author: Murdock:

text:
    Amtorg Trading Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31749, 31750.
    Promulgated January 22, 1932.

      Gourtland Kelsey, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner first contends that the items in question are deductible as “taxes.” The word “tax” is generally understood in this country to mean an involuntary charge imposed by legislative authority for public purposes. Tevander v. Ruysdael, 299 Fed. 746; Loan Association v. Topeka, 20 Wall. 655, 664; Strand v. Martin, 30 N. D. 165; 152 N. W. 280; Voelkel v. City of Cincinnati, 112 Ohio 374; 147 N. E. 754. See other cases cited in Words and Phrases under “ Tax.” It is exclusively of statutory origin. Bente v. Bugbee, 103 N. J. 608; 137 Atl. 552. We look, therefore, for some law imposing taxes in the amounts of the items in controversy. The laws of a foreign country must be proved. This rule is certainly no less true of the laws of a government which has not been recognized by the Government of the United States. The evidence relating to this subject is the statement in the stipulation that:

The laws of the Union of Soviet Socialist Republics purported to confer on the Chief Concessions Committee of the Council of Peoples Commissars and/or the Peoples Commissariat of Foreign Trade, authority over matters relating to foreign trade, including preliminary approval or qualification of parties desiring to institute trade relations, and the making of license agreements prescribing the terms and conditions under which the particular trade relations desired might be carried on. [Italics ours.]

In addition we have the decree and the agreement. But this is not enough to enable us to find that the items in question were taxes imposed by any government in Russia. Furthermore, some of the amounts were paid or accrued under an “ agreement ” between the petitioner and the Peoples Commissariat of Foreign Trade of the Union of Soviet Socialist Republics. Tax burdens and contractual liabilities are very different things. A tax is compulsory, an exaction of sovereignty rather than something derived from an agreement, although the amount of tax is sometimes fixed by agreement. People ex rel Nassau Electric Ry. Co. v. Grout, 103 N. Y. S. 975; 119 App. Div. 130; Columbia Gas Light Co. v. Mobley, 139 S. C. 107; 137 S. E. 211. The facts in evidence fail to sustain the contention of the petitioner that the items in question are taxes deductible under section 234 (a) (3).

The petitioner contends, in the alternative, that it is entitled to a deduction for each period under section 234 (a) (1), which provides that in computing the net income subject to the tax there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. It has been stipulated that the books of the Products Exchange Corporation and of the petitioner were kept on an accrual basis. Therefore, the amount which the petitioner might be entitled to deduct under this provision is the amount of expense incurred in each period rather than the amount paid. As we understand paragraph “ eighth ” of the stipulation, the correct amount of the liability incurred under the decree and agreement for the respective periods was as follows:

January 1 to April 30, 1924_ $725. 75
May 1, 1924 to Dec. 31, 1924_ 40,065.85
Calendar year 1925_ 224,106.37

For the first period the Commissioner disallowed a deduction of $725.75 described as Russian taxes, and added the amount to income, with the explanation that the evidence submitted to him indicated that the item was a distribution of profits. For the next period a deduction of $29,065.85, described as Russian Government taxes, was disallowed and added to income, with the same explanation as was given for the previous period. For the calendar year 1925 a deduction of $224,106.37 described as accrued license tax, Russian Government, and also one of $11,000 described as 1924 Russian Government tax adjustment, were disallowed and added to income with the same explanation as for 1924. The errors assigned by the petitioner are that the Commissioner erred in disallowing the deductions claimed. The respondent concedes that the petitioner and its predecessor were carrying on a business and that the accrued amounts were “ incurred ” during the taxable years in question, but he contends that the amounts incurred in each year were not ordinary and necessary expenses.

There is no direct statement in the stipulation that an agreement such as was entered into was a prerequisite to the conduct of the petitioner’s business in Russia, nor is there a direct statement that such an agreement was the ordinary thing required of those engaged in such business. Apparently, the petitioner feels that the necessary inference from the facts stipulated is that it had to enter into this agreement and agree to pay at least this amount or stay out of Russia. The proof of important facts should not be left to inference. Where parties having divergent interests deal at arm’s length, an inference may arise that each did his best to secure a fair bargain. But that is not the situation before us. Here the- stipulation shows, that the Union of Soviet Socialist Republics was indirectly the principal owner of the petitioner, and perhaps it made little difference, either to the corporation or to the U. S. S. R., what portion of the profits went directly under the agreement to the U. S. S. R. Thus, despite the fact of the agreement, we are not satisfied of the necessity for it. Other facts demonstrate the uncertainty of the proof as to whether or not the expenditures were ordinary and necessary. For instance, the agreement is dated November 28, 1924, but seems to have been retroactive to July 1, 1924, whereas the accruals by the petitioner are for a period beginning May 1, 1924. Thus, the petitioner seems to have carried on a considerable portion of its 1924 trade in Russia before it entered into the contract on November 28, 1924. Another example is the presence in the stipulation of the words “ purported to ” and “and/or.” Responsibility for a sufficiently clear and adequate stipulation of the facts rests upon the moving party, in this case the petitioner. In view of the uncertainty of the circumstances under which the contract was entered into, we are unable to hold that the amounts claimed were ordinary and necessary expenses deductible under section 234 (a) (1).

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Swayne Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30825.
    Promulgated January 22, 1932.

      Chalmers G. Graham, Esq., for the petitioner.

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

Van Fossan :

The petitioner contends that there should be included in consolidated invested capital for the year 1920 the amount by which the indebtedness of the Truckee Lumber Company and the Butte and Plumas Railway Company to the Southern Pacific Company was reduced as a result of the contract between the petitioner, the Butte and Plumas Railway Company and the Southern Pacific Company. The petitioner refers to the amount of the reduction as $275,000 and states in its brief that this sum was necessarily entered as surplus on the books of account of the Truckee Company and the Butte and Plumas Railway Company and therefore must be considered as additional invested capital. No proof of such an entry was offered. The figure quoted is evidently in error — the difference between the loan and interest and the settlement figure being approximately $175,000.

Under the provisions of section 326 of the Revenue Act of 1918, which are applicable to this proceeding, “ invested capital ” means cash or property at its actual cash value, bona fide paid in for stock or shares, and also certain paid-in or earned surplus, not including surplus and undivided profits earned during the taxable year. The respondent computed the consolidated invested capital for the taxable years in the sum of $499,962.43, as stated in Bureau letter dated January 22,1927. This amount is practically identical with the face value of petitioner’s outstanding capital stock at the end of the year 1919, as shown in its income and profits-tax return for 1920, plus its prorated cash receipts from additional capital stock sold during 1919.

With the exception of the tax return and the Bureau letters, very little evidence of the facts revealed by the accounts of the several companies was offered by petitioner. A tax return showing certain figures is not proof of the correctness or even the existence of records. None of the books of account of either of three corporations, the operations of which are involved in this proceeding, were introduced in evidence. No witness testified as to the contents of such books. There is no evidence from which we can determine whether prior to January 1,1920, the petitioner and its affiliated corporations had an earned surplus or an operating deficit. It can not be determined as a fact whether the amount of the reduction in indebtedness hereinbefore referred to had ever been entered in the books of account as surplus, nor can it be determined whether, if such amount was so entered, it had been diminished or altogether extinguished by a deficit in the operating account. Moreover, since it appears affirmatively in the evidence that at the date of the acquisition by petitioner of the capital stock of the Truckee Lumber Company the property of the Butte and Plumas Railway Company had not been used for several years and was in bad condition, it is fairly inferable that between December, 1916, the year of petitioner’s acquisition of the capital stock of the Truckee Lumber Company and the end of 1919 there had been operating losses of a considerable amount.

The fact that petitioner filed a tax return indicating certain invested capital proves little or nothing with respect to the issue before us. Respondent has allowed certain invested capital. The burden was on petitioner to prove the error, if any, in this allowance. It must submit all facts necessary to enable us to reach a conclusion on the issue joined. This it has failed to do, although attention was specifically directed to that fact at the hearing and, on suggestion of the respondent after petitioner had concluded its case, opportunity was afforded to adduce additional evidence. Proof of essential facts can not be left to speculation and conjecture. Being unable to determine, because of insufficient evidence, whether or not the amount of petitioner’s consolidated invested capital was in excess of the amount computed by the respondent, we hold against petitioner.

Judgment will be entered for ihe respondent.


author: MttRdock:

text:
    Detroit Trust Company, Jennie E. Crowley and Daniel Crowley, Executors of the Will of Joseph J. Crowley, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35472.
    Promulgated January 22, 1932.

      Raymond H. Berry, Esq., and G. F. Stanton, Esq., for the petitioner.

      Harold Allen, Esq., and L. H. RusKbrooh, Esq., for the respondent.
   OPINION.

MttRdock:

There is but one thing to be determined in this case, namely, the value of the 11,010 shares of Crowley, Milner & Company common stock on November 1, 1925, the date of the owner’s death. His executors returned this stock for Federal estate-tax purposes at $200 per share. The Commissioner increased this value to $275 per share. At the close of the hearing the Commissioner amended his pleadings to claim that the stock was worth $310 per share, and the petitioner then by amendment, claimed that the value was not in excess of $180 per share. We can see no reasonable basis for the value of $275 placed on the stock by the Commissioner and the claim for a value of $310 is not supported by the evidence.

