author: Sea well:

text:
    Imperator Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29933.
    Promulgated November 30, 1931.

      Donald Horne, Esq., and Victor E. Cappa, Esq., for the petitioner.

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

Sea well:

This proceeding involves a deficiency in income tax as determined by the Commissioner for 1923 in the amount of $13,234.36, and has for its only issue the question whether the unrealized profit ⅛© the petitioner from a prior sale as included in a second mortgage Was realized in 1923 when such second mortgage was used at its face Value by the petitioner in part payment of property purchased in that year. Error was also assigned on account of depreciation allowable, but at the hearing this contention was withdrawn.

The petitioner is a New York corporation, with its principal office in New York City, where it is engaged in business as a real estate operator and owner.

In 1922 petitioner sold certain property located at 1331-1337 Madison Ave., the purchaser assuming a first mortgage thereon of $155,000 and giving to petitioner a second mortgage on the property of $112,000. The second mortgage provided for payments in equal monthly installments of $833.33 until the principal sum with interest at 6 per cent was paid. The total profit on the transaction is not shown, though it does appear that the petitioner elected to report the profit on the installment basis as payments were made on the second mortgage. It further appears that the Commissioner determined that at August 1, 1923, the profit as represented in the second mortgage which had not been realized was $100,676.42, but we do not understand that the petitioner questions the findings of the Commissioner in that respect and no evidence was offered as opposed to such findings.

On August 1, 1923, petitioner purchased property at 3 West 29th Street at a contract price of $503,000. The second mortgage on the Madison Avenue property (referred to in the preceding paragraph) was accepted at its face value (then reduced to $106,166,69) on the contract price for the 29th Street property. In addition, petitioner either assumed a first mortgage on the property, or took the property subject to a first mortgage, of some $300,000 and paid some cash in order to make up the full amount of $508,000. The property-in question was an apartment building on a plot of ground 74.6 feet by 99 feet and annual rentals received from 1923 to 1925 were as follows: 1923, $86,000 (approximate); 1924, $81,314.35; and 1925, $78,110.

In its return for 1923 petitioner reported no profit from the sale or disposition of the aforementioned second mortgage, but the Commissioner, in his notice of deficiency, added to petitioner’s income $100,676.42 as the amount realized in such disposition of the second mortgage. That is, if we understand the situation correctly, the Commissioner determined that at the date of the purchase of the 29th Street property in 1923 the unrealized profits on the second mortgage then held by the petitioner on the Madison Avenue property of a face value of $106,166.69 was $100,676.42, and that, when the petitioner used that second mortgage at its face value in satisfaction of a part of the purchase price of the 29th Street property, the total unrealized profit in the second mortgage was realized. The first contention of the petitioner is that the use of the second mortgage in partial satisfaction of the purchase price of real estate constituted an exchange within the meaning of section 202 (c) of the Revenue Act of 1921 and that accordingly no gain should be recognized, since the property received (the 29th Street property) did not have a “ readily realizable market value.” We think it clear that the transaction here in question was not an exchange within the meaning of the aforementioned section of the statute, but rather an outright purchase of real estate in which property of an entirely different character was used in satisfaction of the purchase price. The purchase price named in the contract for the 29th Street property was $503,000, and in satisfaction thereof the petitioner either assumed a first mortgage then on the property or took the property subject to such mortgage, paid some cash, and applied the second mortgage on the Madison Avenue property at its face value in satisfaction of the remainder of the purchase price. Plainly, this was a purchase in the consummation of which petitioner disposed of an unlike kind of property and not an exchange as contemplated by section 202 (c), supra.

But even if we should concede that the transaction constituted an exchange in so far as the second mortgage is concerned, we are unable to agree with the petitioner’s contention to the effect that the 29th Street property did not have a readily realizable market value and therefore no gain or loss could be computed on the exchange. The argument here advanced by the petitioner is that “ readily realizable market value ” is to be distinguished from “ fair market value ” and to that end witnesses were introduced who testified both as to fair market value as that term is ordinarily used and also as to a quick or forced sale value, the difference between the two values being from $50,000 to $75,000. It is the latter value which the petitioner contends represents the readily realizable market value or, to quote from its brief, “ Readily realizable market value is the value that can be obtained at a quick sale with no special regard to real value, because at a quick sale the seller being forced to turn over his property at once cannot ask for and cannot receive real value for his property.” We can not agree that Congress intended that “ readily realizable market value” should be considered the equivalent of a “forced sale value.” Whatever may be the true meaning of the term “ readily realizable market value ” and what distinction there may be, if any, between that term and “ fair market value,” we are unwilling to say that the statute contemplates a “ forced sale ” value as a basis of determining gain or loss on an exchange coming within the purview of section 202 (c), supra. In the case at bar we are concerned with a piece of improved real property having a value of approximately $500,000, and the evidence shows that it is not usual to be able to sell a property of that size at once without a great sacrifice. In testifying as to a fair market value, the various witnesses (including those offered by the petitioner as well as by the Commissioner) gave their opinion as to value as between a willing purchaser and a willing seller, where a reasonable time was given in which to negotiate a sale. As to what would constitute a “ reasonable time,” the witnesses differed little; the Commissioner’s three witnesses stating from six months to a year, one of petitioner’s witnesses several months to a year arid another a year or two. When we consider the character of'property here involved, we are satisfied that its fair market value as testified to by these witnesses was also its “ readily realizable market value ” within the meaning of the statute.

And also when we consider the evidence offered as to the fair market value of the 29th Street property, as well as the circumstances surrounding the purchase, we are unable to agree with the petitioner’s further contention that there was an inflation of the purchase price because the second mortgage was used in part payment instead of cash, and that therefore the whole amount of the unrealized profit may not be considered as having been realized. The expert witnesses offered by the petitioner gave valuations of from $450,000 to $475,000, whereas the Commissioner’s witnesses gave valuations ranging from $505,500 to $540,000. The strong preponderance of testimony was that property values in the section where the property in question was located were on the decline between 1923 and 1926. The property was sold by the petitioner in 1926 for approximately $475,000 and the petitioner claimed a loss in its return for that year on the basis of an original cost of approximately $503,000. The assessed valuation of the property in 1923 was $475,000. The determination of the Commissioner is based on the contract price of $503,000.

' Various other evidence was introduced, both as to the 29th Street property and as to the property securing the second mortgage in question, as well as evidence relating to the manner in which the 29th Street property sale Avas consummated. Suffice it to say that we have given careful consideration to all evidence offered and the qualifications of the expert witnesses who testified, and we have reached the conclusion that the evidence not only fails to overcome the prima fade correctness of the Commissioner’s determination to the effect that there Avas a purchase for $503,000 in Avhich the second mortgage Avas used at its face value in partial satisfaction of such purchase price, but also that the evidence supports a transaction carried out in the usual manner Avithout any inflation of the purchase price. We are accordingly of the opinion that Avhen the petitioner gave its second mortgage of a face value of $106,166.69 in satisfaction of that part of the purchase price of the 29th Street property, the unrealized profit in such second mortgage of $100,676.42 Avas realized, and that the action of the Commissioner in adding such latter amount to petitioner’s taxable income for 1923 should be sustained. Packard, Cleveland Motor Co., 14 B. T. A. 118, and W. F. Gillies, 20 B. T. A. 570.

Judgment will be entered for the respondent.

       Sec. 202. (e) For the purposes of this title, on an exchange of property, real, personal or mixefl, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized—
      (1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged! for property of a like kind or use.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Robert L. Stearns, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wilmer T. Culver, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37573, 37574.
    Promulgated November 30, 1931.

      Charles 0. BundaTl, Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Smith:

For convenience, we will discuss the case as though petitioner Stearns had been a party to the original agreement, since his tax liability from this transaction must be determined in the same manner as that of petitioner Culver.

The petitioners contend that essentially the transaction was but a guaranty by them that as a result of their management the vendors (stockholders) would receive the book value of their stock. The petitioners’ interests were contingent upon the successful results of their efforts. If and when successful they would and later did receive, as compensation for such efforts and their guaranty, whatever remained of value in the Lumber Company. Until the vendors received the stipulated amount, it is obvious that petitioners could have no reward and could not be in receipt of taxable income from the transaction in the form of dividends or otherwise.

The petitioners were experienced operators of lumber, coal, and salt properties. They had been called upon to operate enterprises that had suffered from poor management or other causes that resulted in financial difficulties. Once, at the request of the stockholders, they had taken over the operation of a lumber company under an arrangement whereby the company’s debts were discharged, the stockholders were paid off, and the petitioners received whatever was left as their compensation. Again, they had performed similar services at the request of the bondholders of another company. The record indicates that their advice and services were sought in the management or liquidation of similar enterprises. The petitioners had been successful in these enterprises and had extended their operations into several states.

Representatives of the stockholders of the Lumber Company offered to sell its property and business to the petitioners in 1919. The petitioners were not interested in a purchase, but told the representatives of the stockholders that they would be interested in the management and operation of the Lumber Company on a speculative basis. Investigations were made, the value of the corporate property determined, and an agreement entered into which in substance provided for the liquidation of the interest of the stockholders. The petitioners took over the operation of the Lumber Company and so conducted its affairs that the company was able to make payments to the trustees for the stockholders in 1923, which the respondent seeks to tax to these petitioners. The respondent contends, in effect, that the agreement of December 13, 1919, was an executed contract of sale; that thereafter the petitioners were the owners of the stock of the Lumber Company; and that the payments to the trustees represented either “ dividends ” within the meaning of section 201 of the Revenue Act of 1921, or income constructively received by the petitioners within the meaning of section 213 (a) of that act.

