trade brands acquired at that time. There are no admissions in the pleadings nor was any evidence presented showing the value of either the tangible or intangible assets acquired by the petitioner from the copartnership.
    The petitioner in its income and profits-tax return for the year 1918, included in invested capital on account of good will alleged to have been acquired from the copartnership of G. F. Coshland & Co., the amount of $35,000, and it deducted in computing its net income, the amount of $11,494.50, as an allowance for the obsolescence of its good will. The respondent excluded from the petitioner’s invested capital the amount claimed on account of good will, trade brands, etc., and also disallowed any deduction for the obsolescence of such intangibles.
   OPINION.

Love;

The petitioner contends that it acquired from the partnership of G. F. Coshland & Co., under the circumstances set forth in the findings of fact, good will of the value of $35,000, and that it is entitled to include that amount in its invested capital for the year 1918. It also claims the right to deduct from gross income for (lie year 1918, the amount of $11,494.50, as an allowance. for the obsolescence of its good will.

The record shows that in the year 1907, the petitioner purchased all of the assets of the partnership, paying therefor its capital stock of the par value of $125,000 and its promissory notes amounting to $41,060.01. The record herein does not disclose the value of the tangible assets so acquired, or of the intangible assets if there were any; nor is there any evidence as to the earnings of the partnership or other facts from which we can determine any value for alleged good will. In the absence of any admissions in the pleadings, or any evidence establishing a value for the alleged good will, we must approve the determination of the respondent in excluding from the petitioner’s invested capital the amount claimed on account of good will. St. Paul Steam Laundry v. Commissioner, 6 B. T. A. 529.

Since the petitioner has failed to establish that it had good will of any value, it follows that it is not entitled to deduct from gross income for the year 1918, any amount on account of obsolescence thereof. However, under decisions of the Board in the Appeal of Manhattan Brewing Co., 6 B. T. A. 952, and Appeal of Olt Bros. Brewing Co., 6 B. T. A. 974, the petitioner would not be entitled to any allowance for the obsolescence of good will even if its existence and its cost or March 1,1913, value had been established.

Judgment will he entered for the respondent.

Considered by Littleton and Tkussell.


text:
    Kanawha Drug Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7948.
    Promulgated July 21, 1927.

      David E. Howard, Esq., for the petitioner.

      Philip M. Glark, Esq., for the respondent.
   Love :

This proceeding is for the redetermination of deficiencies in income tax for the years 1920 and 1921 in the amounts of $485.91 and $36.41, respectively. It is alleged in the petition herein that in computing its net income for the year 1920, the petitioner deducted as debts ascertained to be worthless and charged off within the taxable year, the amount of $3,966.22, and that the Commissioner erroneously disallowed $1,254.53 of the deduction. The answer of the respondent, after admitting certain formal allegations of the petition, denies that the respondent committed error in disallowing as a deduction said amount of alleged worthless debts, and also denies “ each and every allegation contained in the taxpayer’s petition not herein before admitted or denied.” The petitioner produced no evidence that the debts in question were ascertained to be worthless and charged off within the taxable year, and in fact there is nothing in the record by way of competent evidence to show that the debts actually existed. Upon the record we can only affirm the action of the respondent.

Other errors alleged in the petition were abandoned.

Judgment for the respondent. The deficiency for 1920 is $485.91 and for 1921 is $36.41.

Considered by TRITssell and Littleton.


text:
    Morrison, Gross & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14804.
    Promulgated July 21, 1927.
    1. Depreciation of a tractor computed at the rate of 3SVs per cent annually, approved.
    2. Where a tractor used in lumber business for hauling logs was stored in 1920 and used in 1921 as a stationary power plant, held, that the unextinguished cost was not deductible in 1920.

      Maynard Teall, Esq., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency asserted by the respondent for the calendar year 1920, in the amount of $632.66. The entire deficiency arises from the respondent’s dis-allowance as a deduction from gross income for the year 1920 of the amount of $2,470.29 of the total amount of $4,205.44 claimed as depreciation on a tractor owned by the petitioner and used in its business.
    The petitioner contends that the amount of $4,205.44 is a proper deduction on account of loss of useful value of the tractor, if not allowable as depreciation.
    FINDINGS OF FACT.
    The business of this petitioner is, and ever since the beginning of 1920 has been, lumber manufacturing. Early in 1920, the petitioner was engaged in a cutting and sawing operation in the State of West Virginia. The railroad station nearest the site of said operation was Beverly, W. Va., eight miles away. At that time the market price of lumber was very high and the taxpayer then purchased, for the sum of $5,205.44, a tractor to be used for hauling the newly cut lumber from the site of said cutting and sawing operations to said railroad station. During the period of high prices the tractor was in constant use hauling lumber between the points aforesaid and over rough dirt roads. During a period of seven months, owing to said use and notwithstanding high repair and maintenance charges of approximately $2,000 during said period, the tractor deteriorated very rapidly. By the fall of 1920, the market price of lumber had substantially declined, and that fact, together with said high cost of operating said tractor and the deteriorated condition thereof, caused the petitioner to cease using it as such. It then became impracticable to use it because of (1) the lower selling price of lumber, (2) the high cost of operation due to the- tractor’s worn condition and the physical conditions surrounding operation. In 1922, while the tractor was in the same condition as when the petitioner ceased to use it, a representative of the manufacturer after observing the tractor, stated to the petitioner that the expenditure of $1,100 would be necessary to put it in proper operating condition. On ceasing to use said tractor as such, the petitioner endeavored to sell it for $1,000, but being unable to obtain this price the petitioner subsequently offered it for as low as $800. All efforts to sell were unsuccessful until 1926, when sale was effected for $765. This sale was made to a lumberman handling black walnut, which is an expensive lumber and yields a large margin of profit.
    Subsequent to the expiration of said seven-month period, to wit, the fall of 1920, the tractor was placed under shelter against the weather and was not again used by the petitioner as.such, but the motor without being removed from the tractor was used on two occasions in 1921 as a stationary power unit to drive a hoist, one occasion being for six weeks and the other for 30 days.
    The petitioner claimed in its return for the year 1920 a deduction for depreciation of said tractor in the sum of $4,205.44 and the Commissioner in determining the deficiency has allowed depreciation in the sum of $1,735.15, being 33ys per cent of the cost of said tractor; the remaining cost of said tractor being allowed as depreciation in subsequent years at the same rate.
   OPINION.