Evidence was introduced of many facts and circumstances which are too remote from the date of death to have any real probative value. In addition, the record contains the testimony of two witnesses who gave opinions as to the value of the stock. One was Jones and the other an investment banker of Detroit. The latter reached his conclusion principally from a consideration of data furnished him shortly before the hearing. He did his best to value the stock and stated that in his opinion it was worth $190 per share on November 1, 1925. We feel that an extended discussion of the strength and weakness of various parts of his testimony is unnecessary because there is better evidence of value in the record than the opinion of this expert witness. Cf. Andrews v. Commissioner, 38 Fed. (2d) 55.

Jones placed the value of the stock at the decedent’s death at book value less Christmas earnings. But what Jones did is far more convincing than what Jones said. Two months and twenty days after Crowley’s death, Jones agreed to buy 2,450 shares of stock from Emery. This sale was to date back for its effect to some date in 1924 which is not disclosed by the record. Jones was to pay interest and receive all dividends from that date. The interest just about offsets the dividend so far as we can see. Here was a meeting of the minds of a purchaser and a seller, both familiar with the facts, and neither, so far as we know, forced to buy or sell. The situation had not materially changed from the date of the decedent’s death except that the corporation had conducted its business through a Christmas season. We do not know whether the results of this Christmas season were better or worse than might have been anticipated on November 1, 1925. It seems fair to assume that they were neither. This agreement was reached with full knowledge of the pending suit. It involved a minority interest. The price agreed upon was $250 per share. The last sale preceding the decedent’s death was that made 'by the Milner estate to Emery on October 25, 1924. This was about one year before the decedent’s death. The price agreed upon was $250 per share.

We are convinced on the record before us that the value of the decedent’s stock at the date of his death was $250 per share. In reaching this conclusion we have considered not only the evidence discussed above, but all of the other evidence, including that relating to the location of the store, its history, prospects, dividends, earnings and financial condition, the nature of the business in which it was engaged, and the pending litigation.

Judgment will be entered under Rule SO.


author: SteRNhagen :

text:
    Consolidated Coke Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16353.
    Promulgated January 25, 1932.

      Thomcts Watson, Esq., and D. G. Sisterson, O. P. A., for the petitioner.

      Elden McFarland, Esq., and Arthur Glark, Esq., for the respondent.
   OPINION.

SteRNhagen :

The petitioner, having in 1914 acquired the mining properties in question, computed its invested capital for 1917 and 1918 under the war and excess-profits tax by including the full stipulated value of such properties at the date acquired. The statutory authority which it cites is Revenue Act of 1917, section 207 (a), and Revenue Act of 1918, section 326 (a), which provide that invested capital includes paid-in surplus, and that paid-in surplus may include the clear and substantial excess value of tangible property over the par value of shares for which it is issued. The respondent’s determination rests on the view that the properties were not acquired by petitioner for stock or shares and were not paid-in surplus, but were acquired by purchase for the assumption of the Connellsville Company’s liabilities.

If the petitioner purchased the properties, the cost is the measure of its investment, and it may not include in invested capital more than such cost irrespective of how much the value of the properties may exceed it. La Belle Iron Works v. United States, 256 U. S. 377, 389; Hotel Wisconsin Realty Co. v. Commissioner, 47 Fed. (2d) 842, affirming 16 B. T. A. 334; Keystone Wood Products Co., 19 B. T. A. 1116, 1122; Klamer-Goebel Furniture Co., 11 B. T. A. 1322, 1324. On the other hand, if the properties were paid in to petitioner expressly for its shares, the actual value of such properties when so paid in, even though exceeding the par value of the shares issued therefor, would measure the investment and thus be within the intendment and letter of the statute defining invested capital. Nansemond Brick Corporation, 8 B. T. A. 1117, 1119; Charles Rubens & Co., 6 B. T. A. 626; Henderson Overland Co., 4 B. T. A. 1088; Steinbach Co., 3 B. T. A. 348; Sphar Brick Co., 2 B. T. A. 946.

We may first clear away the suggestion that there was a paid-in surplus by way of gift from shareholders. Nothing in the evidence supports it. The plan of refinancing was based entirely on business necessity with all interests carefully guarded. What Whyel, Semans and Whyel gave up was paid for. They agreed with the Connells-ville Company to buy the assets for an amount equal to its liabilities. In turn they assigned their contract to petitioner for the express consideration of the assumption of their obligations. There is in this neither direct evidence of a gift nor motive or other circumstance from which a gift could be inferred.

Both parties suggest, although with frank lack of conviction, the possibility that, because this was essentially merely an arrangement for new financing, it might be treated as a continuing ownership and that the earlier and later corporations might be regarded as identical. We reject this because the record clearly establishes the legal distinction between the two corporations and the contracts by which the transfer was accomplished.

We are of opinion that the contract was not acquired by petitioner under circumstances which indicate a paid-in surplus. It was, as shown by the express terms of the assignment of September 24 and by the surrounding circumstances, acquired, not as a gift or for shares of stock, but by purchase for the fixed amount of the liabilities assumed. All of the shares of stock were later subscribed for by various individuals for cash at par and were in due time paid for in cash at par. Whyel, Semans and Whyel, who were by no means the sole shareholders, paid for their shares in cash like all other subscribers and received only the number of shares to which their cash subscriptions entitled them. At that time, the petitioner had already become the owner of the contract rights under the option, and it could not have been deprived thereof nor’ compelled to issue shares therefor. When Whyel, Semans and Whyel assigned their contract on September 24 they were not making a contribution or investment as shareholders to their corporation, but, as individuals, were thereby disposing of their contractual obligations as well as their rights. The corporation was at the same time investing no more than its obligation to assume the liabilities of the Connells-ville Company. As said in Amalgamated Products Co., 12 B. T. A. 659, 666, “To hold that any contract made by a corporation through the efforts of a stockholder should be treated as paid in for capital stock would be a novel and startling proposition.”

In holding as we do that the contract does not represent paid-in surplus, we have found it essential only to say that the contract and circumstances in which it was acquired in September, 1914, established that it was not paid in for stock or shares or by way of gift from a shareholder. The statement appearing in the alleged copy of the minutes of October 12, 1914, that the assignment be accepted in part consideration for stock might be treated as a mere resolution which, as shown by the evidence, was not carried out. See A. Friederich & Sons Co., 2 B. T. A. 1318, 1322. But the circumstances which developed at the hearing in respect of this exhibit require comment. The respondent, not questioning the genuineness of the copy, at first stipulated it to be correct and made no objection to its introduction in evidence. He later moved to strike the exhibit because it was not the best evidence, and because there was no foundation for the use of secondary evidence. He then introduced proof to show that it was inconsistent with the sworn statements and conduct of petitioner’s officers and representatives for many years, both in connection with official statements to the Commonwealth of Pennsylvania and to the bureau of internal revenue. Petitioner’s attorney then voluntarily testified that he had himself, together with the now deceased president of petitioner, in 1927, after this proceeding had been instituted, caused the original minutes to be removed from the minute book and destroyed, and had a copy made to replace the original. His explanation for doing this was that the original minutes had become mutilated and to some extent illegible. The copy which he said he had compared with the original carried on its face no statement that it was a copy and no lack of legibility, although it was plainly in different type from that of other minutes in the book.

Under such circumstances we can have no assurance of what the original minutes contain, and the secondary evidence should be disregarded. To permit a party to litigation to deliberately destroy evidence and then in his own behalf introduce a copy made by himself and his attorney would obviously subvert the basic principles of the best evidence rule and promote chicanery. If the original minutes were partially mutilated and their contents illegible, their effect was something to be determined by the Board from an examination of the original evidence; and petitioner had no right to rewrite the minutes in an attempt to make clear the portions which were doubtful.

We have been able to find no case like this in the books, but the unmistakable implications support the disregard of secondary evidence introduced by a party in his own behalf after he has voluntarily and deliberately destroyed the best evidence during the pendency of the controversy. The discretion of the court to receive such evidence when the original has been involuntarily or inadvertently destroyed if satisfied of its reliability can not reach the present situation.

In Riggs v. Tayloe, 9 Wheat. 487, the Supreme Court said:

It will be admitted that where a writing has been voluntarily destroyed, with an intent to produce a wrong or injury to the opposite party, or for fraudulent purposes, or to create an excuse for its non-production, in such cases, the secondary proof ought not to be received; but in cases where the destruction or loss (although voluntary) happens through mistake or accident, the party can not be charged with default.

See also 9 Am. and Eng. Ann. Cases, page 4841 note; Wigmore on Evidence (2d Ed.) §1198; Jones on Evidence (3d Ed.) §217.

We hold that respondent correctly excluded from petitioner’s invested capital for 1917 or 1918 any amount in respect of the contract to purchase the Connellsville properties and any amount in respect of such properties themselves in excess of the purchase price thereof paid pursuant to this contract.

It follows also from what has been said that, since the depreciable and depletable properties were acquired by purchase after March 1, 1913, the basis for annual deductions in 1917 and 1918 (and 1919 for net loss purposes in 1918) for depreciation and depletion is the cost represented by the amount of liabilities assumed, with proper adjustments for subsequent depreciation, depletion and new acquisitions.

There is in the record, particularly in view of our holdings above, insufficient ground to modify the respondent’s determination of loss in 1919 to be used as a net loss in computing the deficiency for 1918.

Judgment will be entered imder Buie 50.


author: Lansdon-:

text:
    R. E. L. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47804.
    Promulgated January 25, 1932.

