author: Littleton:

text:
    Herman T. Dietrick, Petitioner, v. Commissioner of Internai Revenue, Respondent.
    Docket No. 9730.
    Promulgated May 13, 1927.
    Acquisition of certain sitares of stock in a corporation held to he a gift and not compensation for services rendered.

      George E. TI. Goodner, Esq., for the petitioner.

      Granville S. Borden, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency for the year 1920 in the amount of $2,647.20, due to the Commissioner’s including in the gross income of petitioner $21,600, as the value of 216 shares of stock of the Seaboard & Inland Oil Corporation alleged to have been acquired by petitioner in August, 1920,. as compensation for services.
    FINDINGS OF FACT.
    The petitioner is a resident of Philadelphia, Pa. Prior to August 1, 1920, the petitioner was employed by the Texas Oil Co. and had supervision of sales and establishing distributors in á territorial division known as the Philadelphia Division, which included the cities of Bloomsburg and 'Williamsport, Pa.
    In June, 1919, the petitioner met one Arthur H. Bruner, who had recently been employed by an oil company other than the Texas Oil Co. Arthur H. Bruner was seeking work as an oil salesman and in an interview the petitioner suggested that he, Arthur H. Bruner, go into business for himself. The suggestion was followed and A. H. Bruner & Co. was organized in 1919, with place of business at Bloomsburg, Pa., John W. Bruner, father of Arthur H. Bruner, being his financial backer, and by the summer of 1920 A. fl. Bruner & Co. had developed all the available business around Bloomsburg and were contemplating expanding the business. At this time petitioner advised Arthur H. Bruner of a.going business in Williamsport which was for sale by one Dudley, T. Stewart. After this information was received from petitioner, John W. Bruner contracted to purchase and did purchase the said Williamsport filling station from, Stewart for a total consideration of $65,000, making an initial payment to Stewart of $5,000. After John W. Bruner had contracted to purchase the Williamsport plant, the Seaboard & Inland Oil Corporation was organized by Arthur H. Bruner and his father,, John W, Bruner, they receiving some suggestions and assistance from petitioner in connection therewith. The Williamsport plant was taken over by the Bruners at a valuation of $65,000 and the Bloomsburg plant at a valuation of $25,000, with a piece of real estate at $5,000, making in all $95,000. The proposition to the Seaboard & Inland Oil Corporation was that it take the properties mentioned, allowing the Bruners $110,000 in cash and notes and $75,000 of its stock at par, which proposition was accepted. The petitioner did not contribute any part of the assets, either money or property, turned into the Seaboard & Inland Oil Corporation. He manifested only a friendly interest in the undertaking of the Bruners. They had an attorney to represent them in the matter of organization, etc.-
    Shortly after the organization, about August 1, 1920, the Seaboard & Inland Oil Corporation issued to petitioner 216 shares of the total of 750 shares of stock that were to be issued as promotion stock to the Bruners, in accordance with the original agreement of sale of properties by John W. Bruner.
   OPINION.

Littleton:

In.the opinion of the Board, the evidence in this case shows quite clearly that the acquisition of the 216 shares of stock by the petitioner was a gift and not compensation for services rendered.

The Commissioner relies on the case of Noel v. Parrott (C. C. A., Fourth Circuit), 15 Fed. (2d) 669, sustaining the United States Board of Tax Appeals in the Appeal of John H. Parrott, 1 B. T. A. 1, and also in the Appeal of Ira A. Kip, Jr., 3 B. T. A. 50, but in the opinion of the Board the facts in these cases are not similar to those in the instant case. The facts of the instant case do not bring it within the principle or rule laid down in the cases cited by the Commissioner.

There was never any charge made by petitioner for any information or counsel he gave or any service he rendered the Bruners or either of them, nor was there any promise made or any assurance, express or implied, given him that he would be paid or compensated for what he did for them. The 216 shares of stock issued to petitioner were an absolute gift, which was made or prompted by the feeling of moral obligation and high sense of appreciation on John W. Bruner’s part, for the kind and valuable services rendered.him and his son by a genuine friend.

The fact that petitioner’s friendship, suggestions, and services were beneficial to the Bruners does not convert what was clearly a bona -fide gift to petitioner into compensation ’ for such' services so Hs to, make the amount of the gift income, taxable under the. statute.

The 216 shares of stock received by petitioner being an absolute gift, it is immaterial what, if any, market value they had when received by petitioner.

The Commissioner was in error in holding that the 216 shares of stock received by petitioner were given him .as compensation for services rendered and the deficiency so determined by the Commissioner is accordingly disallowed.

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


source: Caselaw Access Project

author: SteRNhagen:

license: Public Domain

text:
    Rye Beach Pleasure Park Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13108.
    Promulgated May 13, 1927.

      Perry W. Shrader, Esq., and Jacob Axelrod, Esq.,- for the petitioner. :

      Harry Byrne,,Esq., for the respondent.
    ' Deficiencies of $2,880.08 and $2,751.12, income’ and excess-profits taxes for the calendar years 1918 and 1919. Petitioner alleges that the Commissioner erred in disallowing depreciation; in excluding the alleged value of certain property as paid-in surplus, and in refusing to grant petitioner relief under the special assessment provisions of sections 327 and 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office at Rye Beach, Rye, N. Y. It was incorporated in 1916 for the purpose of operating an amusement park at Rye Beach theretofore operated by the Montross & Hardy Amusement Co. The purposes of the company as stated in its charter are:
    (a) To own, lease, mortgage, buy and sell real estate.
    (b) To buy, sell, mortgage, rent buildings, bouses, chattels and devices of all kinds and character used in connection with the maintenance and operation of hotels, restaurants, public parks, amusement parks and places of amusement generally. -
    (e) To maintain and operate one or more hotels, lunch counters, restaurants, amusement parks, amusement devices, games, theatres, dancing pavilions, merry-go-rounds, roller coasters, bowling alleys and generally all things, acts, performances, exhibitions and devices invented and made for the purpose of amusing the public in a moral and healthful manner.

      (d) To own, lease, rent and sell bath houses, and bathing suits, lease rent and grant the privilege of bathing, boating, swimming, fishing and other public athletic sports and games.
    (e) To sell liquors, ales, beers and wines and operate a restaurant and sell meats, foods and refreshments of all lands and character.
    (f) To apply for and obtain the necessary licenses, permits and legal and other authority to operate, sell, maintain and keep each and every of the above mentioned, and do all things in connection therewith in compliance with the statutes and laws of the State of New Tort, and the several municipalities and subdivisions thereof.
    (g) All of the above named acts, things and deeds are to be done and performed with the view and for the phrpose of making a charge therefor and deriving a compensation therefrom.
    The Montross & Hardy Amusement Co. held the land on which the park was located, under lease from one Charles E. McManus. The following buildings, among others, were located on the land: Three picnic pavilions, old dance hall, pony track, living quarters for pony track, pony track stable, concessionaires’ stands, restaurant, ice cream pavilion, skee ball building, barn, rest room, office, two garage buildings, theatre, quarters for help, drug store,waiting station, entrance towers, automobile entrance, two houses, walks, and benches.
    The Montross & Hardy Amusement Co. had not been successful, and the parties in interest approached one I. Austin Kelly to interest him in the park and in the formation of the petitioner corporation. Kelly had previously been engaged in the amusement business. He considered the property worth $175,000 to $200,000 and agreed to contribute $50,000 in cash for one-half the capital stock of the corporation to be formed. The agreement entered into is as follows:
    • For and in consideration of tbe sum of One Dollar paid, receipt of which is hereby acknowledged an Agreement has this Second Day of December 1916 been entered into by and between Louis Bkrni, of New York City, Edward Lautkr-bach, of Ashland, Ky. and Frank Hardy, of Rye, N. Y. hereinafter known as Parties of the First Part and I. Austin Kelly, of Ashland, Ky., hereinafter known as Party of the Second Part whereby it is agreed that Parties of the First Part hereby turn over to Party of the Second Part Fifty Thousand Dollars ($50,-000.00) of the stock of the Rye Beach Pleasure Park Company and for which Party of the Second Part agrees to pay Parties of the First Part $50,000.00.
    It is understood and agreed that said stock taken over by Party of the Second Part from Parties of the First Part is free and clear from all indebtedness and that Parties of the First Part bind themselves to pay all debts and liabilities of the Park still remaining from past operations of said park. It is understood that Party of the Second Part shall be held harmless and free from all liability, in this direction, by parties of the First Part.
    It is understood and agreed that the Rye Beach Pleasure Park Co., shall take over and assume this agreement when said Company has been incorporated.
    Said Parties to this agreement hereby set their hands and seals.
    Parties of the First Part: . Louis Berni
    E. J. Lauterbach
    Frank Hardy
    Party of the Second Part:
    I. Austin Kelly