Love:

The petitioner contends that the respondent erred in disallowing as a deduction from gross income for the year 1920 the amount of $2,470.29 of the total amount of $4,205.44, taken as depreciation on a tractor owned by it and used in its business. In support of its contention the petitioner urges that the tractor had in fact depreciated in the amount of $4,205.44, during the seven months of the year 1920, while it was used in its lumber business, and it further urges that, if the tractor had not in fact depreciated to the extent alleged, then the petitioner suffered in the year 1920 on account of the loss of useful value of the tractor, a loss in the amount of $4,205.44, being the difference between the cost thereof and the estimated salvage value of $1,000.

With respect to the petitioner’s claim that the tractor had in fact depreciated to the extent of its alleged salvage value, we -must hold that the facts do not substantiate that contention. The amount of $2,000 expended for repairs on the tractor during 1920, the year of purchase, was of course, a proper deduction as a business expense. According to the undisputed facts in the year 1922, the amount of $1,100 if expended for repairs would have put the tractor in proper operating shape. If, then, this amount would have restored it to proper shape in 1922, two years after it is claimed that the tractor had depreciated in the amount alleged, we can not agree that it had depreciated in an amount of approximately four-fifths of its cost-in the first year of use. There is nothing to show that, in connection with the repairs made on it, its life would have been less than three years, the life placed on it by the respondent for the purpose of depreciation. The mere fact that the then market value of the tractor had decreased materially does not in any way substantiate the contention that the tractor had in fact depreciated to its estimated salvage value. We therefore approve the action of the Commissioner in this respect.

Considering the petitioner’s contention that by reason of the loss of useful value of the tractor it suffered a loss in 1920 of the amount of $4,205.44, if depreciation was not sustained in that amount, we must hold that, in our opinion, the facts do not support that contention.

We have heretofore held that when capital assets of a business are discarded as a result of changes in business conditions, the petitioner may deduct in such year the difference between the depreciated cost and the salvage value of the assets discarded. Appeal of Dilling Cotton Mills, 2 B. T. A. 127; Appeal of Automatic Transportation Co., 3 B. T. A. 505; Appeal of Sheridan Coal Co., 4 B. T. A. 563. In each of those appeals, the Board found it to be a fact that such capital assets were discarded permanently.

As stipulated in this proceeding the tractor alleged to have been abandoned in the year 1920, was again used m the succeeding year as a stationary power plant. The facts conclusively show that the tractor had not become obsolete, as that term is accepted, but that on account of a decline in the price of lumber in 1920 it was no longer profitable to use the tractor for hauling logs. The subsequent use of the tractor in 1921 for a purpose for which it was properly fitted, precludes us from holding that it had lost its useful value in the year 1920.

The determination of the respondent in allowing depreciation at the rate of 33% per cent annually on the cost of the tractor is therefore approved.

Judgment will be entered for the respondent.

Considered by TRUssell and Littleton.


author: Phillips :

text:
    William Zakon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5450.
    Promulgated July 22, 1927.
    1. A license to soil liquor in the City of lioston, which, under a long continued custom, entitled the holder to a renewal from year to year and which renewal privilege was valuable, is property.
    2. Petitioner purchased such a license in 1911, paying $11,000 for the renewal privilege. The value thereof was greater on March 1, 1913, than the cost. The license continued to have a substantial value which attached to the renewal privilege until 1919, when it became worthless because of national prohibition.

      Held,, that petitioner sustained a loss in 1919 measured by the cost of the property to him.
    3. No deduction may be allowed for loss of good will value in the absence of any evidence of cost.

      Harry Friedman, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is an appeal from the determination of deficiencies in income tax as folloivs: For the year 1919, $5,803.06; for the year 1920, $22.15; and for the year 1921, $14.03. Errors in determining the deficiency .for 1919 are alleged by the petitioner as follows:
    (1) The March 1, 1913, value of the liquor license of the taxpayer was erroneously determined by the Commissioner as $13,000 instead of $35,000.
    (2) Failure of the Commissioner to allow any deduction for obsolescence of the petitioner’s good will, which had a value of $10,000 on March 1, 1913.
    (3) Failure of the Commisioner to allow the March 1, 1913, value of the liquor license as a deduction for obsolescence in 1919.
    (4) Erroneous spreading of obsolescence deductions over a period of from March 1, 1913, to January 16, 1920.
    FINDINGS OF FACT.
    The petitioner is an individual, residing at Roxbury, Mass. In 1911 he purchased for $11,000 from one Harding, in the City of Boston, a liquor license of the fourth class, which gave him the right to sell liquor in bottles in any quantity. Harding continued in business under this license until April 1, 1911. During April, 1911, the license was transferred to petitioner by the license board of Boston and he began doing business under the license May 1, 1911. The purchase price did not include any stock or fixtures and, upon acquiring it, the business was moved to a new and different location and fixtures and improvements were installed by the petitioner at a cost of more than $2,500.
    Under the law of the Commonweath of Massachusetts the number of liquor licenses issued in the City of Boston was limited to 1,000. The license board of Boston had limited the number to 984. Such licenses were issued annually, on May 1, upon payment of the yearly fee, which varied from 1911 to 1919 from $12,000 to $14,000. It was the practice of the license board of Boston to issue annual licenses only to the holders of old licenses unless refused for cause. If the holder of a license sold or transferred such license to another acceptable party, the transferee had a preferred status before the license board as the holder of such license. This practice made such licenses valuable and they commanded high prices from persons desiring to go into the liquor business. On March 1, 1913, the license of the petitioner had a fair market value of over $11,000. The license continued to have a substantial value until after January 1, 1919.
    Petitioner continued in the liquor business, renewing his license annually until June 30, 1919, when he was forced to discontinue on account of prohibition legislation. He thereupon procured a license for selling 2% per cent beer in bottles. This business was discontinued in October, 1919, when it was determined that sale of such beer was unlawful.
    The petitioner did a large wholesale business and had special trade-marks and trade brands of liquors which he advertized and used in his business. He had a large foreign trade with Poles, Lithuanians, Russians, and Jews, all of which languages he spoke. His location near Haymarket Square was particularly good for this class of trade.
    In his determination of the tax due from petitioner for 1919, the Commissioner allowed a value of $13,000 for the liquor license as of March 1, 1913, but prorated this amount over the period from March 1, 1913, to January 16, 1920, allowing $1,888.15 as a deduction in 1919. In his answer he concedes this method to be in error, but contends that the value of the liquor license on January 1, 1919, was not in excess of $1,910.92. He refused to allow any deduction for the obsolescence of good will in 1919.