      B. B. Turner, Esg., for the petitioner.

      O. 17. SwecJeer, Esg., for the respondent.
   opinion.

Lansdon-:

The respondent asserts deficiencies in income taxes for the years 1925, 1926, 1927 and 1928, in the respective amounts of $4.08, $51.93, $125.25 and $82.88. Petitioner claims that certain income which he received in the taxable years as compensation for services rendered as chief special counsel under the back-tax law of the State of Arkansas is exempt from Federal taxation under the provisions of section 1211 of the Revenue Act of 1926.. In an amendment to his petition, permitted at the hearing and duly filed in writing, petitioner also asks for a deduction from his gross income for each taxable year on account of one dependent member of his family.

The petitioner is a lawyer. For a number of years he served, as a judge of the Second Judicial Circuit of Arkansas and retired from the position in 1922. The next two years thereafter he was a traveling salesman for the Thomas Law Book Company of St. Louis. Throughout the years 1925, 1926, 1927 and 1928 he resided in Little Hock, Arkansas, and was chief special counsel for the State of Arkansas under the back-tax law of that State. He was selected for this position in conformity with the following provisions of the statutes of Arkansas:

Section 10204: Proceedings. Where the Attorney General is satisfied from his own investigations or it is made to appear to him by the statement in writing of any reputable taxpayer of the State, that, in consequence of the failure from any cause to assess and levy taxes, or because of any pretended asssessment and levy of taxes upon any basis of valuation other than the true value in money of any property hereinafter mentioned, or because of any inadequate or insufficient valuation or assessment of such property, or undervaluation thereof, or from any other cause, that there are overdue and unpaid taxes owing to the State, or any county or municipal corporation, or road district, or school district, by any corporation upon any property now in this State which belonged to any corporation at the time such taxes should have been properly assessed- and paid, it shall become his duty to at once institute a suit or suits in chancery in the name of the State of Arkansas, for the collection of the same, in any county in which the corporation owing such taxes may be found, or in any county in which any part of such property as may be found, or in any county in which any part of such property as may have escaped the payment in whole or in part of the taxes as aforesaid may be situated, in which suit or suits the corporation owing such taxes or any corporation claiming an interest in any such property as may have escaped taxation as aforesaid, shall be made a party defendant, and the Governor is authorized to employ any attorneys that may be necessary to assist the Attorney General in such suits; provided, that this act shall be construed as retrospective as well as prospective in operation. Act March 12, 1913, p. 724.
Section 10205: Compensation of Special Counsel. In all cases where the Governor has appointed, or may hereafter appoint, special counsel under Section 10204 to assist the Attorney General in the collection of overdue taxes from corporations, such special counsel shall receive a reasonable compensation for his services, dependent upon recovery, and to be fixed by the chancery court trying said cause; but in no case shall such counsel receive more than twenty per cent of the amount recovered. Act May 30, 1911, p. 324.

As chief special counsel under the back-tax law of Arkansas the petitioner worked in connection with the attorney general. He had an office in the Statehouse at Little Bock and was permitted to use the clerical and stenographic assistants in the office of the attorney general without charge. His duties were to investigate corporations and individuals as to the sufficiency of taxes paid, to report the result of such investigations to the attorney general and to prosecute in the State courts for the collection of taxes not properly assessed and collected. He employed local attorneys as special assistants in the various counties of the State. Such special counsel, under the direction of the petitioner, investigated local taxpayers and, where such action was necessary, sued in tlie courts for the collection of taxes wrongfully assessed and withheld. For the successful prosecution of such suits the courts were authorized to allow a commission not in excess of 25 per cent of the amounts collected, but in all cases during the four years in which the petitioner was engaged in the work of back-tax collections the commission allowed was 20 per cent. If, after investigation, any back taxes were collected without suit the commission on such collection was fixed by the attorney general. From the commissions so determined the fees of local special counsel and other costs, including all travel expenses, were deducted and the remainder constituted the compensation of the petitioner and the sums of such remainders for each of the four taxable years makes up the income here involved.

Petitioner had no written contract with the attorney general of Arkansas or with the State. His appointment had no fixed term. He took no oath of ofiice. He made reports regularly to the attorney general and his accounts were subject to audit at all times. Throughout the taxable years he devoted his entire time to his work under the back-tax law of Arkansas, engaged in no other law practice, and had no other professional engagements or associations.

In our opinion the facts here bring this proceeding within the principles of our decision in W. J. Howard, 10 B. T. A. 62, and David A. Reed, 13 B. T. A. 513. Howard was a lawyer engaged by certain Texas cities to practice his profession in their behalf. Reed was engaged by the Commonwealth of Pennsylvania to conduct a lawsuit to collect State taxes alleged to be due from the Frick estate. He had only one case, while the petitioner has as many as he and his local attorneys throughout the State could find. Each was engaged in the collection of taxes due the State. This Board decided the Howard and Reed cases adversely to the petitioners. Each was reversed by the appropriate circuit court of appeals and such decisions were, in their turn, reversed by the Supreme Court without opinion. Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699. On these issues the determination of the respondent is affirmed. See also, Metcalf v. Mitchell, 289 U. S. 514; Mesce v. United States, 64 Ct. Cls. 481; J. F. Roberts, 13 B. T. A. 438; affd., 44 Fed. (2d) 168.

At the hearing the petition was amended to include a claim for an additional deduction from gross income in each taxable year on account of a dependent member of the petitioner’s family. The petitioner testified that during the years in question he supported a mentally defective daughter, who was then and always will be unable to support herself. The petitioner has proved that he supported a dependent during the years in question. The respondent, in his amended answer, admits that no deduction on account of such dependent was taken in the petitioner’s income-tax return for any of the years here under review. On this issue the petitioner prevails.

Decision will Toe entered’ under Rule BO.


author: Lansdon :

text:
    J. Gordon Hill, Petitioner, v. Commissioner of Internal Revenue, Respondent. Neil E. Larkin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank A. MacHugh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36537, 36597, 39493.
    Promulgated January 25, 1932.

      N. D. Larldn, Esq., and Fred Brown, Esq., for the petitioners.

      John D. Riley, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent asserts deficiencies in income tax for the year 1923 in the respective amounts of $230.69, $188.58 and $2,268.10. The only issue is whether certain additions to the reserve for bad accounts maintained by a partnership of which petitioners were members are ratably deductible from the income of each of the several petitioners in the taxable year.

In the year 1923 all the petitioners were members of the partnership of MacHugh, Hill and Company, accountants and auditors, San Francisco, California. In determining the net income of the partnership, distributable shares of which were taxable to the petitioners in proportion to their several interests therein, a deduction was claimed on account of additions to a reserve for bad debts.

The partnership in the taxable year, as well as prior and subsequent years thereto, maintained a reserve on its books for bad debts and determined its income by taking certain deductions therefrom in each year which it alleges were in the nature of net additions to such reserve. It has never obtained permission from the Commissioner to change the method of charging off debts ascertained to be worthless in the taxable year. The additions to the reserve were not based on a table of experience and were not a certain definite percentage of bills receivable. It was the practice of the partnership to charge the reserve for bad debts with that part of the receivables that it deemed to be uncollectible. At December 31, 1923, the total of receivables was $24,953.21 and the total reserve for-bad debts was $16,459.58. During the same year it collected $14,889.62, which it called progress payments. At the close of the year it examined its receivables and charged the amount of $13,397.04 tq profit and loss as debts ascertained to be worthless in that year. This amount was determined by an examination of each account receivable and represented the judgment of the partnership on the accounts that were then definitely uncollectible. This amount does not appear to be made up by adding worthless accounts together, but apparently contains parts of debts that were not wholly hopeless at the close of the taxable year.

Petitioners’ counsel conceded at the hearing that its method of handling bad debts had been disapproved by this Board in J. Gordon Hill et al., 11 B. T. A. 910, in which similar claims were made and disallowed. It is now contended that a different method was employed in 1923, but the only dissimilarity seems to be that the partnership no longer included the amount of disputed bills in its total charge to reserves for bad debts. The law authorized taxpayers to use either of two bases in determining deductions from taxable income on account of worthless debts. If the reserve basis is used, a reasonable percentage of receivables resulting from experience in prior years may be charged to a reserve and deducted from income in each taxable year. If the charge-off method is used, the amounts chargeable “ against profit and loss must represent debts actually or in part determined to be worthless in the taxable years.” This partnership, of which these petitioners were members, seems to have endeavored to combine the two systems. It is argued that deductions here claimed, while carried to some sort of a reserve, actually represent specific debts ascertained to be worthless and charged to profit and loss in the taxable year. The method used is so much at variance with the law and the respondent’s regulations that we are unable to approve the results of its application to the receivables of the partnership. In the Hill proceedings, supra, the same partnership was involved and the claims there were based on facts, allegations and practice similar to those established herein, but were for different years. Our decision was adverse to the petitioners. No evidence introduced in the present proceeding is sufficient' to require us to reverse our decision therein. On this issue the determination of the respondent is approved.

Decision will be entered for the respondent.


author: Lansdon:

text:
    Charles S. McCain, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31599.
    Promulgated January 25, 1932.

      W. W. Findley, Esq., for the petitioner.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has asserted a deficiency in income tax for the year 1924 in the amount of $9,130.09. The only issue is whether certain losses sustained in 1922 and 1923 may be applied to the computation of the petitioner’s tax liability in 1924 under the provisions of section 204 (a) and (b) of the Revenue Act of 1921 and article 1601 of Regulations 62. The parties have filed a stipulation of facts, which is hereby incorporated in this report by reference. The petitioner also adduced certain oral and documentary evidence. At the hearing respondent, through his counsel, admitted that the petitioner sustained losses in 1922 and 1923 in the respective amounts of $49,842.12 and $5,566.05 and that such losses had been allowed as deductions from gross income in such years.