We are satisfied that the parties to this transaction did not intend a present sale by the execution of the agreement in 1919. The petitioners’ method in such transactions negative any such intent, and the actual conduct of the parties and the express language of the several agreements show that there was no sale of the stock in 1919. Even assuming, but not deciding, that the 1919 agreement resulted in in the acquisition of the Lumber Company’s stock by the petitioners, we are still confronted with the question of whether that agreement was a sale or a contract to sell. In Charles W. Dahlinger, 20 B. T. A. 176, 183, 184 (affd., Dahlinger v. Commissioner, 51 Fed. (2d) 662), we said:

The distinction between a contract to sell and a sale is fundamental in the law of sales, as is pointed out in Williston on Sales, 2d ed., vol. 1, ch. 1, where the following definitions are given:
A contract to sell goods is a contract whereby the seller agrees to transfer the property in goods to the buyer for a consideration called the price.
A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration called the price.
* * * * * * ⅜
The distinction is some times expressed by the terms “ executory ” and “ executed ” sales. Whether a bargain between parties is a contract to sell or an actual sale, depends upon whether the property in the goods is transferred. If it is transferred, there is a sale, an executed sale, even though the price be not paid.
Sales and contracts to sell may both be subject to conditions expressed or implied, and conditions may be conditions subsequent or conditions precedent. A condition precedent requires that something shall happen prior to the vesting of the property in the buyer. A condition subsequent divests by its happening a title which has already vested.
* ⅝ ⅜ * * * ⅜
* * * Although a contract to sell is consummated when the parties execute it, a sale, even where the subject of a contract, is incomplete and imperfect until title passes. But a sale is complete when title passes. At that moment both parties fo the sale achieve what they set out to accomplish by the sale. A seller who formerly had property which he desired to sell, thereafter had that property no longer. He thereupon exchanged his right and title to the property for the purchase price or the purchaser’s promise to pay it. The property thereafter belonged to the purchaser and he had what he did not have before, an obligation to pay for it. The passing of title irrecovably and finally changes the rights of the parties to a sale. A sale is then “consummated.”

See also Charles C. Hanson, 23 B. T. A. 590, wherein we said:

The question whether a contract of sale is executory or executed depends primarily on the intention of the parties, to be gathered from the terms of the contract and such surrounding circumstances as may be legitimately considered as evidencing the intention. 23 R. C. L. 171; Elgee Cotton Cases, 22 Wall. 180; 22 U. S. (L. Ed.) 863; Hatch v. Standard Oil Co., 100 U. S. 124; Beardsley v. Beardsley, 138 U. S. 262.

The agreement under which the stockholders of the Lumber Company transferred their stock to the trustees provides that “ the full legal and equitable title in and to the * * * stock and the property rights and interests represented thereby ” vested in the trustees, who “ shall, and are, hereby authorized and directed to enter into a written contract for the sale of all of the * * * shares of * * * Stock * * * upon such conditions and terms as said Trustees in their sole judgment shall elect.” The agreement of December 13, 1919, provides that:

Vendors * * * agree to bargain, grant, sell, convey, and transfer unto tbe Vendee [s] * * * tbe capital stock of tbe Company * * *.
* ⅜ ⅜ * £ ⅝
(d) And upon full payment of tbe notes herein provided for, tbe Vendors covenant and agree to transfer or cause to be transferred to tbe Vendee[s] * * * all of tbe said shares of the capital stock
* * * * * * #
* * * hereby agreed to be sold * * *.

The first supplemental agreement (Oetober 1, 1922), refers to the 1919 agreement “ by the terms of which the said Trustees contracted to sell and the said * * * [petitioners] contracted to buy * * * the capital stock,” and further provides that “ The title to the * * * stock * * * shall continue in the Vendors as heretofore.”

Although the second supplemental agreement (October 1, 1925), was entered into subsequent to the year before us, that agreement further shows the construction that the parties put upon the earlier agreement as “ a contract * * * to seil ” and further declares that:

* * * tbe Vendors shall and do retain title to tbe * * * stock * * * until * * * all of said promissory notes shall be fully paid and discharged and until full performance by tbe Vendees and tbe Company of each and all of the stipulations and agreements of the original contract, as modified by the first Supplemental Contract and this Second Supplemental Contract and no title to said capital stock shall pass * * * until said purchase price, represented by said promissory notes, and interests, shall have been fully paid.

The parties to the transaction, viewing it as a contract for the sale of the stock, interpreted their agreement as passing title to the stock in 1928, when the petitioners had fully performed their contract and received the stock, which they treated as income in that year. The parties to the 1919 agreement intended to and did enter into an executory contract for the sale of the stock, which sale was consummated in 1928 when title thereto passed. Cf. Webb Press Co., 3 B. T. A. 247; Amalgamated Sugar Co., 4 B. T. A. 568; Abraham B. Johnson, 7 B. T. A. 820; W. L. and J. D. Griffiths, Executors, 10 B. T. A. 799; Buckeye Engine Co., 11 B. T. A. 318; Charles W. Dahlinger, supra; Lucas v. North Texas Lumber Co., 281 U. S. 11.

Furthermore, the proper interpretation of other terms of the 1919 agreement support the petitioner’s contention that this transaction was not a purchase of either the stock or the assets of the Lumber Company. They declined to purchase. They investigated the company’s condition and, as in other such enterprises, they felt that by reason of their experience they could operate and gradually liquidate the property of the Lumber Company and make a profit on the transaction. They found that the net quick assets of the company amounted to $459,420.30 and that the agreed value of the plant and timber was $947,040. The stockholders had advanced $267,000 to the Lumber Company which the petitioners agreed should be repaid. This obligation was evidenced by the Series A notes in that amount; the Series B notes represented the remainder of the quick assets. The Series C notes represented the value of the plant and timber. These notes were to be paid off by the Lumber Company, first by a payment of $5 per thousand feet for all timber cut, logged, and shipped from the company’s land, and $2.50 per thousand feet for timber cut, logged, and shipped from leased land, which payments represented the fair market price of such timber in that section at that time, and, second, by the payment of $1 per thousand feet for milled lumber, which payment represented a fair rental price for the use of the sawmill. Thus the petitioners arranged to liquidate the timber as used and the mill as it depreciated through such use. So far as the record discloses, the payments to the trustees for the stockholders were made in accordance with the terms of their agreements. The petitioners speculated on their ability successfully to operate the Company and liquidate its properties. They, in a way, guaranteed that the stockholders would receive an agreed amount, or the then book value of their stock, and that the petitioners would receive everything above that amount as their reward. When the payments (which pi so far as the record discloses were made by the company) totaled the amount agreed upon, the stockholders surrendered their stock certificates and thereafter those certificates represented the petitioners’ interest in the Lumber Company, which was the remainder of its property which they determined gave the stock a book value of $172,343.26. In effect, they received that amount for liquidating assets that had a value of $1,788,169.29 in 1919, and treated that amount as income in the year in which the stock was transferred to them.

In these proceedings the respondent relies principally upon the decision of the Court of Claims in Long v. United States, 66 Ct. Cls. 475, and Chester N. Weaver, 21 B. T. A. 1283. The syllabus of the Court of Claims in the first case mentioned reads:

Income taw; dividends applied Toy trustee to purchase price of shares of stock; income of purchaser.■ — Under the terms of a contract of sale the shares of stock sold were indorsed in blank and deposited with a trust company, payment therefor being made in installments, the dividends being applied by the trust company in satisfaction of the purchase price and interest thereon, the vendor retaining his voting rights on the balance of the shares unpaid for, the shares as they were paid for being transferred to the purchaser. The purchaser kept his books and made his tax returns on a “ cash received and paid ” basis. Held, that the dividends paid to the trustee on shares not yet transferred to the purchaser constituted taxable income to the purchaser for the year in which paid.

Tbat case is distinguishable from the instant proceedings upon its facts. Long had bargained for the purchase of certain shares of stock at a price of $230,000. The stock was placed in the hands of a trustee until payment was made. Dividends were paid upon the stock and the court held that those dividends were income of the vendee. In the instant proceedings no dividends were declared upon the stock, title to which remained in the trustees for the stockholders until their interest in the corporation was liquidated. The cases are clearly distinguishable.

In the Weaver case certain stockholders contributed $100,000 to the surplus of the corporation. Subsequently a dividend was paid in the amount of $100,000. We held that such a distribution was a taxable dividend. No such facts obtained in the instant proceedings.

In the circumstances presented by the proceedings at bar the respondent’s determination can not be sustained. Viewing the transaction as we do, it will not be necessary categorically to dispose of the several issues raised by the pleadings.

Judgments will be entered for the petitioners.


author: McMahon :

text:
    Coronado Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45135, 50328.
    Promulgated November 30, 1931.

      Robert R. FaulJcner, Esq., for the petitioner.

      Owen W. SwecJcer, Esq., for the respondent.
   OPINION.

McMahon :

The first question presented is whether the respondent erred in holding that the amount of $150,000 should be deducted pro rata each year over the life of the lease, 99 years, instead of the useful life of the improvements, S3 years. Petitioner contends that the amount of $150,000 was paid for the improvements, since the yearly rental provided in the lease was a fair consideration for the use of the land itself, and that, since petitioner expected to derive its income from the improvements alone, it should be entitled to a ratable return of its investment over the life of the improvements before the earnings therefrom are subjected to tax.