      The net income for 1919 determined by the respondent and upon which he computed the deficiency, was $57,852.91.
   OPINION.

Phillips :

It appears that in 1911 and prior thereto the number of liquor licenses which might be issued in the City of Boston was limited by the laws of Massachusetts to not more than 1,000 and that such number might be further limited by the licensing board of the City of Boston in its discretion. This board did limit the number to 984 and refused to issue any larger number. While such licenses were issued annually, expiring on May 1 of each year, it was the established custom of the board to issue such annual licenses to the holders of licenses for the previous year. The holders of any license might transfer it to another, to whom a new license would be issued by the license board, if the purchaser were found to be acceptable by the board. Under such circumstances the holder of such a license had an asset which had a value entirely separate and distinct from the right to conduct the business of a liquor dealer for the remainder of the year for which such license was issued. The' courts have recognized that such value existed and constituted property rights. See Tracy v. Ginzberg, 205 U. S. 170, where the court said:

Because of the large surrender value of old licenses and of the long continued custom of reissuing licenses to old holders until refused for cause, such licenses have been recognized by the courts of Massachusetts as property rights.

In 1911 the petitioner purchased such a license to operate in the City of Boston from one Harding, paying therefor $11,000. The transfer was made to the petitioner in April, 1911, at which time the annual license had less than one month remaining. The petitioner never operated under such annual license but, by reason of its ownership, was enabled to secure the annual license under which he began operations on May 1, 1911. These facts conclusively show that the $11,000 was not paid by the petitioner to Harding for the right to operate during the remaining period which the annual license had to run but was paid in order that the petitioner might be placed in a position where he could thereafter secure annual licenses by payment of the prescribed fee. This intangible right which appertained to the ownership of the annual license continued in the petitioner through 1918 and on March 1 of that year had a value in excess of the amount paid in 1911.

It is the claim of the petitioner that the March 1, 1913, value of his license was $35,000 and that on that date his business had a good will value of $10,000, all of which were destroyed in 1919 as the result of prohibition legislation. He contends that in computing his net income for 1919 he is entitled to a deduction of such March 1, 1913, value either under the provisions of section 214(a) (4) or of section 214(a) (8) of the Revenue Act of 1918, which subsections provide for the deduction of:

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise if incurred in trade or business.
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

The last-quoted provision of the Act indicates that it is intended to care for losses of capital which took place over a longer period than the taxable year. There is nothing in the record in this case which would indicate that there was any exhaustion, wear and tear, or obsolescence of either the license or the good will prior to the taxable year involved. In fact the testimony here is to the contrary. It all indicates that any loss or damage which was sustained by this petitioner occurred in the year 1919. We therefore conclude that the taxpayer has not brought himself within subparagraph (8) of section 214 of the Act, quoted above.

It does appear, however, that the taxpayer sustained a loss in 1919 which he is entitled to deduct under the provisions of subparagraph (4) of the section of the Act quoted above. The deduction, however, is not measured by the March 1, 1918, value as contended by the petitioner, but is limited to the actual loss sustained. United States v. Flannery, 268 U. S. 98; 5 Am. Fed. Tax Rep. 5373; McCaughn v. Ludington, 268 U. S. 106; 5 Am. Fed. Tax Rep. 5376. The license cost the petitioner $11,000 in 1911. In 1913, it had a value in excess of that amount. In 1919, it became worthless. The taxpayer sustained a loss of $11,000 which is deductible in 1919. The good will, however, appears to have cost the taxpayer nothing and under the decisions quoted there is no deductible loss on account of that item.

Decision will he entered on 15 days'1 notice, under Rule 50.

Considered by Marquette and Milliken.


text:
    Clarkson Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8449.
    Promulgated July 22, 1927.

      Karl D. Loos, Esq., for the petitioner.

      O. H. Curl, Esq., for the respondent.
   Phillips :

The petitioner seeks a redetermination of a deficiency of $2,649.35 in income and profits tax for 1920 asserted by the Commissioner. It alleges that the Commissioner committed error in reducing the amount allowable as a deduction for salaries of its officers from $14,400 to $7,200.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal office at Nashville. It was organized in 1919 as the Mid-West Coal Co. Shortly thereafter, its name was changed to the Clarkson Coal Co. It was engaged in the purchase and resale of coal.

The organizers of the company and the stock held by each was as follows:

Shares.
C. H. Johnson, secretary_ 20
E. E. Clarkson_ 40
Samuel Day, vice president_ 20
J. L. Clarkson, president and treasurer_ 120

E. E. Clarkson was the wife of J. L. Clarkson and the 40 shares of stock nominally held by her belonged to J. L. Clarkson, making his total holdings 160 shares.