The petitioner is an individual now residing in the city of New York. In 1924 and for several years prior thereto he was the active president of the Bankers Trust Company of Little Rock, Arkansas. In the years 1922 and 1923 he received the respective amounts of $16,130 and $16,306.88 as salary for services rendered to such bank and an affiliated concern.

In 1916 the petitioner became an owner of the common stock of the Charles F. Penzel Grocer Company, hereinafter called the Grocer Company, and later, but prior to December 31, 1923, he acquired certain shares of the preferred stock thereof. On January 21, 1922, the stockholders of such company authorized the sale of its merchandise and real estate and on that date the liquidation of its business was begun. As a result of such liquidation the petitioner sustained losses on account of his holdings of common and preferred stock in 1922 and 1923 in the respective amounts of $37,-593.75 and $1,246.05. The Commissioner allowed such losses as deductions from petitioner’s income in such respective years.

The petitioner was a director of the Grocer Company and for several years was chairman of its executive committee. He was not present at tbe bearing, but tbe secretary of tbe Banters Trust Company, wbo bad charge of the accounting of such company during the period of liquidation, testified that for several years the petitioner devoted about one-fifth of his time to the affairs of that company.

The only question before the Board is whether the petitioner sustained the losses above set out in 1922 and 1923 in a business “ regularly carried on by the taxpayer.” In the petition it is alleged that petitioner was regularly engaged in buying and selling stocks during the years 1922 and 1923 and that the losses here in controversy were sustained in connection with such business. This contention is not supported by the record, which discloses only the purchase of the common and preferred stock of the Grocer Company and no sales thereof. It has been held that an isolated transaction in stocks is not sufficient to entitle a taxpayer to the benefit of the net loss provision of the taxing statutes. Rogers v. United States, 41 Fed. (2d) 865; Anderson v. United States, 48 Fed. (2d) 201; and J. J. Harrington, 1 B. T. A. 11.

At the hearing and in his brief counsel for taxpayer appears to have abandoned his contention that the losses in question were sustained in the business of buying and selling securities, and he now argues that during the years under review the petitioner by reason of his connection with the Grocer Company was regularly engaged in that business. There is no basis for this contention. It is true, of course, that a man may be regularly engaged in more than one business. Oscar K. Eysenbach, 10 B. T. A. 716; E. M. Elliott, 15 B. T. A. 494; T. I. Crane, 17 B. T. A. 720. This, however, is not the situation here. The business of the Grocer Company, if any, during the years 1922, 1923, and 1924, was regularly conducted by that corporation and any losses sustained in the operation thereof were deductible from its income.

The losses sustained by the petitioner resulted from his investment in stocks. He was not engaged in the wholesale grocery business or in buying and selling securities for profit. In support of his contention the petitioner cites W. H. Ostenberg, 17 B. T. A. 738; Elmore L. Potter, 18 B. T. A. 549; Glenn M. Averill, 20 B. T. A. 1196; and E. D. Anthony, 20 B. T. A. 5. On their facts those cases are clearly distinguishable from the instant proceeding and are not. controlling here.

Decision will be entered for the respondent.


text:
    Leslie H. Fawkes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21992.
    Promulgated January 26, 1932.

      Clarence T. Lowell, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has asserted deficiencies for the years 1922 and 1923 in the respective amounts of $280.16 and $5,587.38. As his causes of action the petitioner alleges that losses which he sustained in his business in 1922 and 1923 in the respective amounts of $36,539.02 and $22,385.41 have not been allowed as deductions from gross income in such years as provided by law.

The petitioner is a resident of Minneapolis, Minnesota, where he has been engaged in selling automobiles since the year 1900. In 1920 he incorporated his business as the Fawkes Auto Company. Until about 1914 he was distributing agent for the Reo car.

In 1913 Bohn E. Fawkes, stepson or adopted son, was through college and began to work for petitioner. Shortly thereafter petitioner and his stepson decided to obtain the agency for the Oldsmobile car. As the Reo Company objected to its agents handling other cars of like price class, the new agency was acquired in the name of Bohn E. Fawkes who, thereafter, maintained a separate place of business in his own name. Petitioner and his wife personally guaranteed a line of bank credit for the new business in the amount of $200,000.

The agency established for the sale of the Oldsmobile was quite prosperous for a good many years. Bohn E. Fawkes from the first reported the income therefrom as his own and paid the income and excess-profits taxes thereon down to and including the year 1923. Some time after 1923 a tax consultant examined the books of the petitioner and the Bohn E. Fawkes business and advised that for the years 1922 and 1923 income-tax returns should be made on the theory that the petitioner was then the owner of both. The consultant •eventually abandoned the case. In 1926, apparently in conformity with the advice of the self-confessed tax expert, Bohn E. Fawkes filed amended individual income-tax returns for the years 1922 and 1923, in which, for the first time, he excluded the results of the operation of the automobile agency that was operated in his name. In each of his original returns, beginning in 1917, he deducted salary for himself from the gross income reported at the rate of $7,500 per annum. In the years 1917 to 1921, inclusive, such deduction was an element in the computation of his excess-profits tax and materially reduced his tax liability. In his original individual income-tax returns for the taxable years 1922 and 1923 the petitioner claimed no deductions on account of losses sustained by the business conducted by Bohn E. Fawkes or for bad debts on account of cash advanced to such business. He now claims that the Bohn E. Fawkes business was his property and that for the years 1922 and 1923 he is entitled to deduct the losses thereof from his gross income in the respective amounts of $36,539.02 and $22,385.41. As an alternative contention, in the event that the Board finds that he was not the owner of the Bohn E. Fawkes Agency, he claims the right to deduct the amounts in controversy as bad debts.

On May 18, 1923, the petitioner, as the plaintiff, testified in a suit in the District Court for the Fourth Judicial Circuit of Minnesota as follows:

Q. Now, Mr. Fawkes, have you any interest, pecuniary interest, in the profits of the business of Bohn E. Fawkes?
A. I have no interest in the business, never have had from the day he started in business and handled the Oldsmobile. I would be glad if they could pay somebody to prove that was the case, as I might save some income tax on rebate.

On the record herein, we are unable to sustain any of the contentions of the petitioner. The Bohn E. Fawkes business, which he now claims was his own from the date of its initiation, reported income as a separate taxable entity for ten years and settled its tax liabilities as such. The period during which every one in interest here now contends that there was no separate business covered the high-tax years incident to the great war and included the entire period in which excess and war-profits taxes were imposed. Down to the taxable years the automobile agencies conducted by Leslie H. Fawkes and Bohn E. Fawkes were both prosperous and it was greatly to their advantage to report their respective incomes separately and thereby get the benefit of lower rates on the divided income. Likewise, it would be very helpful to the petitioner if the separate entities of the two concerns could be ignored in 1922 and 1923, since such procedure would result in substantial refunds to him for those years. It is true, of course, that if the petitioner should prevail as to his main contention his tax liabilities for the years prior to 1922 would be increased, but to him this is not material. It is now impossible to go back to the war and excess-profits-tax years and merge the two separately reported incomes and determine tax liability on the basis now claimed for 1922 and 1923, since the statute of limitations has tolled all tax liabilities of both father and son for all such years.

Taxpayers should not be barred from correcting any mistakes in their returns upon sound proof of the basis of their claims, but the administration of the taxing statutes requires a prompt adjudication of such matters. In the instant proceeding, however, more than 10 years elapsed before the alleged mistake was discovered and during all that time the petitioner profited from his decision that the two automobile agencies were separate business concerns. We see no reason now for questioning the decision of the petitioner made when the Bohn E. Fawkes business filed its first return as a taxable entity. In our opinion no mistake was made when separate returns were filed and, therefore, there is no error to be corrected. It is apparent that this petitioner was nudged into this proceeding by a tax consultant who hoped to share in resulting refunds, but later abandoned the case. To allow such a claim in the circumstances herein would make a farce of the statutes of Congress and render the collection of the public revenues unreasonably costly and difficult.

There is no proof in support of the petitioner’s second contention other than at times substantial amounts were advanced. We are unable to determine whether such advances were made by the petitioner or the Fawkes Auto Corporation, or whether they were loans or gifts to the Bohn E. Fawkes business. If they were loans we do not know when or to what extent they became worthless and were charged off the petitioner’s books.

Decision will be entered for the resfondent.


author: Van Fossan:

text:
    Rollin S. Sturgeon and Lucien Hubbard, as Trustees Under the Declaration of Trust Dated October 18, 1922, Known as the Sturgeon-Hubbard Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37095.
    Promulgated January 26, 1932.

      Hermann F. Selvin, Esq., for the petitioners.

      Alva G. Baird, Esq., for the respondent.
   OPINION.

Van Fossan:

Section 704 (a) of the Revenue Act of 1928 provides:

If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (1) under the regulations in force at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, 1921, or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer’s existence.

In Commercial Trust Co., 18 B. T. A. 1248, we pointed out that in all cases in which the shareholders did not control the actions of the trustees, irrespective of whether or not the taxpayer was engaged in business under corporate form, the rulings of the Bureau of Internal Revenue, in effect up to July 1, 1924, consistently held that the taxpayer was taxable as a trust. See also E. A. Landreth Co., 15 B. T. A. 655; Van Cleave Trust, 18 B. T. A. 486.