Respondent contends that there is nothing in the lease agreement indicating or implying that the $150,000 represented the purchase price of the improvements. After a careful examination of the lease, we find ourselves in agreement with the contention of the respondent. While the stipulated facts do show that petitioner was organized primarily for the purpose of taking over and operating the “ Coronado Building,” which constituted the improvements upon the realty, yet the lease itself covered the premises upon which the Coronado Building is located, and provided that all the consideration, including the $150,000, was for the execution of the lease. We can not find from the evidence that the $150,000 was paid for the improvements or for the specific use of such improvements (to the exclusion of the land itself). The case of L. S. Donaldson Co., 12 B. T. A. 271, cited by petitioner is distinguishable from the instant proceeding. In that case the improvements were purchased by the lessee of the land upon which such improvements were located. We hold that the respondent did not err in prorating the $150,000 over the life of the lease.

Petitioner has also introduced some evidence for the purpose of showing that debts of the face value of $5,052.13 were ascertained to be worthless and charged off in 1927. In that year, after an examination of petitioner’s records by a certified public accountant and upon being advised by him that there were bad accounts to the extent of $7,170.89, petitioner set up a reserve for bad debts in the amount of $7,150. While the items reported by the accountant to the officers of the petitioner as being bad included the items set forth in our findings of fact, the evidence further shows that such items were not actually charged against the reserve until 1928.

Section 234 (a) (5) of the Revenue Act of 1926 provides:

(a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

Article 151 of Regulations 69, relating to the Revenue Act of 1926, provides in part as follows:

Bad debts may be treated in either of two ways—
(1) By a deduction from income in respect of debts ascertained to be worthless in whole or in part, or
(2) By a deduction from income of an addition to a reserve for bad debts.
Taxpayers were given an option for 1921 to select either of the methods mentioned for treating such debts. (See article 151, Regulations 62.) The method used in the return for 1921 must be used in returns for subsequent years and for returns under the Revenue Act of 1926 unless permission is granted by the Commissioner to change to the other method. * * *

In Kay Manufacturing Co., 18 B. T. A. 753, the taxpayer had elected in 1921 to take deductions of debts ascertained to be worthless, instead of employing the reserve method. In 1922 it took a deduction of an addition to a reserve for bad debts, although the addition to the reserve was not made on the books of account until 1923. The taxpayer had not sought or obtained the Commissioner’s permission to change the election made in 1921. We held that, under section 234 (a) (5) of the Revenue Acts of 1921 and 1924 and article 151 of Regulations 62 and 65, the petitioner was precluded from using the reserve method. To the same effect is Ewald & Co., 18 B. T. A. 1130. Section 234 (a) (5) of the Revenue Act of 1926 is identical with the corresponding provision of the Revenue Acts of 1921 and 3924, and article 151 of Regulations 69 is similar to the same numbered article in Regulations 65.

However, as pointed out in Ewald & Co., supra, it does not necessarily follow that, because petitioner claimed in its return only deductions of additions to a reserve for bad debts, petitioner is not entitled to deductions for such debts as were ascertained to be worthless and charged off in the taxable year in question. We therefore turn to a consideration of whether petitioner has met the requirements of the statute with regard to ascertainment of worthlessness and charging off of the debts. As stated in Ewald & Co., supra:

* * * The fundamental purpose in requiring the charge-off is to evidence the worthlessness of the debt, or, in other words, to establish the loss sustained by the taxpayer, and this end is accomplished and the charge-off effected by the elimination of the bad debt from the taxpayer’s assets. If the debt is in fact ascertained to be worthless, it should no longer be treated or considered as an asset. The effective elimination of the debt as an asset meets the statutory requirement as to charge-off. Cf. Thomas J. Avery, supra,; O. S. Stapley Co., 13 B. T. A. 557; Lipman’s, Inc., 13 B. T. A. 1274.

In the instant proceeding we can not determine from the ambiguous and contradictory evidence that the debts in question were eliminated from the petitioner’s assets in 1927. There is evidence to show that it was not until 1928 that they were charged against the reserve. It is our opinion, therefore, that, whether or not the debts were in fact worthless in 1927 (which question we do not here decide), petitioner is not entitled to deduct them in that year, for the reason that it has not shown that they were charged off in that year. See Britton Lumber Co., 20 B. T. A. 583.

The petitioner cites Pool & Kelly, Inc., 19 B. T. A. 1317. However, that case is distinguishable from the instant proceeding for the reason that in that case direct charges to profit and loss were made, in the year in which the bad debt deductions were claimed, of the exact amounts of the accowits involved which had been ascertained to be worthless, but, instead of placing those amounts to the credit of the various accounts, the credit was made in a private ledger in an account denominated “ reserve for bad and doubtful accounts.” In the instant proceeding it appears from the evidence that the specific items of bad debts in question were not charged to the reserve until 1928, the year subsequent to the year in which the deductions are sought to be taken.

Nor have we overlooked McMinnville Manufacturing Co., 19 B. T. A. 486, and Dillon Supply Co., 20 B. T. A. 404. Both of those cases are likewise distinguishable from the instant proceeding. In McMinnville Manufacturing Co., supra, an entry was made on the petitioner’s cash book in the year in which the bad debt deductions were sought to be taken, setting forth each of the individual accounts as a reserve for bad debts. In Dillon Supply Co., supra, each bad debt sought to be deducted was taken out of the loose-leaf accounts receivable ledger and marked “ reserved,” in the year in which the deduction was sought to be taken, and at the end of the year the officers of the taxpayer went over those accounts and made notations of “ reason for charging off.” As pointed out above, in the instant proceeding the evidence discloses that the specific items which petitioner claims as deductions for bad debts were not charged to the reserve for bad debts until 1928.

Judgment mil be entered for the respondent.


author: McMahon:

text:
    Albert Y. Gowen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44021.
    Promulgated November 30, 1931.
    /. W. Sharp, Esg., and William S. Hammers, Esq., for the petitioner.

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

McMahon:

The only issue raised by this proceeding is whether petitioner is entitled to a greater deduction in 1924 than that allowed by respondent as a loss upon his investment in the Iceless Machine Company. The parties are in agreement that petitioner’s investment in the preferred and common stock of the Machine Company amounted to $230,488.40; that in 1918 petitioner received a liquidating dividend upon his preferred stock in the amount of $2,000; and that in 1924 petitioner sold, for $100, whatever interest he had in the assets of the Machine Company then held by the liquidating trustees.

It is the position of the respondent that all of the petitioner’s loss was not sustained in the year 1924, but that most of it was sustained in 1920. He contends that the common stock of the Machine Company became worthless in 1920, and refers to the findings of fact and opinion in Wilford C. Saeger, 9 B. T. A. 890, a copy of which was introduced in evidence, without objection, in this proceeding.

From the evidence it appears that when the liquidating trustees paid a 40 per cent liquidating dividend on the preferred stock of $34,500 par value, there were left in their hands only about $3,000 in cash, some small accounts receivable, some patents and some remaining machines and spare parts. These assets would have to be applied in satisfaction of the claims of the holders of preferred stock of the par value of $20,700 before the holders of common stock would receive any liquidating dividend. From the evidence we can not determine that these assets had a value in excess of the par value of the remaining preferred stock. The petitioner has therefore failed to show that his common stock in the Machine Company did not become worthless prior to the year 1924. See Harry H. DeLoss, 6 B. T. A. 784; affd., DeLoss v. Commissioner, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840. See also Wilford C. Saeger, supra. The respondent has already allowed the petitioner a deduction in the amount of $2,900, representing loss on his investment in the preferred stock of the Machine Company. We must approve the respondent’s determination.

Judgment will be entered for the respondent-.


author: Love :

text:
    John A. Nelson Company (Formerly known as Rockford Milling Machine Company), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 32986, 44700.
    Promulgated November 30, 1931.

      F. E. Seidman, G. P. A., and J. S. Seidman, Esq., for the petitioner.

      Brooks Fullerton, Esq., and John D. Kiley, Esq., for the respondent.
   OPINION.

Love :

The direct issues are three:

1. Whether the amounts paid to the Sundstrands (who were two inventors) for their work in the inception and development of patents, are deductible as expenses, or whether they should be capitalized as a part of the cost of such patents.

2. Whether collections from sales made prior to 1924 on the so-called accrual basis may be included in income for 1924, 1925 or 1926, when the collections were made, during which years petitioner was reporting on the installment basis.

3. Whether taxable gain was realized in 1926, when a reorganiza-

tion occurred, from a transfer of installment accounts maturing in subsequent years. ⅛

To these direct issues, respondent adds the query whether, for 1924 and 1925, the evidence in the record is sufficient to enable the Board to redetermine petitioner’s correct tax liability for those years.

Respondent contends in respect of the years 1924 and 1925, that petitioner has not adduced evidence showing its income for those years (a) as reported on returns, (b) with changes made by the Commissioner, and (c) as corrected by the Commissioner. Counsel for respondent asserts that the determination of the Commissioner is presumed to be correct, and that the burden of proof is on petitioner to show that the Commissioner is wrong, and that petitioner must show what its correct tax liability is.

To clear the way for the consideration of the other issues, we will first dispose of these contentions as applied to this case by denying them. There is no dispute between the parties in regard to the above matters and they are not at issue. The only things that the Board is undertaking to determine in the first instance are the questions at issue. Those once determined by the Board, the “ redetermination ” of the deficiency and the settlement follow under Rule 50 of the Board’s rules of practice, which rule, among other things, is intended to and does provide for just such situations as we have here. It would be supererogatory for the Board to consider matters about which the parties are not in dispute. We conceive that we shall have no difficulty, occasioned by lack of evidence, in reaching conclusions in regard to the issues which are before us.