A branch office was established in St. Louis, Mo., and C. H. Johnson was placed in charge. A contract was entered into between Johnson and the petitioner in 1919 which recited in part:

It is understood and agreed that the Mid West Coal Co., a corporation of Illinois agrees to furnish the sum of Five Thousand Dollars (5,000.00) cash as a working capital to buy and sell coal on a wholesale basis,
That said C. H. Johnson is to act as General Sales Agent for the Mid West Coal Co. with the right to purchase and resell coal and coke, with offices in St. Louis, Mo., as agreed upon by the Mid West Coal Co. and O. H. Johnson,
****** *
It is understood and agreed between said Mid West Coal Co. and C. H. Johnson that for services rendered by said C. H. Johnson, C. H. Johnson will at the end of each calendar month have credited to his acco-emt one half, after all accrued expenses, such as office rent, help, telephone, stationery and all other office expense, of the remaining profit for the past months business.
*******
(Signed) John L. Clarkson
(Signed) Chas. H. Johnson
For Mid West Coal Company.

No change was made in this contract in 1920.

In the beginning the books were kept in St. Louis by Johnson, but he did not keep them in a manner satisfactory to Clarkson and in September, 1919, Clarkson removed them to Nashville and a bookkeeper wras employed to take care of them. Johnson developed a good business in St. Louis.

Amounts paid to officers in 1919 as salaries were as follows:

Per month
O. H. Johnson, secretary- $30
Samuel Day, vice president_ $30
J. L. Clarkson, president and treasurer_$240

Early in 1920, it became difficult to buy enough coal to supply the market. Clarkson had a wide acquaintance among mining men and it became necessary for him to devote a great deal of time in locating and buying coal. He also assumed general supervision of the business and accounts and of collections of the company. He took care of the correspondence, kept in touch with the St. Louis office, and in 1920 made frequent trips to mines to locate available coal, purchased it when he could, and in cases where Johnson had a better contact with the mining companjq advised him of the availability of the coal. During that year about half of his time was used in the performance of his duties as general manager of the hlashville Mining Co. He worked about fourteen hours a day.

Clarkson made frequent trips to St. Louis and in his absence Samuel Day assumed his office duties at Nashville. Day spent about 5 per cent of his time on business of the petitioner’.

In May, 1920, after consultation among the officers, who were also the directors and stockholders of the company, the amounts paid monthly as salaries were increased in the same proportion in which they were then being paid. This was in proportion to the stock held by each. The monthly payments, as increased, were as follows:

Per month
O. H. Johnson, secretary-$120
Samuel Day, vice president- 120
J. L. Clarkson, president and treasurer- 960

In 1921 conditions changed and it became easy to buy coal but difficult to sell it. The business dropped off and the amounts paid monthly as salaries were then reduced. Clarkson had no connection with selling coal, which duty was attended to by Johnson.

The gross sales for the years 1919 to 1922, inclusive, were as follows:

Tear Amount
1919_$157, 795. 44
1920_ 413, 654. 33
1921_ 158, 798. 78
1922_ 41, 332.90

The business was discontinued in 1923.

The total commission paid Johnson in 1920 was $17,965.07. The total salaries paid to officers in 1920 were $14,400. These salaries - were not deducted from gross income in computing the net income, half of which was paid to Johnson under his contract. The bal-anee of 1920 earnings available for dividends after paying salaries and commissions was approximately $4,000. No dividends were declared, and this amount was credited to surplus. The paid-in capital was $5,000 in 1920.

The Commissioner allowed petitioner to deduct $7,200 as a reasonable allowance for salaries in 1920.

Decision will be entered for the respondent.

Considered by Maeqtjette and Milliken.


author: Phillips:

text:
    H. Wilensky & Sons Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5611.
    Promulgated July 22, 1927.
    The owner of a building in poor condition entered into an agreement with a contractor to place the same in a tenantable condition. The petitioner contracted to purchase such building at an agreed price and in addition to pay to the vendor the amount which the latter was required to pay to the contractor for the work to be done. The contract to purchase was executed and the building was placed in tenantable condition by the contractor, the petitioner paying the vendor for the cost of such work. Held, that the petitioner is not entitled to deduct, as an ordinary and necessary expense, the amount representing the cost of the work done by the contractor.

      William M. Williams, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    The present proceeding arises from the determination by the Commissioner of a deficiency of $4,942.20 in income and profits tax for 1919. It is alleged that the Commissioner committed error in holding that the petitioner is not entitled, in computing his net income for 1919, to a deduction of $10,837.15 claimed to have been expended during that year for repairs upon a building in Atlanta, Ga.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation having its principal office at Nos. 38 — 42 West Alabama Street, Atlanta.
    In 1919, E. H. Inman owned a certain brick building located at Nos. 23, 25, 27, Forsyth Street, Atlanta, Ga. The back part of this buidling was one story high with a basement. It was about 70 feet wide and 120 feet long and had a front entrance about 20 feet wide at No. 23. Until July, 1919, it had been leased as a cotton warehouse at a rental of $35 per month.

      This warehouse was a very old building and had not been kept in repair. The roof was made of wood sheeting covered with felt treated with tar and gravel. The gravel had washed off; the felt covering had come away in many places, exposing the sheeting, which had in consequence rotted away. There was a monitor on the roof and skylights built to supply light to the building. The glass in these had been broken out and the sash had rotted away. The coping on top of the walls had disintegrated and the tin flashing had rusted out.
    The main floor of the building was of wood. It was supported on wooden columns resting on a brick base capped with a stone. These brick had disintegrated, the columns rotted at the bottom, and the heavy weight of the cotton stored on the floor had caused it to sag. It was also damaged from water and a number of the.joists were broken.
    The basement floor was of wood and there was a wooden incline or ramp about 8 feet wide leading down to it. Water coming through the roof collected in the basement and both the floor and the incline were rotted out.
    The brick in the walls were porous and in many places had disintegrated from action of the frost and water. At one place, where there was a back entrance to the warehouse, the foundation had given way and the wall had cracked and was in danger of collapse. The windows were broken out, the sash decayed, and the doors worn out.
    About July, 1919, the tenant moved out of the warehouse and Inman entered into an agreement with Charles W. Bernhardt, a builder, to make alterations and repairs and put the building in tenantable condition, the work to be done on the basis of cost plus 10 per cent.
    Thereafter, on August 22, 1919, the building was leased by Inman to one Barnwell for a garage, for a term of two years and three months, at a rental of $250 per month. This lease was executed pursuant to a prior oral agreement.
    On August 7,1919, Inman, through a local real estate firm, entered into a contract of sale of the property including the warehouse with H. Wilensky. This contract recited in part as follows :
    Payne & McAbtiitjr Real Estate and Renting Agents Atlanta, 6a.
    $1-000.00 Atlanta, Ga., August 7th, 1919.