The case at bar is such a case. Therefore, the petitioner comes within the provisions of section 704 (a), supra, and must be taxed as a trust for the year 1923.

This Board has held that the significant tests to be applied in determining whether an alleged trust is a trust, or an association taxable as a corporation, are whether (1) the beneficiaries of the alleged trust have voluntarily associated themselves together in the general form and mode of procedure of a corporation, and (2) are organized to, and in fact are, engaged in the active conduct of a business for profit, or (3) whether the trustees are merely holding the property and collecting the income therefrom and distributing to those beneficially interested. Extension Oil Co., 16 B. T. A. 1028; affd., 47 Fed. (2d) 65; Jackson-Wermich Trust, 24 B. T. A. 150; E. B. Galbreath et al., 24 B. T. A. 1107.

During the years 1924 and 1925 the trustees did nothing more than collect installments of reserved purchase money and distribute them to the beneficiaries. The retention of $10,000 from the purchase price was necessitated by the possible prohibitions of censorship authorities. The trust was continued in 1924 and 1925 solely to meet that contingency. The nominal actions of the trustees during those years do not signify that the petitioner was engaged in the active conduct of a business for profit, but rather that the funds of the trust were merely received and held for distribution. Gardiner v. United States, 49 Fed. (2d) 992; Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 56; Zenith Real Estate Trust v. Commissioner, 54 Fed. (2d) 29.

Under these facts, therefore, the petitioner is taxable as a trust during all the years under consideration.

Judgment will be entered for the petitioner.


author: Seawell:

text:
    Suncrest Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33244.
    Promulgated January 26, 1932.

      E. S. Parker, Jr., Esq., and J. L. Elliott, O. P. A., for the petitioner.

      Bruce A. Low, Esq., and L. H. BusEbrooh, Esq., for the respondent.
   OPINION.

Seawell:

The first issues presented in this proceeding relate to the depreciation and depletion allowable as a deduction from gross income in each of the years here involved, the contention of the petitioner being that the deductions allowed on that account in the deficiency notice are inadequate, and that of the Commissioner being that such allowances are excessive. A consideration of the contention advanced by the Commissioner will show the several questions which are here to be disposed of.

As shown from our findings, the petitioner acquired certain properties from the Champion Lumber Company through foreclosure proceedings which were instituted by the bondholders of the Champion Lumber Company. The bid price by the petitioner at such sale held on September 23, 1918, was $1,000,000 and it is the Commissioner’s contention that this bid price represents cost of the properties to the petitioner and would accordingly provide the starting point or base for the computation of depreciation and depletion allowances for subsequent years. Some of the argument advanced was to show that the transaction through which the properties were acquired constituted a purchase and not a reorganization, and with this position we are in accord. Whether the bondholders in the Champion Lumber Company were also its stockholders and in the same proportion does not definitely appear, though it does appear that only the bondholders as such as distinguished from the stockholders participated in the acquisition of the properties. That is, the bondholders took the various steps incident to their protection, which included the organization of the petitioner for the purpose of having the properties acquired by it, and the stockholders as such were entirely eliminated. There thus came into ownership of the properties not only a new corporation, but also new interests in such corporation which were essentially different from those in the old corporation. Under such circumstances, we have no hesitancy in saying that cost of such properties to the petitioner when acquired through the foreclosure sale in 1918 rather than cost to the Champion Lumber Company must be our starting point in the determination of a depreciation and depletion allowance as well as for invested capital purposes. Cf. Marr v. United States, 268 U. S. 536.

A question presenting more difficulties, however, is to determine what was cost to the petitioner to be used as the basis for its future depreciation and depletion. In the first place, is such cost fixed, as the Commissioner contends, by the bid price at the foreclosure sale of $1,000,000 ? We think not. In short, what occurred was that the Champion Lumber Company became financially involved, and on the petition of certain of its creditors (other than its bondholders) it was declared a bankrupt on September 11, 1916. At or about that time the bondholders became active in an effort to protect their interests as represented by bonds then outstanding of a face value of some $2,755,000. A bondholders’ protective com mittee was first organized, which was later succeeded by a board of reorganization managers, and through these organizations the petitioner was formed for the purpose of taking over the property of the Champion Lumber Company, should it be acquired at a foreclosure sale. In the meantime, there was a default on the bonds and the foreclosure proceedings were instituted. In due course the property was ordered sold and the petitioner, in conjunction with the board of reorganization managers, was authorized to bid $250,000, or, in its discretion, $1,000,000, for the property. Further, the charter of the petitioner contemplated the acquisition by it of the bonds of the Champion Lumber Company. In order to raise the cash deposit of $125,000 required to qualify the petitioner as a bidder at the sale, the board of reorganization managers gave a collateral note secured by bonds of the Champion Lumber Company. At the sale the highest bid and the only bid (in so far as appears from the record) was that of $1,000,000 by the petitioner. No part of the bid price in excess of the cash deposit was paid in cash, and even- the part of the cash deposit which was not required to pay court and foreclosure costs and satisfy the small minority which did not join in the acquisition of the property was turned over to the petitioner. The remainder of the purchase price was satisfied by the petitioner through the issuance of its bonds for bonds of the same face value held by the bondholders of the Champion Lumber Company and the delivery of these old bonds to the court. In other words, the bid price of $1,000,000 was not satisfied through the payment of that amount, but in another manner as indicated above. We must look to what was done rather than to what might have been done in order to find the correct solution to the problem, and when that is done, the answer is evident that $1,000,000 may not be considered as the conclusive measure of cost.

In reaching the conclusion that the bid price of $1,000,000 may not be considered as the measure of the cost to petitioner, we are not overlooking the fact that within ten days after the sale a bid of $1,100,000 was submitted, but aside from the fact that such bid was rejected by the court and that we are not advised as to any relationship which may have existed between the bidder (Champion Fibre Company) and the Champion Lumber Company, the bid was not one which, if considered better than that of the petitioner, would have meant that such bidder thereby became the purchaser, but rather that the property would again be offered for sale. Under • such conditions the bondholders would still have been able to take further steps for the protection of their interests by bidding, if they desired, at the subsequent sale. Besides, as indicated by the court in rejecting the higher bid, such bid gave to the bondholders no additional margin of security beyond the $125,000 deposit, and therefore its acceptance would have tended to defeat the primary object of the foreclosure proceedings. Nor have we disregarded the fact that all bondholders did not join in the purchase through foreclosure proceedings, but a small number elected to take their pro rata payments in cash. However, when we consider the small minority, which apparently was made up of a considerable number of small bondholders in various parts of the country, we do not think this material.

We are also of the opinion that this case is easily distinguishable from that of Petree v. United States, 34 Fed. (2d) 563; affd., 41 Fed. (2d) 517; certiorari denied, 282 U. S. 877 on which much reliance is placed by the Commissioner in substantiation of his contention that the bid of $1,000,000 is conclusive as to cost to petitioner. That case involved a situation where in 1915, after a corporation was adjudged a bankrupt, its property was sold at public auction and bid in by a new corporation which had been formed. The money which was used by the new corporation in paying the purchase price was advanced by three stockholders of the old corporation, who had held 63 per cent of the stock of such old corporation. In consideration for such advancement, the three old stockholders had issued to them the entire capital stock of the new corporation. In 1917 these same stockholders sold their stock, and the question presented was the basis to be used in determining the gain to them on account of the sale in 1917, the contention of the stockholders being that the gain would be represented by the difference between the March 1, 1913, value of the stock in the old corporation and the selling price of the stock of the new corporation in 1917, whereas, the Government contended that the cost of the stock sold in 1917 was the amount paid by the new corporation for the assets at the receiver’s sale in 1915. The court rejected the contention of the stockholders, held that there was no reorganization through the receiver’s sale and acquisition of the stock by the new' corporation, and entered judgment for the Government, concluding its opinion with the following summary of its view of the situation:

That the company was adjudged a bankrupt in 1915 and all stockholders lost their investment and the stock was rendered valueless; that the new corporation directly became the purchaser of all the assets of the old corporation, including the leasehold; that plaintiffs financed the transaction with their private funds; that the new corporation issued its entire capital stock to the plaintiffs for the amount advanced by them in financing the transaction; that this amount was the cost of the stock to them; that subsequently the stock sold at an undisputed figure upon which they have paid an income tax.
It is a hard case because plaintiffs lost a large amount of money in the Black Diamond Coal Company and were unable under the law to deduct that loss from the profit made by them in the sale of the stock in the new corporation in 1917, just two years later. If the entire transaction cannot, under the authorities, be held a reorganization, there is no relief to be had.

The court further said that the old stock was worthless in 1915 and that a complete loss resulted to the old stockholders at that time. On appeal the judgment was affirmed in part, on the ground that the question was improperly presented for review, but in rendering its opinion the court said:

* * * A judgment for defendant upon facts found can be erroneous only when judgment for plaintiff is imperative. Identity and continuity of investment, before and after, are not here found as ultimate facts; the form of the transaction contradicts such continuity; and in view of the presumption that the Commissioner’s computations of cost and value are correct, we cannot say that there was such a clear mistake as compels a court to overrule him.