The first of these, as we have set them out above, is in regard to the amounts paid to the Sundstrands for their work on the patents.

On December 31, 1928, a written agreement was entered into by and between Gustaf David Sundstrand and Oscar J. Sundstrand, parties of the first part, and petitioner (then known as the Rockford Milling Machine Company), party of the second part, by which provision was made in accordance with a preexisting “ oral understanding,” for the assignment to petitioner which had been made by them prior to the date of the written agreement, of “ the entire right, title and interest ” in eighteen applications for letters patent of the United States, the latest bearing date of January 9, 1922, and eight applications for foreign letters patent, the latest, according to the record, being dated January 8, 1921, the assignment “ including foreign patent rights ” not otherwise specified.

In accordance with the provisions of this agreement and the other facts as we have found them, we hold that these disbursements in 1924, 1925 and 1926, of “five per centum (5%) of the net profits of the company ” for each year immediately preceding that in which the distribution was made, were capital expenditures for property acquired, and as such property, subject to depreciation over the 17-year life of each patent concerned. This rule has been consistently followed by the Board. See Individual Towel & Cabinet Service Co., 5 B. T. A. 158, and cases therein cited. See also Stephens-Adamson Manufacturing Co., 16 B. T. A. 41; affd., 51 Fed. (2d) 681. On this issue the Commissioner is sustained.

The second question for our determination is the inclusion in taxable income for the years 1924, 1925 and 1926, of collections on installment sales made prior to 1924.

From 1918 to 1926, inclusive, petitioner sold personal property on the installment plan. For 1918 to 1923, inclusive, petitioner reported its income on the accrual basis. In its original return for 1924 petitioner changed its method of reporting income to the installment basis. For 1925 and 1926, also, its returns were prepared on- the installment basis. There is no question raised as to the propriety of making the returns on the installment basis, the change from the accrual to the installment basis being authorized by section 212 (d) of the Revenue Act of 1926, as that section was made retroactive by section 1208 of the same act.

In accordance with the statute, and the regulations thereunder (article 42 of Regulations 69), petitioner made application for and obtained a refund, for the years 1918 to 1923, inclusive, for the excess tax as returned on the accrual basis and paid for those years, above the tax as shown by recomputation on the installment basis.

In reporting income received for 1924 petitioner, in its return, excluded as being derived from installment sales made prior to January 1, 1924, receipts amounting to $294,452.65. The Commissioner increased petitioner’s reported income bjr that amount.

In reporting income received for 1925 petitioner, in its return, excluded as being derived from installment sales made prior to January 1, 1924, receipts amounting to $29,009.86. The Commissioner increased petitioner’s reported income by that amount.

In reporting income for 1926 petitioner, in its return, included receipts derived from installment sales made prior to January 1, 1924, in the amount of $6,864.68. The Commissioner has made no adjustment in connection with that amount.

Petitioner contends that the Commissioner’s action in thus increasing its reported income for 1924 and for 1925, and the Commissioner’s failure to decrease its reported income for 1926, are in conflict with section 705 of the Revenue Act of 1928, which follows:

SEC. 705. INSTALLMENT SALES — RETROACTIVE.
(a) If any taxpayer by an original return made prior to February 26. 1926, changed the method of reporting his net income for the taxable year 1924 or any prior taxable year to the installment basis, then, if his income for such year is properly to be computed on the installment basis—
(1) No refund or credit of income, war-profits, or excess-profits taxes for the year in respect of which the change is made or any subsequent year shall be made or allowed, unless the taxpayer has overpaid his taxes for such year, computed by including, in computing income, amounts received during such year on account of sales or other dispositions of property made in any prior year; and
(2) No deficiency shall be determined or found in respect of any such taxes unless the taxpayer has underpaid his taxes for such year, computed by excluding, in computing income, amounts received during such year on account of sales or other dispositions of property made in any year prior to the year in respect of which the change was made.
(b) Nothing in this section shall be construed as in any manner modifying section 607, 608, 609 or 610 of this Act, relating to the effect of the running of the statute of limitations.

The provisions of this section apply to all the years in controversy. We are in substantial accord with the opinion of the General Counsel of the Bureau of Internal Revenue as it is expressed in his memorandum 8144 (recorded in C. B. IX-1, p. 113).

In the course of his memorandum, the General Counsel analyzes the somewhat involved syntax of section 705, and expresses the opinion, in conclusion, that:

* * * where a taxpayer properly qualifies under section 705 of the Revenue Act of 1928, in determining deficiencies against the taxpayer there should be excluded in computing income for the year of change to the installment basis and for all subsequent years, amounts received on account of sales or exchanges of property made in years prior to the year of change, and that such procedure should be followed not only for the years involved * * * but also for years covered by the Revenue Act of 1928. * * *

Respondent does not apply this opinion of the General Counsel in the instant case. He contends that section 705, quoted, supra, was enacted solely as a relief measure from double taxation which might result from the operation of the law as construed by the Board in Blum’s, Inc., 7 B. T. A. 737, and that petitioner, having received refunds for 1918 to 1923, inclusive, as provided in section 1208 of the Revenue Act of 1926, is not a taxpayer who “ properly qualifies under section 705 of the Revenue Act of 1928.” Quoting respondent, he says that:

Since petitioner, on account of the refund, has not been taxed on the profits which are included in the installment payments on sales of prior years collected in 1924, 1925 and 1926, the action of the Commissioner in including those profits in income for those years does not subject the petitioner to double taxation. Petitioner is not within the purview of the relief provision of section 705 of the 1928 Act and the Commissioner’s action in taxing the profits as received was correct. * * * The petitioner having two methods of relief available has taken full advantage of one, and has not been subjected to double taxation. Now the petitioner wishes to invoke the other method in his favor and to escape taxation on income which in equity and good conscience should be taxed. Such was not the intent of Congress * * ⅜.

That such is the precise result that will ensue, if we support petitioner’s contentions, is obvious, and it may even be admitted that the entire probability supports respondent’s contention that such was not the intent of Congress, but where the mandate of a statute is clear and free from ambiguity, there are no sufficient grounds for this Board to disregard the statutory provisions merely because in a particular case the application of the statute appears to result in an inequitable or incongruous situation. There is nothing in the statute to indicate that section 705 is purely a “relief measure” available only to those taxpayers who have not received refunds under the other provisions of earlier acts. We are not here concerned whether “ in equity or good conscience ” these amounts in question should be taxed. In our judgment the unmistakable mandate of the statute is that they shall not be taxed, and we so hold.

The two preceding issues are raised in all three of the taxable years in question. The third issue applies only to the last of them, the year 1926. On December 31 of that year petitioner was a party to a reorganization and, pursuant to the reorganization plan, it transferred substantially all of its properties to the Sundstrand Corporation" of~DefeWa're in exchange for 14,060 shares of the preferred stock of the Delaware corporation and $2,000,000 cash. Petitioner immediately used part of the cash so received to retire its own preferred stock and, still pursuant to the reorganization plan, immediately distributed to its own stockholders the preferred stock of the Delaware corporation, and the remainder of the cash. As of the same date (December 31, 1926) petitioner’s books of account showed a reserve for “Unrealized Profit” on installment sales in the amount of $322,980.29. In arriving at the proposed deficiency here in question, respondent added this amount to petitioner’s income, on the ground that when petitioner exchanged its assets for stock and cash, it collected 100 per cent of the total outstanding installment accounts receivable. Included in the $322,980.29 is an amount of $1,640.49 representing uncollected profits on sales made prior to 1924, but such $1,640.49 is not included in the amount of $6,864.68 referred to above as profits received by petitioner during 1926 on account of installment sales made prior to 1924.

The question raised is whether the amount of $322,980.29 or any part thereof is income to petitioner in 1926.

In one form or another, this question has been before the Board upon earlier occasions, and we have considered it as it was presented in the several cases decided. See Packard Cleveland Motor Co., 14 B. T. A. 118; R. L. Brown, 14 B. T. A. 609; Wallace Huntington, 15 B. T. A. 851; M. A. Milan, 16 B. T. A. 1112; Charles F. Meagher, 20 B. T. A. 68; Lucius H. Elmer, 22 B. T. A. 224; and Virginia Beach Golf Course Annex Corporation, 23 B. T. A. 1169.

The pertinent parts of the 1926 Act, which governs here, are:

Sec. 203 (b) (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization * * *
*******
(e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, * * *

We have closely scrutinized the facts in the case at bar, the act relating thereto, and the earlier decisions of the Board. The case most closely paralleling the one now before us is Charles F. Meagher, supra. The Meagher case fell under the provisions of the Revenue Act of 1921, but the Act of 1926, applicable here, though it differs from the earlier act in the phraseology of some of its provisions, differs in no material respect therefrom in the effect of the sections above quoted, as we read and apply them, nor does respondent contend that it does. The 1926 Act is even more definite and free from ambiguity than the Act of 1821. In the Meagher case we said:

We can but conclude that the transfer by petitioner of these installment obligations in a transaction which, under existing law is held not to result in taxable gain, can not be considered as a present realization of income therefrom, and this conclusion is further strengthened by the fact that the determining of a taxable gain from such a transaction is first provided for by the Revenue Act of 1928 in section 44 (d), * * *
This section is not by its terms made retroactive and, as we pointed out in Wallace Huntington, supra, the insertion of this new provision in that act was clearly indicated by the report of the Committee on Finance of the Senate, and the Committee on Ways and Means of the House of Representatives, to be for the purpose of changing the condition existing under the prior revenue acts, including the Revenue Act of 1921 [and the Revenue Act of 1926] here’involved, under which it was possible to dispose of installment obligations in a transfer not giving rise to loss or gain and thereby evade tax liability in respect to the income which would otherwise be represented by them.