    Received of IT. Wilensky, One Thousand and no-100 Dollars as part purchase money on the following described property to-wit: — All that tract or parcel of land lying and being in the City of Atlanta, Georgia, size of lot Seventy (70) feet frontage on Forsyth Street by Two Hundred (200) feet, more or less, in depth, upon which there is situate a two story brick store building known as numbers Twenty Three (23), Twenty Five (25) and Twenty Seven (27) South Forsyth Street, which on and for account of the owner and vendor we have this day sold to the purchaser above named subject to the titles being good, or made good within a reasonable time, for the sum of $105,000.00 Dollars, to be paid as follows:
    Pay in cash the sum of $40,000.00 when trade is'consummated.
    Give notes for balance of purchase price to bear 6% interest from date and payable on or before one (1), two (2) and three (3) years, divided in three equal annual installments.
    Said H. Wilensky agrees further to assume lease to be made by E. H. Inman with Claude Barnwell and said Wilensky agrees further to pay to said E. H. Inman costs of improvements contemplated under said lease with Claude Barnwell, which improvements are estimated to cost $5,000.00. Payne & Mc-Arthur are to receive no commission on the cost of said improvements. All dimension more or less.
    Payne & McAbthuk, By-
    I hereby agree to purchase the above described property on the terms and conditions above named this 7th day of August 1919.
    (Signed) H. Wilensky,

      Purchaser.

    I hereby ratify and approve the above mentioned sale on the terms and conditions named and agree to pay Payne & McAkthub, on the date formal transfer is made, a commission of regular Dollars.
    This 8th day of August 1919.
    (Signed) E. H. Inman

      Owner and Vendor.

    On August 22, 1919, this contract was assigned by H. Wilensky to petitioner and the purchase ivas made by it pursuant to the terms of the contract. The lease with Barnwell was assigned to the petitioner by Inman.
    The work done on the warehouse by the contractor was as follows: In places where the sheeting of the roof was rotted out, it was replaced ; some of the rafters were renewed; the entire roof was scraped, leveled up, covered with three-ply felt and coated with tar and gravel. The monitor, which was about 40 feet long by 10 feet wide, was repaired, new frames were used to replace those rotted out, and new glass was put in the frames. Hew frames and glass were also put in the skylight and an additional skylight was built in. The tin flashing was all renewed and new down spouts were put on. The coping on the wall was renewed.
    In places in the wall where the brick had disintegrated they were cut out and new brick and mortar put in. Some of these places covered 2 or 8 square feet. At the rear entrance where the wall had cracked and the foundation had given way, it was necessary to tear out approximately 20 feet of the wall and rebuild it. In all there were 35,500 new brick used to repair the walls. The doors were replaced with new ones and new windows, sash and glass had to be put in on the main floor. The main floor in the building was taken up and replaced, some of the old flooring being used in the replacement. The broken joists were replaced and two or three new girders were put in. About three-fifths of the columns supporting the floor were replaced with new ones. The floor was jacked up, the brick bases renewed and new concrete bases were put under the columns.
    The old wooden floor of the basement was taken out and a new concrete floor put in. The entrance leading into the building from the front was covered with a concrete floor. The incline or ramp leading to the basement was rebuilt. The worn out plumbing was replaced, and some new and additional plumbing was installed. The building had not been wired for electricity and new electric wiring was put in. The large doors at the front entrance having worn out, new doors were built and attached.
    There had been an ardí over the door and window at the back entrance. This was torn out and steel girders put in. Gratings were installed in the sidewalk to increase the ventilation of the basement. Doors and window sash were painted and the interior of the building was painted white to increase the light.
    The eifect of these repairs and improvements was to put the building in a tenantable condition. Its size was not increased and its general character remained the same.
    The total cost for these repairs, improvements and replacements was $10,968.55. This cost was paid by Inman and he was reimbursed by petitioner in 1919 under the terms of the contract of sale.
    The petitioner, in computing its net income, deducted as expense and repairs, $10,968.55. The entire amount was disallowed as a deduction by the Commissioner in computing the deficiency.
   OPINION.

Phillips:

It is the contention of the petitioner that the amounts expended in 1919 upon the building which it purchased in that year were for repairs and are deductible as ordinary and necessary expenses in computing its taxable income. With this view we can not agree. As a part of its purchase, the petitioner acquired an old building in a very dilapidated condition, for which it agreed to pay $105,000. There was outstanding a contract for the restoration of the building, and as another part of the purchase the amount paid by the vendor under such contract was to be repaid him by the purchaser. The total amount so expended, whether paid to the vendor as a part of the purchase price or as a part of the payment to the contractor, represented the cost to the petitioner of the restored building. For $105,000, plus an additional amount to be paid the contractor, the petitioner was to have, not the old building-in its then condition, but a building in a usable condition. The situation here presented is entirely different from that of a taxpayer who repairs damage which has occurred to a building while he was the owner of it and who, after such repairs, has no greater asset than he originally owned.

Decision will be entered for the respondent.

Considered by MaRquette and Milliken.


text:
    W. H. Haskell and Charles M. Haskell, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6213.
    Promulgated July 22, 1927.
    1. Claim for deduction for obsolescence of mill property, based on loss of value due to discontinuance of petitioners’ business, disallowed.
    2. Claim for loss of good will, due to discontinuance of petitioners’ business, disallowed, no cost having been shown.
    3. Petitioners suffered losses in 1919 from the operation of their business. Held, that such business losses must be reduced by in-' come from other sources in determining the net loss which is to be used in determining taxable income for 1918.