We are not here concerned with a receiver’s sale where the entire investment of the party (or those whom it represented) who bid in the property had become valueless, but rather a sale under foreclosure proceedings where the party (or those whom it represented) had not lost its entire investment and where the sale was being conducted for its benefit and the remaining value of its interest in the property was in a very substantial amount. In fact, in the Petree case the entire bid price was satisfied through new money advanced for that purpose by the party (or its representatives) who had lost its original investment, whereas, in the instant case the acquisition of the property was accomplished without the advancement of additional money other than for court and foreclosure costs and a small amount paid to minority bondholders. On the whole, we are convinced that the Petree case can not be considered controlling in the case at bar.

When we look to what here occurred we find that the petitioner first acquired substantially all of the bonds of the Champion Lumber Company ($2,664,500 of bonds outstanding in the amount of $2,155,000) through the issuance of its bonds therefor. After the petitioner had secured the aforementioned old bonds, these old bonds (together with the small amount of cash paid to minority bondholders) were used in satisfaction of the bid price and the property of the Champion Lumber Company was conveyed to petitioner. In other words, there was an exchange of property for property, namely, bonds of the Champion Lumber Company for the assets of the Champion Lumber Company, and gain or loss to petitioner on such transaction would be computed as the difference between the cost of the old bonds (plus the small amount of cash paid) and the fair market value of the property received in exchange (section 202 of the Revenue Act of 1918), and the starting point or cost to petitioner on account of tbe property so acquired was its fair market value at the time of its receipt.

Both the petitioner and the Commissioner introduced evidence for the purpose of showing the value of the properties in question. The greater part of the evidence on the part of the petitioner was on account of a valuation of the depletable properties and to that end its general manager, who had been with petitioner since 1919, testified in detail as to such valuation, using as a basis a cruise made by him of the properties in 1919 or 1920. Based upon the number of feet which he considered then available and a market value per thousand feet, he gave as his opinion that the depletable properties had a value at the date of acquisition of $4,272,017. He was further of the opinion that the depreciable properties had a value at the same time of some $700,000, thus making a total valuation for both classes of property of approximately $5,000,000. We have further the testimony of two witnesses for the Commissioner, one of whom testified to a fair market value of the timber properties in 1918 of $1,372,000, and the other, of $1,600,000. The book value as shown in petitioner’s capital stock return for the year ended December 31, 1919, was approximately $3,900,000, but it was stated in such return that “ These values were inflated beyond all reason [in setting them up on the books of the petitioner] and in making the tax return were cut down to a fair value.” The fair value as stated in such return was approximately $1,800,000. While we do not know the exact cost used in determining the depletion allowance as shown in the deficiency notice, it is stated in the Commissioner’s brief that the cost allocated to depletable properties was $1,900,000, and from other evidence in the case as to timber cut, amount of depletion allowed and the agreement of the parties as to the rate used by the Commissioner, we are convinced that the allowance has been made approximately on the foregoing basis. The cost of depreciable property as used in the deficiency notice for 1921 in determining the depreciation allowance was approximately $750,000, thus making total costs for depletable and depreciable properties of approximately $2,650,000. We have carefully considered all evidence introduced, including not only the expert testimony and documentary evidence referred to above, but also the facts relating to the sale and the expenditures made in connection therewith, and we have reached the conclusion that the costs as used by the Commissioner are fair and reasonable and they are accordingly sustained.

We do not understand that there is any material disagreement between the parties as to the quantities of timber to be used in computing the depletion allowance, the issue being as to the cost of such property, which has been determined as shown above, and since the depletion allowance as fixed by the Commissioner appears reasonable on the basis of the costs herein determined, the amounts as allowed by the Commissioner are approved. A further question is raised as to depreciation allowance, wherein the petitioner contends that the Commissioner based his allowance on a useful life of the sawmill plant and equipment of 10 years, instead of upon the time required to take the timber from the Sunburst tract. However, the rate claimed by the petitioner takes no account of a residual or further useful value for the property at the termination of the Sunburst operation, which was shown at approximately $200,000. The petitioner’s position is that such further useful value should be disregarded in this case, because it was not known until 1925 that a location could be secured at Waynesville, to which this plant could be moved for operation on the Cataloochee tract. The last named tract was owned from the beginning of the operation at Sunburst and it seems only reasonable to think that consideration would be given to some use of such of the Sunburst equipment as could ordinarily be used in the manufacture of lumber on the Cataloochee tract, which was of about the same size. At any rate, when we consider the evidence offered as to the value of the depreciable assets (the highest value being approximately $700,000 and one value being as low as $300,000) and the fact that the Commissioner allowed depreciation on the basis of a cost of approximately $750,000 at the rate of 10 per cent, without regard to any residual value, we are of the opinion that the allowance as made is ample to care for all depreciation sustained and it is accordingly affirmed.

The foregoing discussion also disposes of the issue with respect to invested capital, since under the determination as made by the Commissioner invested capital would become a factor only in the event that income is increased materially through the disallowance of depreciation and depletion by the use of $1,000,000 (or approximately that amount) as a cost basis for such allowance and also the use of the same amount as the starting point for invested capital purposes, but since we have rejected the bid price at the foreclosure sale of $1,000,000 as fixing cost to petitioner, we are satisfied that no finding is necessary with respect to invested capital.

The next issue arises on account of the purchase by the petitioner of its own bonds at less than their face value and the retirement of the same. The difference between the price at which purchased and retired and their face value was reported by petitioner as taxable income, but it is now contended that such amount should not have been so reported and should have been excluded by the Commissioner in his determination. Since the hearing was had in this proceeding, the Supreme Court, decided, the case of United States v. Kirby Lumber Co., 284 U. S. 1, in which it was held that where a corporation purchases and retires its own bonds at a price less than the issuing price (which was face value), the excess of such issuing price over the purchase price constitutes taxable income. See also Consolidated Gas Company of Pittsburgh, 24 B. T. A. 901. The bonds here in question were issued at their face value for the bonds of 'the Champion Lumber Company, and no contention is made nor was evidence produced by the petitioner to the effect that the petitioner did not receive the full face value for its bonds when issued. In fact, the evidence produced by the petitioner was for the purpose of showing that the assets securing the bonds of the Champion Lumber Company had a value much greater than such bonds, and we have found a value for those assets approximately equal to the par value of the bonds. In view of the foregoing, we are of the opinion that the action of the Commissioner in approving the inclusion by the petitioner in taxable income of the difference between the face value of its bonds and the smaller amount at which they were purchased and retired should be sustained.

The final issue presented is the contention of the petitioner that, if it is determined that it otherwise realized taxable income for the years here under consideration, such income should be reduced by allowing a deduction on account of accrued interest on Class B-II bonds. We can see no merit to this position. The pertinent features of the trust indenture with respect to the payment of interest on these bonds are set forth in our findings and show clearly, in our opinion, that these bonds are income bonds upon which no interest liability attaches until the board of directors meet and “ by resolution specifically set apart from net income as hereinbefore described such sums as may be spared therefrom to pay interest upon bonds of Series B Class II, or if none can be spared the Board shall specifically find that the net earnings do not justify the appropriation of any moneys to such interest payment ” and “ any [interest] coupon which shall not be paid in its order shall thereupon become null and void and shall not constitute an obligation of the company.” The indenture further provided that “ The discretion to determine what are net earnings and to fix- the amount thereof is unreviewable and is hereby lodged in the Board of Directors of the Company.” Not only was interest neither accrued on its books nor paid on any of the bonds during the. years under consideration, but, also, at each semiannual interest date the board of directors determined that no earnings were available for such purposes and declared that the interest coupons due on such dates should be considered null and void. In view of the foregoing, we fail to see how at this time it could be said that liability for interest attaches on account of coupons heretofore declared null and void by the parties who acted with unreviewable discretion in regard thereto, even though it should now be determined by the Commissioner and this Board that the petitioner is taxable on income in excess of that previously determined by tho petitioner’s board of directors.

Reviewed by the Board.

Judgment will be entered for the respondent in the amounts shown in the deficiency notice.

Smith concurs in the result.


author: GoodRici-i:

text:
    William Ernest Seatree, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket Nos. 22094, 33640.
    Promulgated January 27, 1932.

      Edward B. Burling, Esq., and 'William Merrick Parker, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

GoodRici-i:

It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; Wallace Huntington et al., 15 B. T. A. 851; Marshall Field, 15 B. T. A. 718; Grace Scripps Clark, 16 B. T. A. 453; Arthur F. Hall, 17 B. T. A. 752; reversed 54 Fed. (2d) 443; Edward T. Blair, 18 B. T. A. 69; L. Brackett Bishop, 19 B. T. A. 1108; affd., 54 Fed. (2d) 298; Eugene Siegel, Executor, 20 B. T. A. 563; John Leo Stack, 22 B. T. A. 707; Lucas v. Earl, 281 U. S. 111; Corliss v. Bowers, 281 U. S. 376; Mitchell v. Bowers, 15 Fed. (2d) 287; Bing v. Bowers, 22 Fed. (2d) 450; O'Malley-Keyes v. Eaton, 24 Fed. (2d) 436; Young v. Gnichtel, 28 Fed. (2d) 789; David Copland, 15 B. T. A. 238; reversed, 41 Fed. (2d) 501.