We are controlled, by the Meagher case from which we have just quoted, and by Wallace Huntington, supra. Accordingly, we hold that no taxable profit was realized by petitioner when in 1926 it transferred to the Sundstrand Corporation of Delaware substantially all of its properties (including installment accounts receivable) in exchange for 14,060 shares of the preferred stock of the Delaware corporation, and $2,000,000 in cash.

The amount of $1,640.49 representing uncollected profits on sales made prior to 1924, included in the total amount of $322,980.29, is exempt from taxation under our decision on the second issue herein considered.

Judgment will be entered wnder Rule 50.


author: Van Fossan :

text:
    Hover Consolidated Royalties, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50795, 54327.
    Promulgated November 30, 1931.

      F. S. Jacobson, Esq., and E. G. Toomey, Esq., for the petitioner.

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

Van Fossan :

The petitioner is a common law trust in which the shares are represented by certificates of beneficial interest. The entire issue of such beneficial units was 2,500 units or shares of the “ expressed ” par value of $100 each. On July 21, 1926, the petitioner, through its trustees, purchased 1,250 Class B units from Herbert A. Hover for $25,000. The petitioner owned certain oil royalties and working interests in oil and gas projects. The respondent has allowed a proper depletion on such assets. The petitioner contends, however, that it is entitled to some allowance for “ exhaustion or amortization or an offset of some other name,” on the theory that the purchase of the Class B units was the acquisition of a property right to oil and that it is, therefore, the purchase of a depletable asset.

We can not agree with the petitioner’s contention. Its income-tax returns were made as a corporation and it was so taxed. The certificates of beneficial interest correspond to shares of common stock in a corporation. They are assignable and transferable exactly as stock certificates. They represent an interest in the capital of the petitioner. They neither purport to, nor do they represent an ownership in or a property right to oil. Under the provisions of the trust agreement the trust might engage in many kinds of business. On July 21, 1926, it so happened that its assets consisted of oil royalties and operating interests in oil and gas wells.

When petitioner bought in 1,250 units of its ownership, it acquired no additional depletable assets. The only practical effect of the purchase was to make the holdings of its remaining unitholders proportionately more valuable. Houston Brothers, 21 B. T. A. 804. In the cited case we held that a corporation’s own shares are not assets, but merely a convenient form for evidencing shareholding interests. Such an increase in the proportionate value of the remaining units would not increase the base for determining depletion.

Decision will be entered for the respondent.


author: Yan Fossan:

text:
    Fontana Union Water Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34518.
    Promulgated November 30, 1931.

      Daniel E. Farr, Esq., for the petitioner.

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

Yan Fossan:

On December 9, 1930, pursuant to hearing, a report was promulgated in this case. Thereafter, on January 15, 1931, an order was entered granting respondent’s motion for rehearing and restoring the case to the Circuit Calendar for rehearing.

The proceeding duly came on for rehearing, at which time respondent filed an amended answer and petitioner entered a general denial of affirmative allegations contained therein. The case was again submitted on the stipulation of facts with exhibits submitted at the original hearing and the pleadings as amended.

The stipulation of facts is as follows:

Fontana Farms Company, a domestic-corporation, as parent company filed with the Collector of Internal Revenue for its District at Los Angeles, California, a corporation income tax return for the calendar year 1922, which return was a consolidated return and included therein the returns for the same period of the following domestic corporations, namely:
Fontana Farms Company
Fontana Land Company
Fontana Union Water Company
Fontana Power Company
Fontana Citrus Association
Linden Mutual Water Company
Fontana Farms Company during all the calendar year 1922, owned directly or controlled through closely affiliated interests substantially all of the stock of the Fontana Union Water Company.
The Fontana Farms Company owned directly during the period from January 1st to November 17, 1922, both dates inclusive, all of the outstanding capital stock of the Rialto Domestic Water Company, a domestic corporation; the said Rialto Domestic Water Company filed with the Collector of Internal Revenue for its District at Los Angeles, California, an income tax return for the calendar year 1922. The return is the only return filed by the said Rialto Domestic Water Company for the year 1922, or any part of said year, and shows all the income derived during the calendar year 1922 by the said Rialto Domestic Water Company, and all expenses incurred during the said year 1922.
Tlie Orchard Mutual Water Company, a domestic corporation, had issued and outstanding Eight Hundred Fifty (850) shares of capital stock during the period from January 1, 1922, to February 2, 1922, and Eight Hundred Seventy-eight and One-half (878½) shares from February 2, 1922, to December 31, 1922; the Fontana Farms Company owned Seven Hundred Seventy-two (772) shares of the outstanding capital stock of the Orchard Mutual Water Company, or 90.9% of the total issued and outstanding stock, from January 1, 1922, to February 1, 1922, and Seven Hundred Eighteen (718) shares or 84.5% from February 1st to February 2, 1922, and Seven Hundred Twenty-three (723) shares or 82,3% from February 2, 1922 to December 31, 1922. The said Orchard Mutual Water Company filed with the Collector of Internal Revenue for its District at Los Angeles, California, an income tax return for the calendar year 1922. The return is the only return filed by the Orchard Mutual Water Company for the year 1922.

The notice of deficiency fixed the deficiency in taxes for the year 1922 in the amount of $1,614.89, and was predicated on a holding that petitioner was not affiliated with Fontana Farms Company for that year. Respondent now concedes that the basis so assigned was erroneous, but having amended his answer, contends that the deficiency must be sustained because two other companies alleged to be affiliated with Fontana Farms Company filed separate returns and consequently the income of each of the eight affiliated companies, those included in the consolidated return as well as the two who filed separate returns, must be determined as though not affiliated. Petitioner contends that the two companies which filed separate returns were not affiliated for the taxable year, this contention being based on the fact that the affiliation existed during part only of the year 1922. Petitioner cites in support St. Louis National Base Ball Club, 15 B. T. A. 1192; and B. B. Bathing Park, Inc., 17 B. T. A. 748.

The holding of the Board in the St. Louis case was reversed by the Circuit Court of Appeals, 42 Fed. (2d) 984, the court there holding, following Fidelity National Bank & Trust Co. v. Commissioner, 39 Fed. (2d) 58, that a taxable year is divisible as far as making returns is concerned, where corporations are affiliated for only a portion of the year. Petition for certiorari in that case was denied by the Supreme Court, 282 U. S. 883.

The decision of the Board in B. B. Bathing Park, Inc., supra, on the same point was based on our decision in the St. Louis case and rendered prior to the reversal of that case. Neither case, therefore, now stands as an authority on this issue, and petitioner’s contention can not be sustained. See also A. S. Siracusa Sons, Inc., 23 B. T. A. 53.

It appears from the stipulated facts that Fontana Farms Company owned directly during the period January 1 to November 17, 1922, all of the outstanding capital stock of the Rialto Domestic Water Company. The fact of affiliation for the period stated is thus conclusively established. Fontana Farms Company filed what was denominated a consolidated return for the calendar year 1922, on behalf of itself and five other companies, not including the Rialto Company. The Rialto Company filed a separate return of its income and expenses for the calendar year 1922.

In Apartment Corporation, 17 B. T. A. 876, we held that where, for the year 1922, one corporation, a member of an affiliated group, files a separate return the remaining corporations may not file a consolidated return of their income, but must file separate returns. The consolidated return must be that of the entire affiliated group, not merely of part of them.

The action of the Rialto Company in filing a separate return conclusively answers the claim of the petitioner that the tax of all of the members of the affiliated group should be determined on the basis of one consolidated return, and it is unnecessary to determine whether, on the facts stipulated, the Orchard Mutual Water Company was affiliated with Fontana Farms Company. If it were affiliated, the filing by it also of a separate return would merely add weight against petitioner’s contention. If it were not affiliated, this fact would not lead us to a conclusion different from that announced above. The action of the Rialto Company in filing a separate return was sufficient to require the denial of petitioner’s claim.

Decision will Toe entered for the respondent.


text:
    East Jersey Lumber & Timber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41496.
    Promulgated November 30, 1931.

      Edwin C. Dutton, Esq., and Don B. Hutchinson, Esq., for the petitioner.
    : J. M. Leinenlcugel, Esq., for the respondent.
   OPINION.

McMahon :

The sole question here presented is whether the petitioner and the Bridge Company were affiliated during the year 1925 for income-tax purposes. Section 240 of the Revenue Act of 1926 provides in part as follows:

(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925.

The evidence discloses that the same interests that owned all the stock of the petitioner also owned forty of the fifty shares of stock of the Bridge Company. The remaining ten shares of stock of the Bridge Company were outstanding in the name of G. V. Mitchell. Petitioner contends that this stock was also owned by the same interests which owned all the stock of the petitioner.

The evidence does show that the certificate issued in Mitchell’s name for ten shares of Bridge Company stock remained in the possession of the Bridge Company until 1917, for the reason that Mitchell had not paid for it; that in that year Mitchell endorsed the certificate in blank and deposited it with a bank as collateral for a loan, Mitchell’s note being endorsed by the Bridge Company; that Mitchell never paid any principal or interest of the note; that the Bridge Company paid the interest thereon; and that eventually the Bridge Company and the petitioner paid the principal amount of

the note. However, the note was not paid until after the year in question. So far as we are able to determine from the evidence the legal title to the ten shares in question was owned by Mitchell in 1925. The Bridge Company and the petitioner certainly did not own the ten shares of stock in question prior to the time they paid the principal amount of the note for which the stock was pledged as security. Handy & Harman, 17 B. T. A. 980; affd., Handy do Harman v. Commissioner, 47 Fed. (2d) 184; affd., 284 U. S. 136. Furthermore, there is nothing in the evidence to show that the ten shares of stock in question were not “ voting stock ” within the meaning of section 240 (c), supra. The fact that Mitchell did not, in fact, vote the stock has no bearing upon the question of whether the stock was “ voting stock.”