      George B. Davis, Esq., and Sigmond Sanger, Esq., for the petitioners.

      B. G. Simpich, Esq., for the respondent.
    This is an appeal from the determination by the Commissioner of deficiencies in income tax for 1918 of $0,885.45 against Charles M. Haskell, and $6,240.70 against W. H. Haskell. It is alleged that the respondent committed error in computing the net income of the petitioner for 1919 in (1) refusing to allow as a deduction $29,010.40 claimed for loss of useful value of their plant, (2) refusing to allow as a deduction $89,061.80 as a loss of good will of their business, and (3) in reducing net losses for 1919 incurred in trade by the net income of the petitioner from interest and dividends on investments. A large part of the facts are stipulated.
    FINDINGS OP PACT.
    The petitioners, W. H. Haskell and Charles M. Haskell, were during 1918 and 1919 equal copartners trading under the name of W. H. Haskell & Co., at Toledo, Ohio.
    The partnership of W. H. Haskell & Co. was formed in 1887. They manufactured stock feed, hog, and chicken feed. In 1893 they built a plant and started the manufacture of brewers’ grits. As a by-product in the manufacture of these grits there was an offal which petitioners mixed with offal purchased from oatmeal mills and made into a dairy feed. They also bought damaged and salvaged grain and sold it as feed. A large quantity of grain damaged by fire was disposed of in 1910 by the petitioners and the Brooks Elevator Co., jointly. This transaction was carried as a separate account on the books of the firm on account of the interest therein of the Brooks Elevator Co.
    The profits (without deductions of salaries to partners and exclusive of the profit from salvage of grain in conjunction with the Brooks Elevator Co.) and the invested capital of W. H. Haskell & Co. for the years 1909 to 1912, inclusive, were as follows:

    The profits from the salvage of grain in conjunction with the Brooks Elevator Co. in the year 1910 were $46,772.91, and the total allowance for salaries of partners for the four years as computed by revenue agent was $35,000.
    A large portion of the business of the petitioners had been transacted in the States of Ohio and Michigan. During the year 1918, prohibition legislation in these States, the national war-time prohibition legislation, the curtailment of the use of corn products for brewery purposes by the United States Food Administration, and the assurance that the Eighteenth Amendment would be adopted, so affected the brewery business as to destroy the demand for brewers’ grits. At the same time, there arose a demand for corn flour on account of war-time regulations of the United States Food Administration, and petitioners, after making some changes in their plant, began the manufacture of corn flour, which was continued until the Armistice in November, 1918, when the demand for corn flour ceased. It thereupon became evident to the petitioners that their business could not be profitably conducted, since the manufacture of feed was in a large measure incident to the manufacture of brewers’ grits. They investigated the possibility of exporting corn flour, but were told that they could not get shipping facilities. In December, 1918, they determined to sell the plant and go out of business. The property was capable of being used for other purposes than that to which it was put by the partnership, including use as a flour mill.

      The grain and flour business was depressed in December, 1918. The fair market value of the plant at that time did not exceed $30,000. The partners closed their books on December 31, 1918, by reducing the book value of the plant to that amount. In December, 1918, the petitioners began to liquidate the partnership. No further commitments were entered into by them. They had contracts for corn which they could not cancel. This was used up or sold on the market. The stock on hand was used up. The business was finally wound up and the mill closed in April, 1919. The plant was advertised for sale, no price being stated. Petitioners obtained an offer of $20,000, which was not accepted. No sale was made in 1919, but the plant was sold in 1920 for $40,500 net, and subsequently used by the purchaser in the manufacture of a special poultry meal in connection with an established business which he had for that product.
    The profits (without deduction for salaries to partners) and the capital of the partnership for the years 1913 to 1918, inclusive, were as follows:

    The monthly sales for each of the years 1917, 1918, and 1919 of W. H. Haskell & Co. were as follows:

      The depreciated cost of the plant of W. H. Haskell & Co., as of December 31, 1917, was $62,116.21, and the total depreciation allowed by the respondent upon the plant for the taxable year 1918 is $3,105.81.
    In 1919 W. H. Haskell & Co. suffered a net loss of $371.16, exclusive of any deductions for obsolescence of plant and good will.
    The individual income for the year 1919 of W. H. Haskell, exclusive of any partnership profit or loss, was $7,700.66, computed as follows:
    Interest on corporation bonds containing tax free covenant_ $774.15
    Other income:
    Interest on corporation bonds_$120.00
    Interest on bank deposits, etc_ 234. 82
    - 354.82
    Total net income from above sources_1,128. 97
    General deductions, taxes paid_ 607. 64
    Net income_ 521. 33
    Dividends_7,179. 33
    7, 700.66
    The individual income for the year 1919 of Charles M. Haskell, exclusive of any partnership profit or loss, was $3,792.62, computed as follows:
    Interest on corporation bonds containing tax-free covenant_$2,590.00
    Other Income:
    Interest on bank account, etc_ 730.27
    Total income from above sources_ 3, 320.27
    General deductions:
    Taxes paid_$357. 62
    Contributions_ 570. 00
    - 927.62
    Net income_ 2, 392. 65
    Dividends- 1,400. 00
    3, 792. 65
    In computing the share of the 1918 net income of the partnership of W. H. Haskell & Co., distributable to each of the petitioners, the Commissioner refused to allow a deduction of $29,010.40 claimed by petitioners for loss of useful value of the plant in 1918; he also refused to allow a deduction of $89,061.80 claimed as obsolescence of good will for 1918, and he reduced the net losses of each partner incurred in the partnership business in 1919 by the net income received from sources other than the partnership.
   OPINION.

Phillips:

The first error alleged is that the Commissioner, in computing the distributive shares of the petitioners in the income of the partnership of which they were members, refused to allow a deduction of $29,010. 40 claimed for loss of useful value of their plant. The evidence discloses that while the petitioners could no longer use this plant in the business in which they had been engaged prior to and during the taxable year, it was capable of use in other businesses and, while business conditions were such that they were unable to sell it in 1919, it nevertheless had a substantial value. The law authorizes the deduction of losses sustained but does not authorize the deduction of an anticipated loss due to fluctuations in value of property. While the evidence shows that the petitioners determined to discontinue operation of their business in 1918 and attempted to dispose of the building and found it impossible to secure a reasonable price at that time, these facts do not establish such a loss in 1918 as is required under the Income Tax Act before a deduction from income may be taken.