      Kelly desired to manage the enterprise and the following agreement was accordingly made:
    Por and in consideration of the sum of One Dollar paid, receipt of which is hereby acknowledged an agreement has been entered into this Second day of December 1916 by and between Lotus Berni of New York Oity, Edward Lauter-bach, of Ashland, Ky. and Frank Hardy of Bye, N. Y. hereinafter known as parties of the first part and I. Austin Kelly, of Ashland, Ky., hereinafter known as Party of the Second Part whereby it is agreed
    That Parties of the First Part shall pay Party of the Second Part a yearly salary of Five Thousand Dollars ($5000) for his services as General Manager of the Bye Beach Pleasure Park said yearly salary to be paid Party of the Second Part for a term of Four Years as from the date of this agreement.
    It is understood and agreed that, at the end of said term of Four years, Parties of the First Part, if for any reason they may not be satisfied with Party of the Second Part’s management of said Park they shall have the right to purchase the Fifty Thousand Dollars of stock held or controlled by said Party of the Second Part the sum of One Hundred Thousand Dollars ($100,000.00). It is also understood and agreed that Party of the Second Part shall, under said conditions, have the right to purchase the stock held by Parties of the First Part upon the same basis of purchase price. It is further understood that, at the end of the said term of four years, if neither party of this agreement have purchased the stock of the other party that Party of the Second Part shall continue as General Manager of said Park for a further term of eight years (representing the balance of the lease of said park property held by the Bye Beach Pleasure Park Company) and for any further renewal of said lease at the agreed upon yearly salary of Five Thousand Dollars ($5000.00).
    Said parties to this agreement hereby set their hands and seals.
    Parties of the First Part:
    Louis Berni
    E. J. Lauterbach
    Frank Hardy
    Party of the Second Part:
    I. Austin Kelly
    The petitioner was incorporated December 6, 1916, with an authorized capital stock of $10,000 divided into 100 shares having a par value of $100 each.
    The following are pertinent portions of the minutes of the meeting of the stockholders of petitioner held on December 19, 1926:
    Whereas, the stockholders and board of directors of this corporation have received a proposition, reading as follows, to wit:
    “Bye Beach Pleasure Park Co., Inc.,
    Bye, New York.
    Gentlemen:
    The undersigned being the owners, in their respective names of all of the outstanding stock issued, whether common, preferred or otherwise of the Montross & Hardy Amusement Company, do hereby offer said stock to your Company, together with all of the properties, assets, rights and privileges of any kind or character of such corporation for the sum of Fifty thousand ($50,000.00) Dollars, or its equivalent, Fifty (50) shares of the common stock of your corporation.
    Very truly yours,
    (Signed) Louis Berni
    (Signed) Frank Hardy
    (Signed) Mary E. Hardy”
    *******
    Whereas, the stockholders and board of directors of this corporation have received a proposition, reading as follows, to wit:
    “ Bye Beach Pleasure Park Co., Inc.,
    Bye, New Fork.
    Gentlemen:
    Pursuant to a resolution passed at a meeting of the stockholders of the Montross & Hardy Amusement Company and a similar meeting of the hoard of directors of the Montross & Hardy Amusement Co., the Montross & Hardy Amusement Company does hereby offer to sell, assign, transfer and convey to your company all-of the business, good will, right to do business stock in trade, assets, leases, licenses, privileges, benefits advantages and chattels and property, real, personal or mixed for the sum of Fifty thousand ($50,000.00) Dollars to be paid for in Fifty (50) Shares of the common stock of your corporation, the same to be delivered eleven shares to Mr.. Frank Hardy, five shares to Mrs. Mary E. Hardy, seventeen shares to Mr. Louis Berni and seventeen shares to Mr. Edward J. Lauterbach.
    This proposal to be accepted forthwith.
    Very truly yours, -
    [seal.] Montross & Hardy Amusement Co.,
    By (Signed) Louis Berni
    President.”
    Attest.
    (Signed) Frank Hardy
    Secretary
    The proposal from the Montross & Hardy Amusement Company was thoroughly discussed and the following resolution presented find its adoption regularly moved, seconded and carried, and
    Whereas, the Montross & Hardy Amusement Company has proposed, in writing, to sell, assign, transfer, convey and set over all its rights to do business, good will, stock in trade, office fixtures, assets, leases, licenses, privileges, benefits, advantages and property, whether real, personal or mixed; and Messrs. Frank Hardy, Louis Berni and Mrs. Mary E. Hardy have proposed, in writing, to sell; transfer, assign, and set over to this Company, the stock of the Montross & Hardy Amusement Company, consisting of sixty (60) Shares of common stock all of which are owned and controlled by them. .
    Now, Therefore, in consideration of the amount specified in said proposal, which amount is of the fair value of the stock, assets, etc.,'of the Montross'& Hardy Amusement Company, be it
    Besolved, that this company purchase of Mary E. Hardy, Frank Hardy and Louis Berni, the sixty (60) shares of the common-stock of the Montross & Hardy Amusement Company and purchase of the Montross & Hardy Amusement Company all the good will, right to do business, stock in trade, assets, leases, licenses, privileges, benefits, advantages and property, of any kind or character whatsoever and wheresoever located for the sum of- Fifty thousand ($50,000.) Dollars, to be paid for by issuing and delivering fifty (50) shares of the common stock of this company, as follows:

      Mary E. Hardy flye (5) shares, Frank Hardy, eleven (11) shares, Louis Berni seventeen (17) shares and Edward J. Lauterbaeh seventeen (17) shares, and be it further
    Resolved that these stocks are not to be delivered and transfer consummated until Messrs. Louis Berni, Edward J. Lauterbaeh and Prank Hardy execute to the corporation their joint and several bonds in and by virtue- of the terms of which they each promise and agree to hold the Rye Beach Pleasure Park Co., Inc.-, its successor or successors harmless from any debts, liabilities, obligations, liens or incumbrances, of any kind -or character that may be outstanding against the Montross & Hardy Amusement Company or any one claiming under or through it and by which they further promise and agree to bind their heirs, executors and assigns, and be it further
    Resolved, that the president be and he hereby is authorized and directed to execute such certificates of stock and the secretary is hereby authorized and directed to attest the same and attach the official seal of the corporation thereto and enter the same upon the corporate books of this company.
    The Secretary then presented and read a proposal from Mr. I. Austin Kelly in and by virtue of the terms of which he agrees to subscribe to fifty (50) shares of stock of the Company and pay therefor the sum of Fifty thousand ($50,000.) Dollars, on account of which he has paid the sum of Fifteen thousand ($15,000.) Dollars with the understanding and in consideration that he is to be the general manager and treasurer of the Company at a salary of Five thousand ($5,000.) Dollars a year, payable in equal monthly payments beginning with the 1st day of February, 1917, and terminate of the 1st day of February, 1911 [sic].
    There then follows a discussion and a resolution approving the contract agreement above set forth.
    The minutes of the meeting of the board of directors held on December 19, 1916, disclose action by the directors similar to that taken by the stockholders, as set forth above, and in addition thereto the following:
    Mr. Hardy reported that Mr. Charles E. McManus was willing to enter into a lease with the corporation embodying the premises of the lease and extensions and renewals thereof, entered into between the Montross & Hardy Amusement Company and Charles E. McManus.
    The following resolution was introduced, seconded, and declared carried:
    Resolved, that the President be and he hereby is authorized and empowered to enter into a lease in the name of the Company, embodying the premises above, with Dr. Charles E. McManus, and to execute the same in the name of the corporation, and that the Secretary be and he hereby is authorized and empowered to attach the corporate seal thereto.
    Kelly paid $50,000 to the petitioner and received fifty shares of stock therefor.
    On some date prior to January 27, 1917, the following agreement was entered into between the petitioner and Charles E. McManus:
    Indentup.e, made this first day of December, 1917, [sic] between Charles E. McManus, of the Village and Town of Rye, County of Westchester and State of New York, herinafter called the lessor, and Rye Beach Pleasure Park Co,, Inc., a corporation organized and 'existing under and by virtue of the laws of the State of New York, having its place of business in the Village and Town of Rye, County of Westchester and State of New York, hereinafter called the lessee.
    Witnesseth : That the lessor has letten and by these presents doth grant, demise and to farm let unto the lessee the lands and premises situated at or near Rye Beach, in the Tillage and Town of Rye, County of Westchester and State of New York, hounded and described as follows:
    Easterly in front by Rye Beach Avenue, southerly by the northerly line of a piece or plot of land laid out and designated “ Map of Lounsbury Park, at Rye Beach, etc.,” which map is on file in the office of the register of the county of Westchester; westerly by Forest Avenue and Northerly by land belonging respectively to Emily Ward, and the New York and Stamford Railway Company and Beck Avenue, for the term of twelve years, beginning with and including the first day of December, 1916, and terminating on the 30th day of November, 1928, upon the terms and conditions following:
    First: It is agreed and understood that the rent for the said premises shall be as follows:
    (A) From and including December 1st, 1916, up to and including November 30th, 1920, $16,000.00, payable each year in six equal installments of $2,666.67 on December 1st, March 1st, April 15th, July 1st, August 1st and October 1st of each year, beginning with the first day of December 1916, up to and including the first day of October, 1920.
    (B) 'From December 1st, 1920, up to and including November 30th 1921, the sum of $17,000, payable in six equal installments of $2833. and 33 cents each on the following dates to wit: December 1st, 1920, March 1st, 1921, April 15th, 1921, July 1st, 1921, August 1st, 1921 and October 1st, 1921.
    (C) From the first day of December 1921, up to and including the 30th day of November, 1926, at the rate of $18,000. per year, which sum shall be payable each year in six equal installments of $3,000. each on December 1st, March 1st, April 15th, July 1st, August 1st and October 1st, during each of said years, beginning with and including the first day of December 1921, and ending on the first day of October, 1926.
    (D) From the first day of December, 1926, to the 30th day of November, 1928, at the yearly rent of $20,000. per year as follows: Payable each year in six equal installments of $3,333.33 each on December 1st, March 1st, April 15th, July 1st, August 1st and October 1st of each year beginning with and including the first day of December 1926 and ending on the first day of October, 1928.
    Second: The lessee promises and agrees during the term of this lease to pay the rent for the premises above described as herein specified and set forth, and in addition thereto to pay each year any increase in taxes that the lessor might be required to pay, because of any additional buildings or improvements heretofore or hereafter, during the occupancy of said premises by Ambrose O. Montross, Frank Hardy, Montross & Hardy Amusement Company, or the lessee hereunder erected upon the premises above described by the lessee, not including the hotel; bath houses and bathing pavilion.
    Third: It is agreed and understood that all the buildings and structures now erected and standing upon the premises above described are included in this lease and the lessee is to keep the same in repair and may alter, change, sublet, lease, tent, or license all or any part of the premises above described for any lawful purpose and all buildings and structures now erected and standing thereupon may be removed by the lessee at any time before the expiration of this term, except the hotel, bath houses and bathing Pavilion, and any addition or extension thereto which has been or hereafter may be erected by the lessee, which actually become a part of either said hotel, bath houses or pavilion.