We conclude that the evidence does not establish that at least 95 per centum of the stock of the petitioner and' the Bridge Company was owned by the same interests. The respondent’s holding of non-affiliation is approved.

Judgment will be entered for the respondent.


text:
    Woodward Iron Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35146.
    Promulgated November 30, 1931.

      H. C. Kilpatrick, Esq., and Wm. B. White, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   opinion.

Smith:

The respondent determined the following deficiencies in the petitioner’s income and profits taxes:

1920_$37, 939.43
1921_ None.
1922_ None.
1923_ 67, 607. 89
Total_ 105, 547.32

At the hearing the parties filed the following stipulation:

The parties having agreed to a basis for settlement of all of the issues in this case, save and except the issue hereinafter set forth, it is hereby stipulated and agreed that the Board may consider and determine this cause on the basis of the facts and statements herein contained.
1. The sole issue to be considered and determined by the Board is whether or not the Commissioner lawfully included in the petitioner’s income subject to tax for the years 1920 to 1923, inclusive, certain sums constituting the difference between the amounts for which the petitioner sold its bonds and the amounts for which same were reacquired by it as hereinafter set forth, to-wit:
(a) The petitioner duly issued and delivered to the Farmers Loan & Trust Company, a New York corporation, as Trustee, its First and Consolidated Mortgage securing Twenty-five Million Dollars ($25,000,000.00) face amount of its 5% Sinking Fund Gold First and Consolidated Mortgage Bonds, said mortgage being dated as of January 1, 1912. Contained in said First and Consolidated Mortgage as Article Second thereof was a convenant on the part of Petitioner that it would pay to the Trustee under the mortgage, and that the Trustee would retain, certain sums as a sinking fund all as set out in said Article Second a true copy of which is hereto attached marked Exhibit “A” and made a part hereof as if incorporated herein. [This article further provided for the purchase of the bonds- by the taxpayer and/or the trustee. Other provisions are not material here.)
(b) In accordance with the obligations imposed upon them by said Article Second of said First and Consolidated Mortgage the Petitioner purchased for the sinking fund for the calendar year 1920 bonds of said issue of the face amount of $107,000.00; for the calendar year 1921, bonds of said issue of the face amount of $112,958.39; for the calendar year 1922, bonds of said issue of the face amount of $118,000.00, and for the calendar year 1923, bonds of the said issue of the face amount of $128,925.42. All of said bonds of the face amount aforesaid were delivered to and retained by the Trustee under said mortgage in the sinking fund and said bonds were marked “ held for the sinking fund and not transferable” as provided in said Article Second Of said mortgage.
(c) After making proper allowance for discount previously allowed as a deduction with respect to bonds sold at less than the face amounts thereof, the prices paid by the Petitioner for bonds so' purchased for and deposited in the sinking fund were less than the amounts for which said bonds were sold by the Petitioner in the following amounts in the following years, to-wit:
For the calendar year 1920-$23,190. 00
For the calendar year 1921--- 30,124. 94
For the calendar year 1922_:- 24, 652. 00
For the calendar year 1923- 23, 505. 40
On account thereof the respondent has included the aforesaid amounts in the gross income of the petitioner for the respective calendar years. The effect of the inclusion of said amounts in the gross income of the petitioner for the said calendar years is to increase the net taxable income of the petitioner for the year 1920 by the sum of $23,190.00, and for the calendar year 1923 by the sum of $78,282.34, the petitioner having suffered net losses for the years 1921 and 1922 which are applicable to reduce the net taxable income otherwise received by the petitioner for the calendar year 1923. As a result of the aforesaid inclusions in income the tax proposed to be assessed against petitioner has been increased in the amount of $6,493.20 for 1920 and $9,785.29 for 1923.
(d)In the event said amount of $23,190.00 is lawfully included in the gross income of the petitioner subject to Federal income and excess profits tax for the calendar year 1920, it is stipulated and agreed that there is a deficiency due from the petitioner with respect to said calendar year 1920 in the amount of $48,905.09; but if said sum of $23,190.00 is not lawfully included as a part of the gross income of the petitioner subject to Federal income and excess profits tax for tlie calendar year 1920, it is stipulated and agreed that a deficiency is due from the petitioner with respect to the calendar year 1920 in the amount of $42,411.89.
(e) In the event that the aforesaid sums of $30,124.94 with respect to the calendar year 1921, $24,652.00 with respect to- the calendar year 1922 and $23,505.40 with respect to the calendar 5'ear 1923 are lawfully included in gross income of the petitioner subject to- Federal income tax for these years, it is stipulated and agreed that there is a deficiency due from the petitioner with respect to the calendar year 1923 in the amount of $53,122.45; but if the amounts aforesaid are not lawfully included in the gross income of the petitioner subject to Federal income tax for the respective calendar years, there is then due a deficiency from the petitioner with respect to the calendar year 1923 in the amount of $43,337.16.
2. That with respect to the years 1921 and 1922 the Board has no jurisdiction for the reason that the notice of deficiency upon which the appeal was based

In United States v. Kirby Lumber Co., 284 U. S. 1, tbe Supreme Court held that the taxpayer realized income upon the purchase of some of its bonds at a price less than the amount received upon the issuance of such bonds. The court pointed out that the transaction involved in Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, “ as a whole was a loss,” whereas in the Kirby Lumber Co. case “ there was no shrinkage of assets and the taxpayer made a clear gain.” The court also stated that:

* * * As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct. * * * The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here. Burnet v. Sanford & Brooks Co., 282 U. S. 359, 364.

The stipulated facts of the instant case do not distinguish it from United States v. Kirby Lumber Co., supra, which controls the issue here.

The parties having stipulated the-amount of the deficiencies to be assessed as the result of our determination,

Judgment will be entered for the resfondent in the amounts of $48,905.09 for 19W, and $53,m.45 for 19m.


author: Matthews:

text:
    J. P. Burton Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44014.
    Promulgated November 30, 1931.

      L. F. Loux, Esq., and Henry Rcmenel. Esq., for tbe petitioner.

      J. M. Leinenkugel, Esq., for tbe respondent.
   ORINION.

Matthews:

The petitioner in the instant proceeding is claiming that it was affiliated with the By-Products Coal Company for the entire fiscal year ended March 31, 1925, and that it is entitled to file a consolidated return for that period.

Section 240 (c) of the Eevenue Act of 1926 provides:

* * * * * * *
(e) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925.

We are concerned in this case only with the second subdivision of the above section. The petitioner contends that since the two corporations were operated as an economic unit, with Burton controlling both businesses, and that since Jones did not actually vote his stock or take any active interest in the business, the two corporations are affiliated, regardless of the fact that Burton, who owned all of the stock of the petitioner, did not own but 75 per cent of the stock of the By-Products Coal Company.

The evidence in this proceeding does not show that Burton and Jones constituted the “ same interests.” Jones did not own any stock in the petitioner and his interest in the By-Products Coal Company was not the same as that of Burton. The mere fact that Jones acquiesced in the management and did not vote his stock and that Burton determined the policies of the business does not entitle the corporations to file consolidated returns. See United States v. Cleveland, Painesville & Eastern R. R. Co., 42 Fed. (2d) 413, and United States v. Mahoning Coal R. R. Co., 51 Fed. (2d) 208. We must, therefore, sustain the action of the respondent in refusing to allow the petitioner and the By-Products Coal Company to file consolidated returns and in refusing to allow the petitioner to deduct the loss sustained by the By-Products Coal Company from its net income.

We do not believe that the cases of Baker Lumber Co., 21 B. T. A. 124, and Kile & Morgan Co. v. Commissioner, 41 Fed. (2d) 925, relied upon by the petitioner are controlling in this proceeding. In the Kile case two individuals, Kile and Alling, owned 99 per cent of the stock of one corporation and 1,656 shares out of 1,810 of another (91½ per cent). Of the remaining, 17 were owned by Kile’s sister, Mrs. Boston, and 137 by her husband, an employee who was heavily indebted to the corporation and under an agreement not to sell his stock without first offering it to the trustees. In the Baker case, Baker owned all of the stock of one corporation, from 76 to 86 per cent of another and 92 per cent of another, the remaining stock being owned by Swenson, Ludden and Curtis. Curtis was Baker’s brother-in-law and had purchased the stock at 50 per cent of its face value, in order to act as director. Swenson and Ludden were employees and purchased their stock under an agreement whereby no sale or transfer could be made without' Baker’s consent. It was shown that the interests of these three in no way conflicted with that of Baker.

It is clear from a study of the above cases that affiliation was granted upon the theory that the minority stockholders constituted the “ same interests ” as the majority, and as we have pointed out above such is not the situation here.

Judgment wild be entered for the respondent.


text:
    The A. L. Wilson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19505.
    Promulgated November 30, 1931.

      George T. Adams, Esq., for the petitioner.