The second contention is that the partnership of which the petitioners were members should be allowed a deduction of an alleged loss of the good will value of their business. It is not contended that this good will was acquired by the petitioners at any cost to them and, this being so, no loss can be allowed. In United States v. Flannery, 268 U. S. 98; 5 Am. Fed. Tax Rep. 5373; and McCaughn v. Ludington, 268 U. S. 106; 5 Am. Fed. Tax Rep. 5376, the Supreme Court held that only actual losses sustained were deductible in computing the net taxable income and that the provision in the statute with respect to the March 1, 1913, value of property sold or otherwise disposed of served only to limit the actual loss and not to increase it. Here there was no actual loss and consequently no deduction may be allowed. In their brief, counsel for the petitioners contend for the allowance of a deduction in 1918 for the exhaustion or obsolescence of good will. Under subdivision (a) (8) of section 214, Revenue Act of 1918, any deduction upon such a basis must be disallowed upon authority of the decision of the Board in Manhattan Brewing Co., 6 B. T. A. 952, following the decision of the Circuit Court of Appeals, Eighth Circuit, in Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; 6 Am. Fed. Tax Rep. 6360.

It appears that in 1919 the partnership sustained a net loss, one-half of which is attributable to each of the petitioners. In determining whether the petitioners, as distinguished from the partnership, had sustained any net loss in 1919 which they might deduct in determining taxable income for 1918, the Commissioner took into consideration the income received by each of the petitioners from investments. Petitioners claim this is error.

In defining the term “net loss ” the Revenue Act of 1918 in section 204(a) provides:

That as used in this section the term “ net loss ” refers only to net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities constructed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) over the sum of the gross income plus any interest received free from taxation both under this title and under Title III.

It is the contention of the petitioner that the phrase “when so resulting means the excess of the deductions allowed by law * * * over the sum of the gross income plus any interest received free from taxation both under this title and under Title III” refers only to income from the sources specified in clauses (1) and (2) of the paragraph. With this construction we can not agree. The term “ gross income ” is defined in section 213 of the Act and we see no reason to believe that the definition there given does not apply here. The two portions of the paragraph separated by a semicolon must be read together, and when this is done it seems clear that in determining whether a net loss has been sustained in 1919 which may bo deducted in 1918, the taxpayer must establish not only that a loss occurred from the sources mentioned in clauses (1) and (2) of section 204(a) of the Act, but also that such losses were not offset by income from other sources during 1919. The latter part of this paragraph of the Act is so worded that it is onty when a loss is sustained, considering all of the income of the taxpayer from all sources, and only to the extent of such loss, that he may shift a loss occurring under clauses (1) and (2) of the paragraph from 1919 to 1918. If the section were otherwise interpreted the taxpayer would be entitled in 1919 to deduct a loss under clauses (1) and (2) of the paragraph against nonbusiness income received in that year and also to deduct the same amount in determining net taxable income for 1918. It is not to be assumed that Congress intended to confer a double deduction and certainly, in view of the use of the words “ gross income ” and the definition of these words in the Act, such a construction would be unreasonable.

Decision will be entered for the respondent.

Considered by Maequette and Milliken.


text:
    Elmira Arms Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8762.
    Promulgated July 22, 1927.
    1. Excise taxes upon articles sold, levied upon the manufacturer, are not deductible by the purchaser as taxes paid by him, although specifically added by the manufacturer in fixing the sales price of the goods. Such taxes constitute a part of the cost of the goods to the purchaser. Appeal of R. 0. Musser, 3. B. T. A. 498, followed.
    2. A building was erected by a corporation upon property owned by its principal stockholder, the corporation being the tenant at will. Helé, that the building is to be depreciated over its expected useful life.

      Joseph W. Bucle, Esq., for petitioner.