      Fourth: It is agreed and understood that the lessor reserves a right of way over and across the premises above described upon and ■ over the premises laid out and used as a roadway from Rye Beach Ave. to the trolley station, with the right of passage. to pedestrians only upon and over the same, which roadway the lessee is to keep in good order and condition and keep open at all times for the purpose of allowing and permitting the passage above mentioned.
    Fifth: It is agreed and understood that the lessee will during the term of this lease, insure and keep insured in the name of the lessor the buildings and additions actually connected therewith, standing and erected upon the premises above described, known as the hotel, for at least a sum of twelve thousand dollars $12,000. in a good and substantial insurance company or companies, insuring the lessor by the standard form of policy against loss or damage by fire, with lightning clause, and including right to use electricity, which policies or policy shall be delivered to and retained by the lessor. In the event that said building shall be injured by fire, or the elements to such an extent that it cannot be used, the lessor promises and agrees to restore the same as speedily as possible at a cost not to exceed the sum of twelve thousand dollars $12,000. and until such time as the same is repaired and restored, the rent reserved herein shall be reduced at the rate of $175.00-per month until such time as said repairs shall be substantially completed and said building ready for use as a hotel and in the same event of the total destruction of the said building, the moneys' received from such insurance shall be used for the reconstruction of the same.
    Sixth: The lessor hereby agrees to insure and keep insured the bathing pavilion and bath houses on said premises for the further sum of six thousand dolars $6,000, in the name and for the benefit of the lessor and deliver said policy or policies to the lessor; and if the bath houses and pavilion erected upon the said demised premises shall be destroyed by fire or lightning, the same shall be repaired as speedily as possible by the lessor out of the insurance money received by him for such loss or damage, at a cost not to exceed the sum of six thousand $6,000. provided, however, that if such loss or damage shall occur in any year after the 15th day of September, it shall be a sufficient compliance with the terms of this agreement, if such pavilion and bath houses are fully repaired and restored on or before May 1st in the following year. And if such bath houses and pavilion shall be so destroyed by fire at any time between June 1st and September 15th, in any year during the said demised term, the rent provided to be paid in and by this lease shall be reduced at the rate of $300.00 three hundred dollars per month, from the date when said fire may occur until September 15th next following, such reduction of rent to be deducted from the payment of rent next following the date when such fire may occur.
    Nothing herein contained, however, shall be deemed to require the said lessor to pay for the repairing of damage done by fire, lightning or the elements to either of said buildings of any amount greater than the amount received under the insurance policy or policies covering the said building as payment for such loss.
    Seventh: And it is hereby mutually agreed that the said lessee may at any time, at the end of any season, viz., after September 30th, and before March 1st next following of any year during the term of this lease, by notice in writing to the lessor, cancel the lease of the premises hereby demised, if all the licensed attractions erected or used on the said demised premises shall be stopped by law for any reason not due to the fault, omission, act or neglect of itself, its officers, agents, licenses or servants, in which event the lessor may hy notice in writing to the lessee, at any time within sixty days after receipt of such notice of cancellation from said lessee at his option, cancel the lease or leases of any other premises leased by the lessor to the lessee.
    Eighth: It is mutually understood and agreed that if any of the rents herein reserved shall be unpaid after the respective dates when the same are hereby made due and payable, or if default shall be made in any of the covenants herein contained, then it shall be lawful for the lessor to re-enter the said premises and to remove all persons therefrom and take possession of the demised premises, and notwithstanding such re-entry or order, judgment or warrant which may be made or issued in any summary or like proceeding, the lessee shall remain liable for the rent hereby reserved, and the lessor may at his option re-let or sub-let said premises, or any part or portion thereof, as agent for the lessee, and receive rent therefor, and in such case the lessee shall be liable for any deficiency between the rent so received and the rent hereby reserved.
    Ninth: The lessee covenants and agrees that it will permit the lessor or his agents duly authorized in writing, to show the demised premises to persons desiring to hire or purchase the same on and after the 1st day of September, next preceding the expiration of the term and will permit suitable notices of “ To-Let ” or “ For Sale ” to be placed upon the said premises, and remain thereon without hindrance or molestation.
    Tenth: The lessee covenants and agrees that it will during the term hereby demised keep, the demised premises, together with the building and improvement thereon, and also the said roadways or passageways in good condition and repair at its own expense, and will save harmless and keep the lessor protected from all loss or damage by reason of its neglect so to do.
    Tenth: The lessee covenants and agrees that it will at all times comply with all laws and with all rules, regulations and orders of the Board of Health of the Village of Bye, and all other duly constituted authorities in relation to the demised premises, and will keep and save the lessor harmless and indemnified from any claim or liability caused by any violation of any such law, rule, regulation or order, or arising under the law known as the Civil Damage Law, or other similar enactment, now in force or hereafter to be enacted.
    Eleventh: It is mutually agreed that in order to permit of the erection of attractions in the Grove upon the westerly part of the demised premises. The lessee may from time to time cut down such trees as shall be specifically identified and permitted by the lessor in writing, but without such written permission however, no trees shall be cut down, nor shall any of the same be destroyed, mutilated or otherwise injured, but they shall be properly protected and cared for by the lessee.
    Twelfth: The lessee hereby further covenants and agrees that if any default be made in the payment of rent reserved herein, or any part thereof, at the times above specified or if default be made in the performance of any of the covenants and agreements herein contained, the said hiring and relation of landlord and tenant at the option of the lessor shall wholly cease and terminate, and in the event that-the lessee shall be dispossessed of the said premises, it hereby waives the privilege of redemption given by section 2256 of the code of Civil Procedure, or by any similar future law.
    Thirteenth: The lessor hereby covenants and agrees .with the lessee, on payment of the rent reserved herein, and upon the performance of the covenants aforesaid, it shall and may peaceably and quietly have, hold and enjoy the demised premises and every part thereof, for the term hereinbefore granted.
    Fourteenth: It is mutually covenanted and agreed that all of the provisions of this agreement are and shall be binding on the parties hereto, their heirs, administrators, successors and assigns respectively.

      In Witness W-hereof, the lessee hath hereunto affixed its corporate seal, and hath caused these presents to be signed by its president, and the lessor has hereunto set his hand and seal the day and year first above written.
    In the Presence of :
    Rye Beach Pleasure Park Co. Inc.
    By: Louis Berni, President
    Charles E. McManus
    Attest:
    Prank Hardy,
    Secretary.
    In 1925 the heirs of Charles E. McManus conveyed the leased premises to the County of Westchester. The deed of conveyance contains the following provisions, among others:
    It is understood that the conveyance of the above property shall be subject to two existing leases, both in the name of Rye Beach Pleasure Park Company, Inc., and both expiring November 30, 1928; it being further understood and agreed that the Vendors shall retain any rental accruing under the aforesaid leases prior to date of closing title, October 21, 1925, and the rents due December 1, 1925, shall also belong to the Vendors; and the Vendors specifically reserve the right to and shall be entitled to make collection and receive payment of said rents. It is understood and agreed that the conveyance of the above property shall be subject to all restrictions now in force and effect, contained in prior deeds.
    # * * * * * *
    Together with such buildings and improvements thereon as are specifically enumerated in the annexed Schedule A, * * *
    The following appears on Schedule A attached to the deed:
    (1) The structure or structures referred to in the lease to Rye Beach Pleasure Park Co., Inc., dated December 1, 1917, as the “ hotel ”.
    (2) The structure or structures referred to in the lease above mentioned as the “bath houses”.
    (3) The structure or structures referred to in the lease above mentioned as the “ bathing pavilion ”.
    (4) The structure or structures referred to in the lease to Rye Beach Pleasure Park Co., Inc., dated December 1, 1916, as the “ three certain bungalows” with appurtenances, and the right, title and interest of the Vendors in the furniture therein contained.
    In April, 1926, the following agreement was made between petitioner and Kelly and the County of Westchester:
    This Agreement made this 19th day of April, 1926, by and between Rye Beach Pleasure Park Company, Inc., a domestic corporation having its principal place of business in the Village and Town of Rye, Westchester County, New York, and I. Austin Kelly, of the same place, parties of the first part and The County of Westchester, a municipal corporation of the State of New York, party of the second part, Witnesseth :
    Whereas, the party of the second part has heretofore acquired title from Evelyn Hall Pierce, formerly Evelyn Hall McManus, and Evelyn L. Finnegan, formerly Evelyn L. McManus, of certain lands and premises situate in the Town of Rye, Westchester County, New York, known and distinguished as parcels 12, 13 and 13A, Sheet 2 on a map entitled “ Map showing lands to be acquired by the Westchester County Park Commission for Manursing Island Park in the Town and Village of Bye, Westchester County- N. V.” said map prepared by Carpenter & Duffy, C. E. & S. September 28th, 1925, and hied in the office of the Register of the County of Westchester on December 9th 1925, as Map #2795, subject to two certain leases, one dated the 1st day of December, 1916, made by Charles E. McManus to the Bye Beach Pleasure Park Company, Inc., and expiring on the 30th day of November, 1928, and the other dated the 1st day of December, 1917, made by Charles E. McManus to the Bye Beach Pleasure Park Company, Inc., and expiring on the 30th day of November, 1928, which said leases are attached hereto and made a part hereof; and
    Whereas, the party of the second part is desirous of purchasing the said leases and all the equipment, buildings and property owned or used by the parties of the first part in the operation of its pleasure park.
    Now therefore, in consideration of the sum of One ($1.00) Dollar and other consideration in dollars, lawful money of the United States to the parties of the first part in hand paid at or before the ensealing and delivery of these presents by the party of the second part as hereinafter set forth, the receipt whereof is hereby acknowledged, the parties of the first part have bargained and sold and by these presents do grant, convey, assign and transfer unto the party of the second part its successors and assigns the two aforesaid leases, together with all and singular premises therein mentioned and described and all the rest, residue and remainder yet to come of and in the terms mentioned in said leases, together with the equipment, buildings, appurtenances and all other property owned or used by the parties of the first part in the operation of its pleasure park at Bye Beach, including all the leases, property, goods and chattels described in the schedules hereto annexed and made a part hereof.
    And the parties of the first, part do hereby covenant, grant, promise and agree to and with the party of the second part that the aforesaid premises, leases, property, goods and chattels are free and clear of and from all former and other gifts, grants, bargains, sales, leases, judgments, executions, back rents, taxes, assessments and encumbrances whatsoever, except outstanding leases, sub-leases and concessions expiring not later than November 30th, 1928, all of which are included in this sale and transfer and a schedule of which is hereto annexed and made a part whereof.
    It is understood that the parties of the first part shall not be liable for any taxes or assignments becoming a lien after March 15th, 1926.
    It is expressly understood and agreed that the stipulated and agreed consideration to be paid by the party of the second part to the parties of the first part herein is the sum of One Hundred Thirty-Eive Thousand ($135,000.00) Dollars, together with the sum of Three Thousand ($3,000.00) Dollars for rent due on December 1st, 1925, on the aforesaid lease dated December 1st, 1917, and paid by the parties of the first part to Evelyn Hall Pierce and Evelyn L. Finnegan the successors in interest of Charles E. McManus, the lessor therein, which said sum under the terms of the purchase of the aforesaid property from Evelyn Hall Pierce and Evelyn L. Finnegan the said grantors were entitled to retain.
    It is understood and agreed that the Secretary of the Westchester County Park Commission will and does hereby at the time of the execution and delivery of this agreement refund to the parties of the first part the sum of Three Thousand ($3,000.00) Dollars, which said sum was paid by the parties of the first part to the Westchester County Park Commission as the installment of rent due under said lease March 1st, 1926.
    It is also understood and agreed that apportionment of fire and liability insurance will be made as of March 15th, 1926, as set forth in the schedule hereto annexed and made a part hereof.