The difficulty in applying this rule lies in determining in each case precisely what has been assigned. Upon consideration, it is our opinion that in the case at bar, petitioner transferred, not income, but a property right. It is conceded that petitioner and the other five partners named in section 2 of Article IY were largely responsible for the establishment, growth, and good will of the firm and that the purpose of the provisions of that section was to compensate them upon their retirement, or their estates in event of death, for their respective interests in that good will. Their interests were in the nature of capital assets. The payments provided were in the nature of a three-year annuity. It is true as respondent points out, that the amounts of the payments were to be measured by the future profits of the firm and that they might be great or small accordingly as the partnership prospered. But the method of measuring the payments does not determine the nature of the source thereof. The partnership contract gave petitioner a right to four shares of the firm profits for a period of three years after his retirement. That right was a property right, a chose in action, and it could be transferred or assigned in praesenti. It was independent of the rendition by him of any further services to the firm and it was to vest in him immediately upon his retirement or in his heirs in event of his death. It was not the right of a partner while such to a share of partnership profits, but was a contractual right to compensation for his interest in the good will of the firm, built up by his services in the past, accruing to him in consideration of his retirement, whether by his own volition or by death. In law it is of the same nature us an interest in a contract of sale or lease (Eugene Siegel, supra; Charles W. Walworlh, 6 B. T. A. 788); a share of an estate (Young v. Gnichtel, supra; O'Malley-Keyes v. Eaton, supra); royalties (Wm. I. Paulson et al., Executors, 10 B. T. A. 732, and J. V. Leydig, supra); a right to income from a trust (Edith H. Blaney, 13 B. T. A. 1315; F. C. Hubbell, 14 B. T. A. 1040), and other property rights or choses in action which have heretofore been considered and held capable of complete alienation.

It is true that the instrument in precise language did not assign the contract itself. Petitioner did not intend to assign the whole of the contract for he had other payments due him thereunder — his capital investment with interest and his share of the firm profits earned prior to his retirement — which h.e retained for himself. We think, however, that it, in effect, assigned an interest therein. The instrument describes the subject of the assignment as “ all my right, title and interest, in and to four undivided shares of the profits or income ” arising under the partnership agreement. When read with the articles of partnership, there is no ambiguity. After his retirement, petitioner’s only right to the earnings upon four shares of the firm arose under section 2 of Article IV. We think the granting clauses of the assignment sufficient to transfer that right and interest and, as we consider- them in the nature of a capital asset, we think the assignment thereof was equivalent to an assignment of petitioner’s interest in that part of the contract of partnership. Cf. L. Braclcett Bishof, supra; Arthur F. Hall, supra. Beyond doubt the assignor was divested of all right thereunder; beyond doubt the assignee could have demanded an accounting from the firm, and had the right to examine its books and records upon reasonable suspicion that it had failed to comply strictly with the terms of the agreement. Such a right, with respect to section 2 of Article IV, we think, was lost to petitioner by his assignment, for he had relinquished all ownership in the property right created by that section of the agreement when he transferred it by an irrevocable instrument.

However, petitioner had not divested himself of his contractual right before the payments for the first year were due thereunder. It is stipulated that the assignment was executed and delivered to the Equitable Trust Company on June 29, 1922. We refuse to be bound by that stipulation, for it appears to be contrary to fact as disclosed by the record. The instrument was executed in Paris on June 29,1922, but it was accepted by the Trust Company on August 3, 1922, in New York. Petitioner testified that the matter had been taken up with the Trust Company’s foreign agents, but it does not appear that the instrument was delivered or accepted by them on June 29. On the contrary, the testimony is that it was mailed by petitioner in Paris to May in New York, who delivered it to the Trust Company. As this transaction was clearly in the nature of a gift, the delivery of the instrument to and the acceptance of it upon its terms by the trustee was essential to the completion thereof. Despite the stipulation, we are convinced that the transfer was not completed before August 8, 1922. The record does not disclose the basis upon which petitioner kept his accounts for the year 1922, nor does it disclose any basis of cost, beyond that of services rendered in the past, for petitioner’s right to four shares of the firm earnings after his retirement. Therefore, for lack of evidence proving the same to be erroneous, we sustain respondent’s action in including in petitioner’s income for the year 1922 the sum of $22,378.30, regarding the assignment as effecting a transfer of accrued income in that amount in that year.

We are not impressed by respondent’s contention that, because the recited nominal consideration of $1 was not in fact paid, there was no valuable consideration for the assignment and that, consequently, petitioner could have avoided it had he so desired. As we have indicated, we regard this transfer as a gift, and a gift needs no consideration. Moreover, the instrument, which was irrevocable, also recited “ other valuable considerations ” and, in such case, the fact that the nominal consideration was not paid does not establish a failure of consideration. Lessler v. Deloynes, 135 N. Y. S. 948; 150 App. Div. 868; Williams v. Whittell, 74 N. Y. S. 820; 69 App. Div. 340.

Furthermore, the petitioner could not have avoided the assignment by claiming that the instrument was without consideration, even if that were true. The law of New York is controlling upon this point. In the case of Hull v. Hull, 172 App. Div. 287; 158 N. Y. S. 743, the plaintiff was entitled to a residuary interest of one seventh under his father’s will. He assigned his interest by an instrument under seal, reciting a valuable consideration, to two of his brothers and executed and delivered the assignment to another brother, the defendant, who was the executor. Thereafter, he claimed the assignment was without consideration, and that no consideration was ever given by the defendant or paid by the assignees. The court in its opinion stated:

While it is true that under the provisions of Section 840 of the Code of Civil Procedure an executory instrument under seal is only 'presumptive evidence of consideration, which may be rebutted, an assignment is not an executory instrument. It is completed by delivery of the assignment, and the statute has not changed the rule of the common law with respect to such instruments. The allegations of the complaint that the instrument was without consideration can, therefore, have no bearing upon the question. The declaration that the instrument was signed and delivered and the instrument itself being set forth and being under seal, it is conclusive upon the plaintiff insofar as the question of consideration is concerned.

In the light of this decision it is clear that petitioner could not have revoked his assignment to the Equitable Trust Company on the theory that there was no valuable consideration for it, since the assignment was signed, sealed and delivered to the Equitable Trust Company, which, in writing accepted the same upon its terms.

Reviewed by the Board.

Judgment will ~be entered under Rule 50.

Morris, Lansdon, Stern i-i agen, Trammell, Arundell, and Mur-dock dissent.


author: Smith :

text:
    Acme Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 37802.
    Promulgated January 29, 1932.

      J. H. Amiok, G. P. N.'j.for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Smith :

Petitioner alleges that the respondent has erred in refusing to permit it to report its profits from the sales of real estate in 1924, 1925, and 1926 on the installment basis. The petitioner’s books were kept upon the accrual basis. All profits from the sales of real estate were entered in the petitioner’s books at the time of the sales and no profit was shown in any year on account of collections on sales made in prior years. In some instances where collections made during the years were not reported, the properties were repossessed and resold in a subsequent year and the profits reported in the year of the resale.

The profits on the real estate sales were computed without any allowance for selling costs or other overhead expenses. The cost used by the petitioner in computing its profits represented only the cost of the lot and the lumber furnished to the contractors up to the time of the foreclosure by the petitioner. Apparently the other expenses of completing the construction and selling the property went into operating expenses of the current year. We do not know the extent of these expenses or whether they can now be determined from the petitioner’s records.

It is obvious that the installment method of reporting profits computed in this manner would not correctly reflect the petitioner’s taxable income. The result would be excessive expense deductions in the year of the sale and excessive installment profits in subsequent years.

At the hearing, the petitioner offered in evidence a schedule prepared from its books and records purporting to show all of the sales of real estate made on the installment basis on which collections were made in 1924, 1925, and 1926, and all necessary data for computing the profits therefrom on the installment basis. It was brought out upon cross-examination, however, that there were other sales upon which payments were received in the years in question which did not appear on the schedule, as where the properties were repossessed and resold in a subsequent year. There were still other sales not included in the schedule, some of which resulted in losses rather than profits and some of which were treated as closed transactions in the taxable years.

The evidence contains no information about the sales of lumber except that they usually involved a small down payment and installment payments ranning for one or more years. The petitioner is not protesting the respondent’s determination that the profits from the sales of lumber are taxable on the accrual rather than on the installment basis.

In Warren Reilly, 7 B. T. A. 1327, 1330, we said:

It is a cardinal principle of the taxing statutes that the method of accounting employed shall clearly reflect the income; and a taxpayer may not compute its income partly on one basis and partly on another, as it is apparent is contemplated by tlie suggested method, for the very reason that income is not thereby clearly reflected. To treat the collections made during the year, on installment sales of prior years, as income for the years in which such sales were made, while at the same time returning as income for 1919 only the profits upon the sales made in that year which are actually reduced to possession, is, in effect, an accounting for the income on sales of prior years on the accrual basis, and for the income on sales made in 1919 on the installment sales basis. Both methods cau not be used in computing the income of one year; one must give way to the other. * * *

The installment plan for reporting profits, as we have said, does not depend upon any prescribed methods of bookkeeping or accounting. But it is necessary that the accounts kept by the taxpayer permit of a correct determination of tax liability by the installment method. L. S. Weeks Co., 6 B. T. A. 300; Warren Reilly, supra; Grand Rapids Show Case Co., 12 B. T. A. 1024.

However, we are unable to determine from the evidence before us that the petitioner has met that condition with respect to its real estate sales. In our opinion, the petitioner’s use of the installment method of reporting its gains from the sales of real estate did not result in a true statement of its taxable income and was properly rejected by the respondent. See Yost Furniture Co., 5 B. T. A. 652; L. S. Weeks Co., supra; Herman Tillman, Administrator, 10 B. T. A. 4; Renier Music House, Inc., 15 B. T. A. 241; H. A. Dunham, 13 B. T. A. 582.