      L. W. Orearon, Esq., for the respondent.
   OPINION.

Matthews:

We will first consider the petitioner’s allegation that the assessment and collection of the tax for the fiscal year ended January 31, 1918, hereinafter referred to as the taxable year, is barred by the statute of limitations. The return was filed on March 30, 1918; hence, the statutory period for assessment and collection, unless otherwise extended by waivers, expired on March 30, 1923. (Sec. 250(d), Act of 1921.) The respondent, in order to show that the statutory period had no't expired, has introduced a series of waivers, the terms and dates of which are fully set forth in our findings of fact. These waivers, if valid, clearly extended the statutory period for .assessment and collection to December 31, 1926, which is later than the date of the mailing of the deficiency notice.

The petitioner contends, however, that the waiver dated October 20, 1925, was not effective to extend the limitation period except as to a deficiency in the amount of $160.07, which was the amount determined to be due in the respondent’s thirty-day letter of August 28, 1924. Counsel for the petitioner testified that about October 10, 1925, he had a conference with a Mr. Cavanaugh of the Solicitor’s office relative to the year in question; that Cavanaugh asked him to have a waiver executed for that year for a deficiency of $162.07; that he wanted to have the tax assessed at once, but Cavanaugh thought it would be a big help if the Department could keep all the years in question in the same file and assess all the taxes at the same time; and that for this reason he had the corporation execute a waiver for the year “ ended January 31,1918, to cover the additional tax of $162.07 for that year.” The waiver referred to, however, clearly provides for the waiving of the time prescribed by law for making any assessment of the amount of income, excess-profits or war-profits taxes due under any return made by or on behalf of the taxpayer for the years ended January 31, 1917, 1918, and 1919.

In the case of Welz &s Zerwech, Inc., 11 B. T. A. 1416, the petitioner filed consents extending the statutory period for assessment and collection. While the last of these consents was in full force and effect, certain agents of the Commissioner requested further consents for the years 1918 and 1919, and prior years, stating that they were going to recommend the cancellation of the taxes outstanding, but that it was necessary to have the waivers executed and that if the petitioner would sign the waivers they would submit their report, which would undoubtedly be approved and would in effect relieve the petitioner from any additional liability for 1919 taxes. Belying upon this representation, a consent was executed covering the years 1919 to 1921 on the regular income and profits-tax-waiver form. The Commissioner later made a determination and assessed a deficiency in tax for the year 1919. In holding that the assessment was not barred by the statute of limitations, we said:

* * * Tlie petitioner contends tiiat tlie agents represented to. their secretary, the corporate officer who, for the petitioner, executed the consent of October 19, 1925, that consents were not desired for the years 1918 and 1919, but that inasmuch as the agents did not have with them sufficient blanks to prepare a consent for each year one blanket consent would be given which would enable the Commissioner to straighten out deficiencies for all years 1909 to 1921, inclusive. It is further contended that the agents represented that they were recommending to the Commissioner that the petitioner’s claims for the years 1918 and 1919 be allowed and that they would undoubtedly be allowed and that the taxes assessed against them for those years would be abated. The consent bearing date of October 19, 1925, makes no reference to such an understanding. It does not except from the period of years covered by the consent the years 1918 and 1919, which could easily have been excepted if the agents or the petitioner had desired to except thereto. A properly executed instrument in writing must be considered to express the intent of the parties signing the same.
It is a well established rule of the common law, which has been embodied in statutes in a number of states, that when any * * * contract, agreement, or undertaking has been reduced to writing, and is evidenced by a document, or series' of documents, the contents of such documents cannot be contradicted, altered, added to or varied by parol or extrinsic evidence. (22 O. J. 1070).
The authorities giving expression to the principle are so many as to prohibit any attempt at selective citation. See Slater v. Van Der Hoogt, 23 App. D. C. 417; Knight v. W. T. Walker Brick Co., 23 App. D. C. 519; Bieber v. Gans, 24 App. D. C. 517; Brawley v. United States, 96 U. S. 168; Willard v. Tayloe, 8 Wall. 557. In Brown v. Spofford, 95 U. S. 474, the Supreme Court said:
In the absence of fraud, accident, or mistake the rule is the sanie in equity as at law, that parol evidence of an oral agreement alleged to have been made at the time of drawing, making or indorsing a bill or note cannot he permitted to- vary, qualify, or contradict, or to add to or subtract from, the absolute terms of the written contract. Forsyth v. Kimball, 91 U. S. 2. (Italics supplied.)
See also Converse & Co., 1 B. T. A. 742; J. W. Solof, 1. B. T. A. 776; Arthur B. Grover, 3 B. T. A. 508.
The findings of fact state the circumstances under which the consent of October 19, 1925, was given. We think, however, that that evidence is not competent to vary the terms of the consent given. * * *

The instant proceeding presents a somewhat similar situation. The testimony of counsel for the petitioner can not change the terms of the waiver which clearly extends the period for the assessment of the tax. The respondent has the right at any time prior to the expiration of the statutory period of limitations to increase the amount of tax proposed to be assessed. Austin Co. v. Commissioner, 35 Fed. (2d) 910. The assessment and collection of the tax for the taxable year are not barred by the statute of limitations.

With regard to the remaining assignment of error, that the respondent erred in refusing to grant special assessment, we are of the opinion that the evidence is insufficient to establish the petitioner’s claim. Counsel for the petitioner argues that the petitioner is entitled to relief upon the ground of abnormality caused by inadequate salaries paid to officers and by the fact that it borrowed money. The only evidence is the testimony of Key, vice president of petitioner, to the effect that he was told by others that the salaries paid were less than those paid by other similar concerns and that it was necessary for the petitioner to borrow money. There is absolutely no evidence that there was an abnormality, and clearly the petitioner is not entitled to special assessment.

Judgment will loe entered for the respondent.


author: ARUndell :

text:
    Estate of John W. Rapp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28618.
    Promulgated December 2, 1931.

      William H. Matthews, Jr., Esq., and Benjamin Mahler, Esq., for the petitioner.

      J. G. Gibbs, Esq., for the respondent.
   OPINION.

ARUndell :

The several issues in this case may be grouped under two heads. In the first group there are the questions of whether Eapp is a transferee of the Empire Company and whether the assessment against his estate was timely made. The second group goes to the amount of the deficiency, it being claimed: (a) That the Empire Company was affiliated with three other companies in that part of 1920 prior to August 10; (b) that invested capital was erroneously reduced by excluding claimed good will and on account of taxes for 1918 and 1919; (c) that the sale of assets by the Empire Company was not taxable; and (d) that if it was taxable it was an installment sale.

The material facts relating to the transferee liability may be briefly restated. In 1920 the Empire Company conveyed a part of its assets to a newly organized corporation in exchange for stock of the latter, which stock, pursuant to an agreement with the Empire Company, was issued directly to the Empire’s sole stockholder, John W. Eapp. The brokerage concern that handled the consolidation agreed to purchase a part of the stock thus acquired by Eapp at a fixed price, which agreement it partially performed.

We think these facts are sufficient to establish liability on the part of Eapp. By the conveyances of the Empire’s assets, that company was left without means of satisfying its tax liability, and the assets taken over by Eapp and the proceeds of those conveyed to a third party, were taken subject to the liabilities of the transferor. Concrete Industries Co., 19 B. T. A. 655. Moreover, under the agreement between Eapp and the Empire Company, the Central stock and the remaining Empire assets were expressly taken by Eapp subject to the Empire’s liabilities.

The Empire Company’s return for 1920 was filed on September 15, 1921. Assessment was made against it on February 20, 1926, which was well within the five-year statutory period. A jeopardy assessment of the Empire Company’s deficiency was entered against petitioner on March 5, 1927, and petitioner was notified thereof by letter of March 22, 1927. The statutory period for assessment against the Empire Company did not expire until September 16, 1926, which was after the enactment of the Eevenue Act of 1926, and the assessment against petitioner having been made within one year thereafter, the case falls within section 280 (b) (1)' of the Revenue Act of 1926, and the assessment was timely made. Louis Costando, 16 B. T. A. 1294; J. A. Kemp, 20 B. T. A. 875.

The amounts and percentages of stock owned by the several stockholders in the Empire Company and the three others with which it claimed affiliation are set out in the findings of fact. The tabula-

tion sot out shows that the Empire Art Metal Company owned all the stock of the Empire Metal Aircraft Company. On this showing there can be no doubt that these two companies were affiliated and entitled to file a consolidated return. The Empire Company owned no stock in the other two concerns, the Perfection Metal Products Company and Queensboro Trucking Company, and no control on the part of the Empire Company is shown. Accordingly, if these two companies are to be included in the affiliation, it must be under' section 240 (b) (2) of the Revenue Act of 1918. All the stock of the Perfection Metal Products Company was owned by three individuals. These three owned only 85 per cent of the Queensboro Trucking Company stock and 94 per cent of the Empire Company stock. In view of the widely varying percentage of stock ownership and the absence of any showing of control or economic unity, we are of the opinion that respondent’s refusal to allow the affiliation of the Perfection and Queensboro companies with the Empire Company should not be disturbed. Block Street Wharf & Warehouse Co., 2 B. T. A. 183.

The claim for the inclusion in invested capital of the Empire Company of good will in the amount of $90,000 is based on the fact that upon organization Rapp assigned to it a contract for equipment of a building in New York and that after incorporation the company itself obtained a contract for equipping a building in Philadelphia, from both of which contracts it expected to realize substantial profits. The evidence is insufficient to sustain the claim. The ability to secure contracts may in some measure be determined by good will, but the fact that a corporation has two contracts does not establish the existence of that intangible, much less its value. Any profits realized under the contracts would find their way into invested capital through earned surplus.