      The parties of the first part agree to and do hereby pay to the Westchester County Park Commission the sum of Fifteen Thousand and Four Hundred Thirty-two and 79/100 ($15,432.79) Dollars, which said sum.is all of the rents collected by the parties of the first part on all outstanding leases, sub-leases or concessions of, in or on the said premises of the parties of the first p&rt up to March 31st, for the season of 1926, as shown by the schedule which is hereto annexed and made a part hereof.
    To Have and To Hold the same unto the party of the second part, its successors and assigns forever, and the parties of the first part do for themselves, their legal representatives and assigns covenant and agree to and with the party of the second part to warrant and forever defend the sale and transfer of the said leases and all the property, goods and chattels hereby sold unto the party of the second part its ■ successors and assigns against all and every person and persons whomsoever.
    In Witness Whereof, the Rye Beach Pleasure Park Company, Inc., has caused this agreement to be signed by its President and its seal hereunto afSxed and the said I. Austin Kelly has hereto set his hand and seal the day and year first above written.
    Rye Beach Pleasure Park Company, Ino.
    By E. R. Louden

      Vice-President

    By I. Austin Kelly

      Treasurer and General Manager

    I. Austin Kelly (L. S.)
    In 1917 Kelly purchased the stock of the other stockholders for $50,000.
    In December, 1918, the authorized capital stock of the petitioner was increased to $125,000, and stock certificates issued for the increase.
    In 1917 the petitioner at a cost of $92,290.66 acquired certain amusement devices, including among other things a whip, roller coaster, fun house, merry-go-round, Panama Canal and skating rink. The average probable useful life of all of these devices at the time of their acquisition was ten years. A reasonable allowance for exhaustion, wear and tear is 10 per cent.
   OPINION.

SteRNhagen:

The deficiencies in question were determined under section 302 of the Revenue Act of 1918, “ since,” as stated in the Commissioner’s notice, “ this amount is less than the amount computed under section 328.” The petitioner assigns as error (1) that the tax thus computed is excessive and the invested capital has not been determined, (2) that depreciation has been incorrectly determined as to both the property to be depreciated and the rate applicable, and (3) that special assessment under section 328 has not been made. The facts alleged in the petition were all denied in the answer.

From the trial and the briefs it is difficult to ascertain what relief the petitioner seeks and upon precisely what it relies to prove that its liability has not been correctly fixed. The determination of tax under section 302 does not involve a determination of invested capital, and is presumably less than if determined with reference to such capital under section 301. It does not appear what the Commissioner used as the factors of invested capital or by the comparison of what figures he determined that the tax under section 302 would be less than under section 301. Furthermore, as the Commissioner applied section 302 because he found the tax thus to be less than under section 328, and the petitioner asks for assessment under section 328, there is further confusion in perceiving the significance of the issue as to invested capital. It may be that the petitioner believes that a correct computation of its invested capital under section 326 and the resulting ratio between it and correct net income would bring about a lower tax under section 301 than that found under section 302 or that hoped for under section 328. But this could only be established by evidence, upon which such comparison could be made. It is not -to be assumed. Nor could the Board make a finding as to a single factor of the statutory invested capital, such as the value of tangible property received for stock, without knowing whether this has been allowed or disallowed by the respondent or otherwise how such factor is related to the result sought to be reached.

Speaking more specifically, it appears that Kelly paid $50,000 in cash for one-half the stock at a par value of $5,000 and that for the other half of the stock the petitioner received both the assets of the Montross & Hardy Co., including whatever rights it had to the tangibles on the leased land, and the stock of that company. It does not appear what the Commissioner regarded as the value of property paid in for stock or shares or how much, if anything, was claimed or allowed as surplus, either earned or paid in. Supposing it true that title to the amusement structures on the land was legally sufficient to constitute them its assets and that when received by petitioner they were of substantial value, there is from this record no way of telling that the application of section 302 was wrong.

This will indicate the difficulty of ascertaining what are the petitioner’s rights and the necessity for sustaining the respondent in his use of section 302 instead of section 301 or section 328.

The evidence sufficiently establishes the reasonableness of an allowance of 10 per cent as an average rate of depreciation of amusement devices. This rate should be applied to not less than the amount of $92,290.66 stipulated as the cost of those acquired in 1917, and such additional amount, if any, as the Commissioner has determined as the value of the depreciable amusement devices acquired prior thereto. This additional amount we are unable to determine from the evidence. -

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


author: GReen :

text:
    Boucher-Cortright Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6764.
    Promulgated May 20, 1927.
    1. A contribution of $500 held not to- be deductible as an ordinary and necessary expense.
    2. Claim for a deduction by reason of obsolescence or loss of useful value denied for want of evidence.
    3. The petitioner purchased and used within the year, certain car wheels, axles and bumpers, and cast iron blocks, for use on mine cars. Held that the amounts so expended are deductible as ordinary and necessary business expenses.
    4. The petitioner contends that it is entitled to have its depletion allowances computed on the basis of discovery value. Held that the evidence does not prove the discovery.

      Henry P. Erdman, Esq., for the petitioner.