The petitioner alleges that the respondent erred in disallowing the deduction in 1924 and 1925 of the respective amounts of $5,158.09 and $3,160.51, representing additions to a reserve for bad debts or “ bad debts ascertained to be worthless within said years and to cover which, credits were made to reserve for bad debts ” in the said amounts. The respondent has disallowed the deduction of the disputed amounts for reason, as stated in his deficiency notice, that the petitioner elected to claim a deduction for specific bad debts in its return for 1921 and may not, in the absence of permission from the Commissioner, change to the bad debt reserve method in the subsequent years.

We have heretofore held that, under the provisions of section 234 (a) (5) of the Revenue Act of 1921, and the Commissioner’s Regulations 62, article 151, taxpayers were given the option of deducting cither specific bad debts or a reasonable addition to a reserve for bad debts, and, having elected one of such methods, were bound thereby in subsequent years unless granted permission by the Commissioner to change to the other. Kay Manufacturing Co., 18 B. T. A. 753; Gustave Rader Co., 19 B. T. A. 12; Momsen-Dunnegan-Ryan Co., 24 B. T. A. 365; Athol Manufacturing Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230. In our opinion the facts do not show that the petitioner used the reserve method of treating its bad debt deductions in 1921, nor is there any claim or proof that permission was granted to change as required by the Commissioner’s regulations. The petitioner carried in its books in that year an account styled “ suspense account ” showing numerous credits and debits including a credit of $1,486.84 entered December 31, 1921, and representing approximately 1 per cent of petitioner’s gross sales of that year. At December 31, 1921, there was a small balance of $5.85 which was closed out into expense account. The petitioner’s secretary and manager testified that he always passed upon the accounts and that whenever a debt became worthless he instructed the bookkeeper to charge it off. In these circumstances we find no error in the respondent’s determination that the petitioner did not employ the reserve method for treating its bad debts in its 1921 return. There is no evidence before us that the respondent has not allowed the deduction of all of the debts ascertained to be worthless and charged off by the petitioner during 1924 and 1925.

Judgment will Toe entered for the respondent.


text:
    National Contracting Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24520.
    Promulgated January 29, 1932.

      H. V. Mercer, Esq., for the petitioner.

      G. H. Curl, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner seeks a redetermination of overassess-ments for the years 1920, 1921 and 1922. This Board has no jurisdiction where overassessments do not arise from the denial of a claim in abatement, even though such overassessments are included in the notice in which the Commissioner asserts deficiencies for other years. This proceeding, in so far as it relates to years in which overassess-ments only have been determined, is dismissed. Section 274 (g), Revenue Act of 1926; Cornelius Cotton Mills, 4 B. T. A. 255; W. H. Morefield et al., 4 B. T. A. 394.

The petitioner contends that the group of eight contracts herein designated as 60, 63 and 64 should be regarded as covering a single job which was completed in 1925, and that all profits therefrom must be reported as income in the year of completion. The respondent has broken the group into separate jobs and determined the deficiencies here in question on the theory that the major portion of the work was completed in 1923 and 1924. The parties agree that the tax liability in controversy should be computed on the completed-contract basis. This Board must determine, therefore, (1) whether the construction undertaken by the petitioner is to be regarded as a single job, or whether each contract was a separate job with its own completion date; and, (2) if the entire construction is to be regarded as a single job, whether it was completed in 1923 or 1924, or in some subsequent year not now under review.

The eight contracts here in question covered all the work undertaken by the petitioner in connection with alterations and construction of two school buildings erected for the District. All are governed by the terms of an instrument designated “ The General Conditions of the Contract,” a standard form used by the American Institute of Architects. Each of the separate contracts contains the following:

The contractor and the owner agree that the General Conditions of the Contract, the specifications as modified by Addenda No. 2, which have been identified on the first and last sheets by initials of Contractor and Owner; together with the agreement form the Contract and that they are as fully a part of the contract as if hereto attached or herein repeated. * * *

“ The General Conditions of the Contract ” is made np of 45 sections, each of which applies to every engagement undertaken in each of the several attached contracts. Its terms require that at the completion of the work, “ he [the contractor, petitioner here] shall remove all his rubbish from and about the building and all his tools, scaffolding and surplus materials and shall leave his work ‘ broom clean ’ or its equivalent, unless more exactly specified.” It also provides that “ the Contractor shall promptly remove from the premises all materials condemned by the Architect as failing to conform to the Contract, whether incorporated in the work or not, and the Contractor shall promptly replace and re-execute his own work in accordance and shall bear the expenses of making good all work of other contractors destroyed or damaged by such removal or replacement.” Under the terms of “ The General Conditions of the Contract,” this petitioner was the first on the job and the last to leavq, until every condition of every contract had been fulfilled. The eight several contracts cover parts of the same construction, all of which was undertaken by the petitioner for a single owner. The completion of all effected the completion of the job, and, until the last work was done on the last unfinished part of the job, the petitioner was bound by all the terms of “ The General Conditions of the Contract.”

The petitioner always regarded the work covered by the eight contracts as a single job. It effected no separate organization, had no separate foreman or superintendent for the several kinds of construction under the so-called separate contracts. It made no attempt to segregate or allocate the costs of discharging its operations under each contract. It is in evidence that in a single day or even in a single hour, one mechanic might work on the construction involved in two or more of the contracts. The entire work to be done was broken up into eight separate undertakings for convenience in construction and reletting to subcontractors. It is our opinion that “ The General Conditions of the Contract,” together with the eight separate contracts attached thereto, cover a single job and that completion thereof required the discharge of the obligations undertaken in each of such contracts.

The date of completion must be determined by the evidence. Petitioner’s witnesses on this point all testified that the petitioner and some of the subcontractors were at work as late as March, 1925. Its records show that it incurred expenses and received substantial payments on the job in that year. Its officers testified that it finished its work, cleaned up, and moved out in March, 1925. The respondent introduced no evidence in rebuttal and relies on his cross-examination of the witnesses called by the petitioner. He lays some stress on the proved fact that all the work was 80 per cent or 90 per cent completed when it was stopped by injunction and argues that petitioner could easily have discharged all his contractual obligations in 1922 or Í923, at the latest, attaching no importance to the fact that the injunction proceedings not only interrupted the work, but resulted in damage which materially delayed the construction that remained to be done upon resumption. The evidence is convincing that the petitioner was still on the job early in 1925, and we are of the opinion that the contract was completed in 1925. It follows, therefore, that income therefrom is not taxable in 1923 or 1924.

The second issue relates to the method of allocating overhead costs when a taxpayer is engaged on several contracts and proposes to report income from each on the completed-contract basis. The formula used by the petitioner is fully set forth in our findings of fact, together with the results of its application to the petitioner’s 'accounts during the years involved. Unless a taxpayer reporting profit on a completed contract basis is to be deprived of all deductions from gross income on account of overhead costs, it is difficult to see how any other method could be employed. The petitioner’s formula is in conformity with article 36 of Regulations 65 and with good accounting practice and, in our opinion, results in a reasonable, accurate determination of overhead costs. The amount of $50,890.48 should be deducted from petitioner’s gross receipts from the contracts in question as an element of the cost of construction. This conclusion is of no importance in the decision of the issues here, since we have held that work covered by contracts 60, 63 and 64 was a single job that was completed in 1925 and these apportioned overhead costs are, therefore, deductible in that year instead of in any of the years under review.

The record does not sustain the petitioner’s claim of a deductible loss in 1924, in the amount of $27,386.42. This alleged loss resulted from a job undertaken in 1919 without advertising and on an oral contract, on which work was stopped by an injunction before it was completed. Petitioner claimed $80,000, was paid $37,023.08 less than that amount, and sued for the remainder. It obtained a quantum meruit judgment in 1924 which left the amount finally received less by $27,386.42 than its claim. It now contends that it should be allowed a deductible loss in such amount as sustained in the year in which the court decided its claim. There is here no evidence of any loss sustained in 1924 or at any other date. The record is silent as to the cost of the work done and it is impossible therefore to determine whether the entire amount claimed was cost or cost plus profit. The fair presumption is that it included the cost plus the profit contemplated in the oral contract and, for all we know, the entire claim may represent profit which the petitioner would have realized had it been permitted to finish the job. No loss having been proved, the deduction claimed is denied.

The fourth issue is whether the petitioner should be allowed to add the amount of $26,092.51 to the cost of contracts 60, 63 and 64. Since we have found that such contracts were completed in 1925 and that year is not before us, it is not necessary to decide this question.

Petitioner asserts for its fifth cause of action that the respondent improperly added $3,892.47 to its gross income for 1924, as interest received in that year. The record discloses no basis for any finding of fact adverse to the determination of the respondent. The petitioner’s books show credit for interest in a certain account in that amount. No evidence adduced at the hearing overcomes the presumption that such entry and the determination of the respondent based thereon are not correct. The determination of the respondent is approved.

The last question is whether penalties imposed for negligence shall be collected. The evidence shows that petitioner kept a good set of books that diverged only on minor points from the requirements for reporting income from long-time contracts on the completion basis. It is true that overhead costs were not worked out and allocated for each year, but that omission is important only if income from contracts is to be reported on either the accrual or cash basis. The entries necessary to allocate the entire overhead cost of contracts 60, 63 and 64 were all on the books for each year and only the application of the formula used by the petitioner was necessary to determine the amount thereof at any given time. It was not necessary, however, to make any such determination until 1925. There were other minor divergencies from a perfect system of books, but they were of small importance and without effect as to income reflected. The penalties for negligence should not be collected.

Decision will be entered under Rule 50.