      Harold Allen, Esq., for respondent.
    Tliis is an appeal from the determination of deficiencies in income and profits tax for the fiscal years ending January 31, 1920, and January 31, 1921, of $2,956.84 and $4,636.13, respectively. It is alleged the respondent committed error in computing the net income of petitioner in (1) refusing to allow as .a deduction for the period ending January 31, 1920, $4,336.86 and for the period ending January 31,1921, $2,256.43, claimed as sums expended for United States excise taxes; (2) refusing to allow as a deduction for the period ending January 31, 1921, $6,291.35 expended by petitioner in erecting an addition to its store building upon the lands which it occupied as a tenant at will; (3) refusing to include in invested capital for the-periods ending January'31, 1920, and 1921, $53,085.27 shown on petitioner’s books as “ inventory capital reserve.” It is conceded by the respondent that the invested capital for each of the years involved should include such amount of $53,085.27 and that in computing the invested capital for each of such years, the respondent did not include such amount. With respect to the second error alleged, it appears the Commissioner determined that the cost of the addition to the store building should be amortized over a period of five years and allowed a deduction of $1,258.27 in the fiscal year 1921. The respondent in his answer alleges that this ivas in error and that such cost should be amortized over the reasonable life of the store building.
    FINDINGS OF FACT.
    Petitioner is a New York corporation with its principal office at 117 1ST. Main Street, Elmira, N. Y.
    During the taxable periods in question, petitioner was engaged in business as a wholesale and retail dealer in sporting goods and related articles. On many of the articles and goods handled and dealt in by the petitioner during each of the fiscal years 1920 and 1921, there was imposed by Title IX of the Revenue Act of 1918 an excise or merchandise tax. When such goods were purchased by petitioner they were billed to it in such a manner that the invoice reflected the cost of the article without the tax and the amount added for the excise tax.
    The taxpayer’s merchandise inventory as of January 31, 1920, was $187,829.52 and as of January 31, 1921, was $261,004.73, both computed on the basis of cost or market, whichever was lower, including the war tax as an element of cost or market value. During the period from May, 1919, to January 31, 1920, the excise tax on purchases was charged to an account known as “war tax on merchandise,” and on J anuary 31,1920, this account, amounting to $11,225.26, was credited and the merchandise account was charged with $11,225.26. For the fiscal year ending J anuary 31,1921, the excise tax paid on merchandise was included directly in the charges to the “ Merchandise Purchase Account.”
    On January 31, 1920, an entry was made charging “ Profit and Loss” account and crediting a “Reserve for Merchandise War Tax ” account with $4,336.86. This amount, $4,336.86, was claimed as a deduction from gross income and was disallowed by the Commissioner.
    On January 31, 1921, an entry was made charging the “Reserve for Merchandise War Tax ” account and crediting “ Profit and Loss ” account with $4,336.86, thus' reversing the entry made on January 31, 1920. A further entry was made on January 31, 1921, charging “ Profit and Loss ” account and crediting “ Reserve for Merchandise War Tax” account with $6,593.39. The difference, $2,256.43, was claimed as a deduction for the fiscal year ending January 31,1921, and was disallowed by the Commissioner. On January 31, 1922, an entry was made charging the “ Reserve for Merchandise War Tax” account and crediting the “Profit and Loss” account with $6,593.39.
    No credit was made to the purchase account or to the inventory account because of the excise tax element contained therein.
    One of the principal parts of the petitioner’s business was distributing and retailing Victor talking machines. The showroom for these machines was located on the second floor of the building occupied by petitioner at 117 North Main Street, Elmira, N. Y. During the year 1921 petitioner was faced with the necessity of providing room on the first floor for this showroom or losing its agency, which was a profitable one.
    The petitioner occupied its store building under a lease which ‘ expired on March 31, 1925. W. O. Crew, who was president and majority stockholder of the petitioner company owned the leased store and a vacant plot adjoining it. The petitioner first endeavored to induce Crew to erect a building upon this lot and lease it to the petitioner. When Crew refused the petitioner’s directors sought to secure a lease from Crew upon this lot in order to build an addition to its building sufficient to provide for the necessary Victrola showroom. Mr. Crew refused to give a lease on this lot but finally permitted petitioner to erect a building thereon and to occupy same at a rental of $200 a year, payable monthly, under an agreement that the tenancy was to be from month to month and that the petitioner might be required to vacate at any time should the owner desire to sell it or build upon it. The lot was very valuable, being within a half block of the business center of the city. In 1921, petitioner erected upon this lot a wing or addition to its store at a cost to it of $6,219.35 and claimed said cost as a deduction in computing its net taxable income for that year. The Commissioner held that the cost should be amortized over a period of five years, the unexpired term of the lease on the store building occupied by the petitioner, and allowed one-fifth of the cost as a deduction in the fiscal year 1921. The petitioner continued to occupy the store and this addition in 1927.
   OPINION.

Phillips:

The parties are agreed that the effect of the entries made by the petitioner was to deduct excise taxes paid on purchases in the year in which such purchases were made, whether or not the goods were sold in that year, while the effect of the adjustments made by the Commissioner is to refuse such deduction in that year and treat such tax as a part of the cost of the goods, allowable as a deduction when the goods are sold. The question presented for our decision is whether such excise taxes are a tax upon this petitioner, deductible as such in the year paid, or are to be considered as cost of goods.

The taxes in question were authorized by section 900 of the Revenue Act of 1918 reading in part:

That there shall be levied, assessed, collected, and paid upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the price for which so sold or leased— * * * (4) * * * talking machines, music boxes, and records used in connection with any musical instrument * * * 5 per centum: * * * (10) Firearms, shells, and cartridges * * * 10 per centum * * *.

The statute levies an excise tax to be paid as an incident to the sale of the article by the manufacturer. Either directly or indirectly the tax is no doubt included in the price which the purchaser pays but it seems clear that the tax is not one imposed upon the purchaser., There is nothing in the law which requires that it be paid by the purchaser or collected by the manufacturer who sells, and if, through ignorance or misunderstanding of the law or for any other reason, the manufacturer fails to add the tax in computing the selling price, it is he and not the purchaser who has incurred liability for its payment. It is our opinion that whether the tax is added directly or indirectly to the price which would otherwise be paid, it constitutes a part of the cost to the purchaser of the articles purchased and is not a tax paid by the purchaser. R. C. Musser, 3 B. T. A. 498; George E. Hamilton, 6 B. T. A. 240.

Petitioner bases its claim upon article 132 of Regulations 45 and 62. Inasmuch as there is no tax, as such, paid by it, that article of the Commissioner’s regulations has no application to the situation here presented.

We have heretofore held in circumstances such as are presented hej'e that the cost of a building erected by a corporation upon land owned by its principal stockholder should be depreciated over its expected useful life. Sentinel Publishing Co., 2 B. T. A. 1211; Thatcher Medicine Co., 3 B. T. A. 154; William Scholes & Sons, Inc., 3 B. T. A. 598. Counsel seeks to distinguish these decisions from the instant case upon the ground that in each of those cases the taxpayer had a reasonable assurance that it could continue to occupy the premises for an indefinite period. The situation presented in this case, however, seems to be no different in substance, for while the owner reserved the right to terminate the lease at any time he should sell the property, there is nothing to indicate that there was any prospect in the taxable year of an immediate sale by him, and the evidence discloses that the property continued to be occupied by the petitioner in 1927. See Geo. H. Bowman Co., 7 B. T. A. 399.

The respondent contended that he had erred in allowing a deduction for depreciation or exhaustion based on a five-year period. There is nothing in the evidence upon which we may fix a proper deduction at any other amount than that determined by the Commissioner.

The deficiency should be recomputed in accordance with the error admitted by increasing invested capital for each of the taxable years by $53,085.27.

Decision will be rendered on IS days' notice, under Rule SO.

Considered by Maequette and Millielen.