      A. G-. Bouchard,, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the year 1919, for which the Commissioner has determined a deficiency in the sum of $8,994.20. The petitioner alleges error on the part of the Commissioner: (1) In disallowing a contribution of $500 to St. Agnes Church of Beaver-dale, Pa., as an ordinary and necessary expense; (2) in disallowing as a deduction for obsolescence or loss of useful value certain items amounting to $9,806.19; (3) in disallowing as ordinary and necessary expense an amount of $2,030 paid for mine-truck parts and bumpers; (4) in denying a depletion rate based on discovery; (5). in determining an insufficient allowance for depreciation on plant and equipment.
    FINDINGS OF FACT.
    The petitioner is a corporation organized in January, 1917, for the purpose of mining coal near Beaverdale, Pa. During the year 1919 the petitioner donated $500 toward the building fund of a parsonage for the St. Agnes Church of Beaverdale. Beaverdale is a town of about 3,500 to 4,000 inhabitants who are for the most part employees of the various coal-mining companies nearby. About 25 to 30 per cent of the mine employees were members of the Roman Catholic Church, which percentage also applied to the petitioner’s employees. The St. Agnes Church was started several years prior to 1919 as a mission from Dunlow, a nearby town. A priest living at Dunlow made trips to Beaverdale to conduct services. The St. Agnes Church, desiring to have a priest permanently there, sought contributions to build a parsonage. "Various mining companies were among the contributors.
    In equipping its mine for operation the petitioner in the early part of 1917, installed six room hoists as an experiment. This experiment was a failure and the six hoists were replaced later by more permanent hoists.
    During the year 1919 the petitioner purchased 25 sets of wheels and axles for mine cars for $1,590, 80 bumpers for $420, and 100 cast iron blocks at $20 each, a total of $2,030. These parts were used during the year 1919 to repair cars.
    Petitioner acquired a lease from the Beaver Run Land Co., dated March 2, 1917, for the “ D ” seam of coal in a certain tract of land in Cambria County, Pa., consisting of something over 800 acres. The lease was secured through Cortright as stockholder, who was paid $10,000 by the petitioner for acquiring the lease. Under the terms of the lease petitioner acquired the right to take out all of the “ D ” seam of coal in the area leased upon payment of 6 cents a gross ton royalty, and with the further provision that a minimum of 20,000 gross tons should be paid for each year for five years beginning January 1, 1917, a minimum of 30,000 tons a year during the second five years, and a minimum of 50,000 tons a year thereafter until the “ D ” vein of coal was all mined and removed. The lease further provided that the petitioner should not be required fco mine and remove any coal where the thickness was less than 2 feet, 6 inches, of clean, merchantable coal.
    The leased property was located in what was known as the Wilmore Basin of coal, in a district in the southwestern portion of Cambria County, Pennsylvania, which basin was from 8 to 10 miles in width and 30 miles in length. The “ D ” seam of coal was a well recognized seam in this district and was known to exist on the leased property prior to the date of the lease, but it had never been commercially operated near Beaverdale. There were other seams of coal also known to exist and two of them, the “ B ” and “ E,” were being operated by other companies in 1917 in the same area that contained the petitioner’s coal.
    The “ D ” seam of coal outcrops on the leased property but the exposed coal is thin and of poor quality. A drift about 75 feet long bad been driven along the seam prior to January 1, 1917. Some house coal for local use was taken from this opening. The coal showed improvement inside this drift over that at the outcrop but commercial coal was not developed. In the fall of 1916 parties who later became stockholders of the petitioner began exploration work on this property, both by tunnels and drifts and also by diamond drilling. A corporation was organized for the purpose of exploring and operating this seam of coal in January, 1917. The lease on the “ D ” seam was dated March 2, 1917. The diamond drilling, consisting of from five to seven drill holes, was completed and the tunnel and drift had reached merchantable coal by May 1, 1917.
    The mine opening to the coal was made through an old abandoned drift in a coal seam located above the “ D ” seam. This entry was used in order to avoid driving through broken and faulty areas. The coal exposed by this opening proved to be of commercial thickness and quality. The diamond drill holes also indicated coal of from 8 to 4 feet thick.
    The engineering records obtainable in 1926 indicated that there were 773 acres of coal of the “ D ” seam included in the petitioner’s lease. The coal varied from 2 feet, 6 inches, in the southerly and westerly portions to 4 feet in the northerly portion of the workings. The mine workings at that time extended over 427 acres of the 773 acres and showed an average thickness of 3 feet, 9 inches, resulting in an average content of 5,900 tons an acre. The recoverable coal was determined to be 83.3 per cent of the total, or 4,915 tons an acre.
    After May 1, 1917, equipment and facilities, costing some $50,000, were installed for the purpose of mining and extracting the coal. This equipment was capable of handling 200,000 tons a year.
    The plant and equipment, and facilities, were subdivided as follows:
    Mine development, including siding facilities_$10, 606. 65
    Frame buildings, including tipple, barns, blacksmith shop_ 4, 317. 61
    Mine equipment located inside the mine- 28,291.28
    Nonmining equipment, including locomotive- 7,222.40
    The mine equipment depreciated rapidly owing to the fact that the mine waters contained considerable sulphur. The life of items of equipment is as follows:
    Type of equipment. . Life.
    Mine rope-2 months to 1 year.
    Mine rails-5 years and over.
    Locomotive-8 years.
    Cars_ 8 years.
    Large hoists-10 to 15 years.
    Small hoist-1 year and over.
    Electrical motors, small. 2 to 3 years.

      Type of equipment. Life.
    Electrical motors, large_10 to 12 years.
    Motors on pumps_8 years.
    Motors on small pumps_ 5 years.
    Pumps_2 to 8 years.
    All bronze pumps_8 years.
    Erame buildings_10 years.
   OPINION.

GReen :

Petitioner urges that it be permitted to deduct as an ordinary and necessary expense the amount of $500 contributed by it to the St. Agnes Church of Beaver dale to assist in the building of a parsonage, in order that a priest might be permanently located there. The evidence indicates that prior to the time the contribution was made the employees who were members of that church were not deprived of the opportunity to attend church or of having the services of a priest. The parsonage merely made such services more easily available. Nothing has been introduced to show that the petitioner would have suffered any business embarrassment or difficulties if the parsonage had never been built. We, therefore, believe that the contribution of $500 can not be classed as an ordinary or necessary expense of doing business.

The petitioner’s claim for a deduction of $9,806.19 for obsolescence or loss of useful value is unsupported by any evidence. It has shown that $2,310 was expended for room hoists in 1917 and that subsequently such hoists had to be replaced. The record is silent as to the year of abandonment or disposal of such hoists or the salvage value thereof. Without such evidence we are unable to find that any deductible loss occurred.

During the year 1919 the petitioner purchased car wheels, axles, and bumpers, and cast-iron blocks, for use on mine cars. All of such parts and material so purchased were used during the year in repairing the mine cars then in use. The parts and materials thus purchased and used are of such a nature that the cost thereof may not, under the conditions here existing, be classed as a capital expenditure. Such expenditures are ordinary and necessary business expenses and the petitioner is entitled to a deduction therefor in 1919.

The petitioner claims that it is entitled to a discovery value and depletion based thereon with respect to the lease it acquired in 1917 on the “ D ” seam of coal. It has endeavored to show that no commercial quantity of coal has ever been found in this seam in the Beaverdale district prior to the time it acquired this lease. It is admitted that the D ” seam was known to exist on the property and that it had been operated in a small way. Various companies had prospected this seam within two or three miles of this property but no commercial quantities of coal had been found. The parties interested in the organization of the petitioner apparently had the information that a faulty or broken condition of the “ D ” seam, designated the “ trouble area,” extended from the outcrop into the coal seam for only a limited distance and that beyond this “trouble area ” would be found merchantable coal. This is borne out by the fact that the first underground work was carried on through old workings in another vein. The record also discloses that considerable prospecting work was done prior to the time the lease was acquired. A witness for the petitioner testified that he and his associates began drilling this property in the fall of 1916, having had some letters from the Beaver Bun Land Co. agreeing to make the lease. He further testified that five or six diamond drill holes were put down and that drilling was completed around the first of May.