We further hold, on the same evidence, that there was no error in respondent’s exclusion of $90,000 as cost of good will in determining profit on the sale of the Empire Company’s assets. Whatever assets the Empire Company sold were acquired by it after March 1, 1918, and the basis is therefore cost. What the cost was does not appear from the evidence.

The Empire Company’s return for 1918 was filed June 16, 1919, and the statute of limitations, unless waived, ran against assessment five years later, or on June 16, 1924. Respondent introduced no waivers in evidence and we accordingly hold that the assessment of additional taxes for 1918 made on May 29, 1925, was too late. Under our holdings in Lancaster Lens Co., 10 B. T. A. 1153, and National Products Co., 11 B. T. A. 511, it was error for the respondent to reduce invested capital for 1920 on account of the barred tax for 1918.

The 1919 return was filed July 16, 1920, and the assessment for that year made on May 29, 1925, was timely. Accordingly, there was no error in reducing invested capital on account of that assessment. Section 1207, Revenue Act of 1926.

The remaining questions have to do with the amount of profit realized by the Empire Company on the sale of assets for the Central Company’s stock. There is no merit in the contention that'the profit should be computed on the installment basis, as the entire consideration, namely, stock of the Central Company, was received at once by the Empire Company. The fact that Rapp received in cash within the year less than one-fourth of the price at which he agreed to sell the stock does not affect the question, as he was not the vendor of the Empire Company’s assets.

Section 202 (b) of the Revenue Act of 1918, under which the profit to the Empire Company is to be computed, provides that:

When property is exchanged for other property, the property received in exchange shall, for the purpo'se of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value, if any; * * *.

Respondent computed the gain under this section, but in so doing he used $444,843.80 as the sale price and now concedes that that figure is in error in so far as it exceeds the $340,000 shown as the sale price in the return. There is no dispute between the parties that the amount of $187,569.30 listed in the return as the value of assets sold is the correct basic figure — except for the $90,000 good will item eliminated by the respondent, which elimination we have sustained.

The sale price of $340,000 now contended for by respondent represents a value of $85 per unit for the stock received by the Empire Company, each unit consisting of one share of preferred and two shares of common stock. We are satisfied that the figure of $85 per unit is higher than the fair market value. The evidence shows that despite extraordinary efforts exerted by the Geiger-Jones Company, sales were exceedingly slow and in very small blocks. The stock was peddled in three States and common stock offered as a bonus, and yet the sales dwindled with the passage of each month. The stock was not listed and there are no bid or asked prices of record. Banks refused to accept the- stock as collateral. The issuing company, Central, was losing money in 1920. The Geiger-Jones Company was in a bad way financially. The Central Company, it is shown, was tremendously overcapitalized. -The agreement of the Geiger-Jones Company to purchase Rapp’s holdings at a stipulated price is no evidence of market value. The figure agreed upon was purely an artificial price fixed before any market value was established. The widely scattered purchasers of the stock had no knowledge of the value of the stock, and it appears that they were induced to buy through the efforts of Geiger-Jones salesmen and on the basis of the fictitious statements in the prospectus put out by that company. The sales made, in our opinion, do not establish the fair market value of the stock.

We do not believe that petitioner makes his case solely by establishing that $85 was not the fair market value of the preferred shares. The evidence is all to the effect that Geiger-Jones arbitrarily wrote up the assets and the plant account alone was increased $1,000,000 above its actual worth as a justification for the basis on which the financing of the Central Company was being undertaken. The fact that shares of stock may not be marketed at an excessive price does not establish the lack of a market for the same shares at a fair price. The new company had the assets of two companies that had previously been operating, and, as far as we know, had been successful concerns. The former president of the Zahner Company, who also acted as consulting ■ accountant to the Geiger-Jones Company prior to the consolidation, and who was familiar with the plants and operations of both companies, testified that consolidation would have been an excellent thing for both companies if the capitalization had been kept down to a basis commensurate with the value of the assets, and he expressed it as his opinion that the preferred stock was worth from $25 to $35 per share on the basis of the combined value of the assets of the two companies. Upon careful consideration of all of the evidence we feel warranted in fixing a fair market value on the preferred stock, and in our opinion its fair market value was not in excess of $50 per share. It follows that the amount realized by the Empire Company on the exchange of its assets for stock should be computed on that basis.

Decision will be entered under Bule 50.


author: Teammell :

text:
    Arthur P. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent. William L. Juhring, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37554, 37555.
    Promulgated December 3, 1931.

      Paul L. Peyton, Esq., and Albert 8. Bockwood, Esq., for the petitioners.

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

Teammell :

The petitioners contend that their proportional shares of the amount of $36,000 which was paid in stock to Sayre in 1923 in settlement of his claim for his share or interest in the good will of the partnership are allowable deductions either as an ordinary and necessary business expense and/or as a loss. The respondent contends that the amounts represent payment for Sayre’s interest in the good will of the partnership, that they are therefore capital expenditures and as such are not allowable deductions.

In support of their contention the petitioners urge that the payment made to Sayre was for the purpose of avoiding the legal action threatened by him and its injurious effects as well as to assure his retirement from the business. They also urge that under the agreement of January 20, 1920, he was barred from any payment for good will.

The petitioners testified that in making the payments here in controversy they did not consider that they were made for any interest that Sayre might have had in the good will of the partnership, but that they made them for the purpose of preventing legal action. They also testified that they considered that when Sayre had received the payments provided for in the agreement of January 20, 1920, he would not be entitled to any further payments of any kind.

An examination of the partnership agreement of January 20, 1920, discloses that the term “ good will ” is used only twice. Once, in a provision giving four in number of the partners the power, in event that number of the partners desired to sell “the assets, business, and good will of the partnership as a going concern, either for cash or wholly or in part for securities or other property,” to make such sale. The term is used again in the following provision:

Tenth. — In tbe event of the termination of this partnership at the end of the term hereby created or prior thereto (except in the event of sale as herein-before provided) the share of the said partner, William IT. Vossler, shall be limited to the amount of capital contributed by him and his percentage of profits without taking into consideration any good will attached to the business of said partnership.

In view of the foregoing provision that the partner, Yossler, was not to receive anything on account of the good will of the business upon the expiration of the partnership, it is difficult to understand why a similar provision was not inserted in the agreement with respect to Sayre if it was intended, as the petitioners contend, that he, too, should not receive anything because of good will. It is true that the agreement did not specifically provide that upon expiration of the partnership Sayre should be paid anything on account of any interest he might have in the good will. However, on the other hand, it does not contain any provision that he should not be entitled to a payment on account thereof, as was specifically inserted with respect to Yossler. The absence of a provision barring Sayre from an interest in the good will becomes more significant when it is considered that he was to retire from the business at the expiration of the partnership agreement and that also he was to retire monthly the capital he had invested in the partnership, while Yossler was not to do either. Since there was no discussion among the partners prior to or at the time the agreement of January 20, 1920, was entered into as to what should be Sayre’s rights with respect to the good will of the petitioner at the expiration of the agreement, and in view of the fact that the agreement was silent with respect to Sayre’s rights thereto, but was specific that another partner should not be entitled to an interest therein, we are unable to concur in the contention of the petitioners that the agreement precluded Sayre from receiving any payment for good will.

The business carried on by the partnership formed under the agreement of January 20, 1920, had been carried on continuously by various partnerships since 1811. Since 1871 it had been operated at a profit every year except 1896 and 1920 and only in the latter year was it operated at a loss. Sales had increased from about $1,250,000 in 1880 to about $10,000,000 in the year ending January 31, 1923. The corporation whiT took over the assets and business of the partnership at its expiration on January 31, 1923, shortly thereafter carried the good will in its financial statement at a value of $500,000. We think it is clear that the partnership had good will of a substantial value. However, for our purpose it is not necessary to determine what that value was.

The good will of a partnership is ordinarily considered part of the property and assets of the firm and in the absence of a contrary agreement is to be accounted for upon the termination of the partnership. Here the partnership had a valuable asset which was not carried on its books, and consequently was not reflected in the capital accounts of the partners upon the partnership books. Sayre demanded that upon termination of the partnership this asset should be considered and that upon his retirement from the business he should be paid something on account of it. Since there was no agreement to the contrary, he was entitled to have the good will accounted for upon termination of the partnership. To the extent that the value of the good will increased the surplus of the partnership assets over liabilities, he had an interest therein. From the record in the case we think it was for this interest that the remaining partners agreed to pay him $36,000. The amount having been paid to Sayre for this purpose, we think it constituted a capital expenditure, and consequently the proportional parts thereof contributed by the partners were likewise capital expenditures and are therefore not allowable deductions in determining net income.

It may be well that the partners in contributing their porportional parts of the payments made to Sayre considered that they were making such payments solely for the purpose of avoiding litigation, but the fact remains that as a result of the expenditures so made by them they increased their own interest in the excess of the partnership assets over liabilities. The avoidance of litigation was only incidental to the object accomplished by the payment.

In this connection it is to be observed that by the agreement of January 12, 1923, Sayre agreed that for a period of five years he would not become interested in or identified with any business of a similar character to that carried on by the partnership or by the new corporation. The record does not show what consideration, if any, was given for this promise on the part of Sayre. But whatever the consideration was, the fact remains that the promise was acquired in connection with the settlement of Sayre’s claim with respect to good will. To tbe extent that any part of the $36,000 was in payment for this promise it was capital expenditure. See News Leader Co., 18 B. T. A. 1212; Aluminum Products Co., 24 B. T. A. 420.

Judgment will Toe entered for the respondent.