An examination of the map submitted discloses seven drill holes put down on this and the adjoining property and indicates three other drill holes designated “ Penn. C. & C. Company,” -which company was operating the B ” seam 160 feet below the “ D ” seam. These three drill holes must have passed through the “ D ” seam and might have been a source of information to the petitioner. Since at least six drill holes were put down prior to- May 1, 1917, and since drilling commenced in the fall of 1916, we assume that several drill holes were completed prior to the date of the lease and that on the date of the lease it was known that coal of commercial thickness and quality could be found in the “ D ” seam in this area.

The record further discloses that the petitioner paid an individual $10,000 for acquiring the lease, and that it agreed in the lease to pay minimum royalties amounting to $1,200 a year for five years, $1,800 a year for the next five years and $3,000 a year thereafter, and to pay for all coal extracted at the rate of 6 cents a ton.

All of these facts tend to indicate that the “ D ” seam was sufficiently proven on the date of the lease to be classed as a proven tract.

Even assuming that such was not the case, we do not have sufficient information before us to determine that there was a discovery as defined by the Bevenue Act of 1918. No information has been submitted as to the dates the drill holes were put down or the results of such drilling. Without such information it would be impossible to determine the grade and quantity of coal in the property. The engineers testifying for the petitioner have not shown that the tonnage they used could have been determined from information available on May 1, 1917, or that it could not have been determined at an earlier date. All estimates of quantity appear to have been based, in part, on information acquired subsequent to May 1, 1917.

Section 284(a) (9) of the Revenue Act of 1918 provides:

In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.

The petitioner has failed to meet the requirements of this section. It has not proven that a discovery was made after the property was acquired, and has presented no evidence as to the fair market value on the alleged date of discovery or within thirty days thereafter. Accordingly, we are of the opinion that the petitioner has not established a discovery or a discovery value and is not entitled to depletion based on discovery.

The last issue has to do with the depreciation rates on plant and equipment. The petitioner’s claim is as follows:

The Commissioner allowed a composite rate of 10 per cent on the total cost indicated above, which was the amount originally claimed by the petitioner on the return for the year 1919, and in addition allowed 10 per cent for one-half year on $19,022.24, designated “ purchases ” during 1919.

The petitioner sought to have depreciation determined upon the basis of the four classifications set forth above but failed to establish the proper rate for each of such classifications. The Commissioner, used a composite rate applicable to all depreciable property. The petitioner^ method of subdividing the depreciable property into various groups or classes and applying a composite rate to each class is a more accurate method of determining depreciation, and had its proof been complete as to all classes we would have accepted it as the better and more accurate of the two methods. However, it is incumbent upon a petitioner attacking a composite rate found by the Commissioner to establish by the correct composite rate the proper rate to be applied to all of the depreciable assets, and we must, therefore, affirm the Commissioner’s action in this regard.

Judgment will de entered after 15 days’’ notice, u/nder Bule 50.


author: Littleton :

text:
    H. R. De Milt Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8541.
    Promulgated May 20, 1927.
    1. Upon the organization of the petitioner, it issued twenty-year 6 per cent debentures and common stock for the assets of an existing partnership. Held,, upon the evidence, that the debentures represent evidences of indebtedness and may not be included in invested capital.
    2. The selling price of certain shares of stock for cash immediately after organization of a corporation is not sufficient of itself to establish the value of good will.

      Ben Jenkins, Esq., and WilUam, A. Daly, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
    This proceeding involves a deficiency for the calendar year 1920 in the amount of $1,835.99.
    The issues presented are: (1) Whether the Commissioner erred in excluding from invested capital $50,000, representing 6 per cent twenty-year debentures, on the ground that the debentures represented borrowed money and were not, in effect, stock, and (2) whether the Commissioner erroneously excluded from invested capital any value for good will acquired in exchange for capital stock.
    FINDINGS OF FACT.
    The petitioner, a New York corporation, was organized on January 1, 1907, with an authorized capital stock of $100,000, divided into 1,000 shares. At incorporation it issued its entire capital stock (except two qualifying shares) to H. R. De Milt for the partnership assets of H. R. De Milt & Co., a business which had been in existence since 1889. The partners were H. R. De Milt and Albert Bieling, though the assets were owned entirely by De Milt. In acquiring the assets of the partnership, a purchase and sale agreement was entered into between De Milt and the corporation, by which the corporation received all of the tangible assets, inventoried at $85,000, in exchange for $35,000 par value in stock and $50,000 par value of 6 per cent twenty-year debentures. By the same instrument, but expressed therein as a separate transaction, the good will of the partnership was transferred to the corporation in exchange for the remaining $85,000 par value of stock.
    Within a few days after incorporation, De Milt sold 140 shares of the common stock, which had been issued to him, to Bieling, his former partner, for $7,000 cash. About the same time 20 shares were sol’d to one Ellsworth for $1,000 cash.
    The debentures in controversy read as follows:
    United States of America
    State of New York
    H. R. De Milt Company
    Twenty-Year Six Per Cent Income Debenture
    H. R. De Milt Company, a corporation of the State of New York (hereinafter called the “Company”), is indebted and, for value received, promises to pay to the registered holder, hereof the sum of one thousand dollabs ($1,000.) in lawful money of the United States of America, on the first day of January, 1927, or on such earlier day as the same may become due and payable in accordance with the provisions hereof, and to pay interest annually on said sum in like lawful money, at the office of the Company in the City of New York, at the rate of Six Per Cent per annum, on the thirty-first day of January in each year, such interest to be payable only out of surplus or net profits as hereinafter provided. It is understood and agreed that the payment of the principal of this debenture and of the other debentures of this series shall always be postponed to the prior payment in full of all other lawful debts and obligations of the Company.
    This debenture is one of a series of fifty debentures, numbered consecutively from 1 to 50, both inclusive, all bearing even date and each for the principal sum of One Thousand Dollars ($1,000.)
    Each year’s interest on the debentures of this series shall be payable upon such debentures, then outstanding, pari passu out of the net profits arising from the business of the company for the year' ending December 31st, immediately preceding the time of payment thereof, and such interest shall be cumulative from the date hereof, that is to say, if such interest shall not be earned and paid in respect of any yearly period as aforesaid it shall be payable out of subsequent net profits or out of any surplus available therefor. Such interest shall be payable in priority to the payment of any dividends on the capital stock of the Company.
    This debenture shall immediately become due and payable if a .judgment or decree is rendered for the dissolution of the Company by any Court of competent jurisdiction, or if the Company is adjudicated a bankrupt or insolvent, or if an effective resolution is adopted by the stockholders for the voluntary dissolution or winding up of the Company.
    Tins debenture may be redeemed by the Company at any time after five years from the date hereof at the price of One thousand and sixty dollars, and interest accumulated and unpaid hereon, upon thirty days’ notice in writing sent by mail or delivered personally to the registered holder hereof, or upon such shorter notice as shall be accepted by such holder.
    A register of the debentures will be kept at the Company's office wherein there will be entered the names and addresses of the registered holders and particulars of the debentures held by them, respectively.
    Every transfer of this debenture shall be in writing, signed by the registered holder, or by his legal representative. Such instrument of transfer accompanied by this debenture shall be delivered at the Company’s principal office, and such transfer shall be duly acknowledged, if required by the Company, and thereupon the transfer shall be registered and a note of such registration shall be endorsed hereon. The Company shall be entitled to retain the instrument of transfer. * * *
    The petitioner in its income and profits-tax return claimed the par value of the debentures as a part of its invested capital, and also took as a deduction $8,000 as interest paid on the debentures, though it now admits that if its contention as to invested capital prevails, the deduction for interest was erroneous.
   OPINION.

Littleton :

The question of whether or not instruments somewhat similar in character to the one here in question should be considered as capital stock or evidence of indebtedness has been before the Board on several occasions and in each instance it has been emphasized that the final determination must be made upon a legal interpretation of the meaning of the entire instrument and not upon the name by which it was denominated. Fletcher’s Cyclopedia on Corporations, vol. 6, p. 6020, lays down the principle that:

Whether or not the holder of a particular instrument or certificate is to be regarded as a stockholder or a creditor is a question of interpretation, and depends upon the terms of his contract as evidenced by such instrument and the corporate charter and the statutes of the state.

We said, however, in Appeal of Kentucky River Coal Corporation. 3 B. T. A. 644, that the name given to an instrument by the parties “ is not a thing to be ignored, for it is not lightly to be assumed that parties have given an erroneous name to their transaction.”

As distinguished from other apparently similar cases considered by the Board, this instrument is entitled a twenty-year 6 per cent debenture and not debenture stock or debenture bonds, as was true in other cases. Bouvier’s Law Dictionary, p. 783, defines the term “ debenture ” as an instrument in writing, generally under seal, creating a definite charge on a definite or indefinite fund or subject of property, payable to a given person, etc., and usually constituting one of a series of similar instruments. Such a definition would define, ordinarily, an evidence of indebtedness, and not stock which is not a definite charge on property. See Appeal of A. H. Stange Co., 1 B. T. A. 58.

We said in Arthur R. Jones Syndicate v. Commissioner, 5 B. T. A. 853, that:

The fundamental characteristic of a share of stock is that the holder is a coowner of the business and not a creditor.

That the parties themselves considered this instrument as placing a definite charge on the property is indicated by its fourth paragraph:

This debenture shall immediately become due and payable if a judgment or decree is rendered for the dissolution of the Company by any Court of competent jurisdiction, or if the Company is adjudicated a bankrupt or insolvent, or if an effective resolution is adopted by the stockholders for the voluntary dissolution or winding up of the Company.

What the owner of a debenture would receive under such circumstances would be confined to a return of the principal and interest and would, in no sense, allow him to share in additional assets as a coowner of the business.

Further, we find, in the instrument, such phrases as the petitioner “ is indebted and * * * promises to pay * * * as the same may become due and payable * * * and to pay interest annually * * * and such interest to be payable only out of surplus or net profits * * All of the above expressions are used, generally, in connection with debts owing, rather than with capital stock, except as to the payment of the interest “ out of surplus or net profits.”

As possibly indicating that the instrument might have been considered by the parties as some specie of stock we find the proviso: “ It Is UNDERSTOOD and Agreed that the payment of the principal of this debenture and of other debentures of this series shall always be postponed to the prior payment in full of all other lawful debts and obligations of the Company.” But we found in Appeal of I. Unterberg & Co. 2 B. T. A. 274, that “ The fact that the principal amount is subordinated to the claims of general business creditors is not sufficient to warrant this Board’s determination that it is stock for the purpose of invested capital, when for all other purposes so far as we are advised the parties have treated it as a note.” Further, in the same opinion we say that “They were an obligation of the corporation, enforcible in all respects except that the general creditors might insist that assets should not be impaired below the amount of their claims.” In other words the holders of these debentures would seem to have enforcible evidences of indebtedness, ahead of which would come the claims of general creditors, but which must be satisfied before any distribution of assets is made to stockholders in liquidation.

Nor do we think the fact that the interest was to be paid out of “ surplus or net profits ” would be controlling. We are concerned here with the principal itself, which is an enforcible lien against the assets of the corporation and which is subject to repayment in twenty years. To the extent of the interest to be received, the holders of these debentures were subject to the hazards of the business in a similar manner to stockholders, since no provision is made for the payment of unpaid interest from the assets of the company on final liquidation and, therefore, would be paid only to the extent of accumulated earnings, but the interest even then would rank ahead of dividends on common stock.

We consider it significant that the instrument speaks of the principal as becoming “ due and payable ” on a particular date, though subject to payment at a prior date. Such phraseology is more consistent with the idea of a loan than of capital stock. Debts become “ due and payable ” whereas we ordinarily think of stock as being “ retired,” when any provision is made for payment prior to dissolution of the corporation.

While the petitioner now admits its error, the fact can not be overlooked that the petitioner deducted from gross income interest on these debentures when it filed its income and profits-tax return, though claiming the par value of them in invested capital. This would indicate that it considered the interest as a proper charge against its business operations.

Looking to the terms and legal effect of the instrument and taking into consideration the testimony offered, we are of opinion that this was a loan and not a capital stock investment. We must hold, therefore, that the action of the Commissioner in excluding these debentures from invested capital was correct.

In rendering this opinion, we are not unmindful of our decisions in the Appeal of Kentucky River Coal Corporation, 3 B. T. A. 644, where we held that certain debenture stock was not an obligation of a taxpayer for money borrowed; the Appeal of Leasehold Realty Co., 3 B. T. A. 1129, where we held that certain preferred stock did not constitute evidence of indebtedness; and in Arthur R. Jones Syndicate, 5 B. T. A. 853, where we held that the amount paid for the use of money for which first preferred shares were issued, represented the payment of a dividend and not the payment of interest on debtedness, but for the reasons given we think these cases are distinguishable from this proceeding.

The other question is the value of the good will for which $65,000 common stock was issued. Since this stock was issued specifically for good will and a specific amount of common stock and debentures was given for tangibles, we are not concerned with a situation where a mixed aggregate of tangibles and intangibles were acquired for stock and bonds sucb as we had in the Appeal of St. Louis Screw Co., 2 B. T. A. 649. Our only proposition is to determine whether the good will which was acquired for $65,000 common stock had a value which can be recognized for invested capital purposes.

No evidence was presented either as to the earnings of the partnership prior to the organization of the corporation or as to the earnings of the corporation subsequent thereto. The only evidence consists of two sales of stock for cash about the date of issue, one of 140 shares at $50 (par $100) and another of 20 shares at the same price. The sale of 140 shares was made to a former partner who apparently was familiar with the past history of the business and present prospects of the corporation. The sales were representative in amount, constituting 17 per cent of the total stock issued. The purchaser of this stock may have been looking to the return of tangibles without, regard to a going-concern value.

We are of the opinion that the above evidence standing alone is not sufficient to establish a value for the good will. The valuation of good will is a question of fact and must be determined on the evidence in the record. Appeal of Schulz Baking Co., 3 B. T. A. 470.

In the foregoing case we recognized the selling price of stock immediately after incorporation in determining the value of the property, including good will acquired for stock, but the stock sales were not the only evidence. We had in addition evidence showing that the corporation acquired a thriving and growing business, that the former proprietor had built up a reputation in the town where the plant was located and that the number of customers was both large and constant. No such evidence is presented in this case. We have no evidence as to the past history or future prospects of the company; evidence which we consider essential in establishing a value for good will.

In the Appeal of Pevely Dairy Co., 1 B. T. A. 385, the Board said:

Good will is not something which can be delivered like merchandise, but as recognized in all the definitions, it is the probability or expectation of retaining the old customers and that probability or expectation is all a purchaser can acquire.

We must, therefore, hold that the petitioner has failed to establish any value for good will, and that the determination as made by the Commissioner was correct.

Judgment will Toe entered for the respondent.