text:
    Appeal of Liberty Agency Co.
    Docket No. 6257.
    Promulgated December 14, 1926.
    1. Taxpayer was not entitled to classification as a personal service corporation for tlie year 1919.
    2. Taxpayer kept its books upon the accrual basis. In 1918 The Insurance Corporation, having 6,000 of its shares of stock of the par value of $25 a share for sale at $37.50 a share, and the taxpayer entered into a contract under the terms of which the taxpayer paid to The Insurance Corporation $45,000 in cash for the said 6,000 shares and agreed to pay to The Insurance Corporation the balance — $30 a share in cash or notes on or before September 10, 1920, which time limit was later extended to January 1, 1922. The 6,000 shares were forthwith issued by The Insurance Corporation to the taxpayer and the latter immediately endorsed these shares in blank and returned them to The Insurance Corporation to be held by it as a guarantee for the unpaid balance of $30 a share. It was comtemplafed that the taxpayer would sell the 6,000 shares to the public at $50 a share for cash, or 25 per cent in cash and interest-bearing prom'ssory notes for the balance, and with such cash or notes discharge its obligation to pay The Insurance Corporation the additional $30 a share and retain as its profit on the transaction the amount of $12.50 a share, and that upon receipt by The Insurance Corporation of the balance of $30 a share in cash or in notes it would release and transfer to the person or persons designated by the taxpayer the number of shares thus paid for. It was further agreed between the parties that, if the taxpayer did not assign the 6,000 shares or cause the same to be paid for as above mentioned within the time prescribed, The Insurance Company might, at its option, declare that portion of the $45,000 cash paid at the ratio of $7.50 a share for all of the 6,000 shares, which the taxpayer had not assigned or paid for as provided, forfeited as liquidated damages, and retain the unsold shares in satisfaction of taxpayer’s obligation to pay the balance of $30 a share. Held,
      that taxpayer was not entitled to deduct from gross income for the calendar year 1919 the amount of $11,707.50, being $7.50 a share on 1,561 shares of The Insurance Corporation’s stock which it had not sold to the public at the close of the year 1919, upon the ground that if it should not pay for these shares on or before January 1, 1922, that amount might, at the option of The Insurance Corporation, become forfeited.
    3. One J. J. Howard was promoter and sales manager of the taxpayer. In connection with the above-mentioned contract the taxpayer’s directors adopted a resolution which provided that upon completion of the contract with The Insurance Corporation it would pay to Howard $25,000. This resolution was rescinded in April, 1920. Held, that the taxpayer was not entitled to deduct from gross income for 1919, as an accrued expense, the amount of $16,243.83, representing $4.16% a share on 3,899 shares of The Insurance Corporation’s stock sold during the year.
    4. Taxpayer sold the stock at $50 a share and required purchasers to whom sold to pay 25 per cent of the purchase price in cash and give interest-bearing promissory notes for the balance. Held, that taxpayer was not entitled to reduce gross income for 1919 in the amount of $2,562.50, representing the amount of unpaid notes at December 31 of that year.
    5. The taxpayer realized no taxable gain upon the purchase of its own preferred stock for an amount less than the amount at which it had theretofore sold it.

      F. W. MoReynolds, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits tax in the amount of $14,253.94 for the calendar year 1919. Petitioner filed a personal service corporation return. The only issue before the Commissioner was whether it was entitled to classification as a personal service corporation. He denied it such classification and computed the deficiency upon the net income of $55,354.53, determined upon the accrual basis as shown in the return. Pie determined the profits tax under the provisions of section 328 of the Revenue Act of 1918. In its petition filed with this Board the petitioner claims (1) that it should be classified as a personal service corporation, (2) that if the Board should hold that it was not entitled to classification as a personal service corporation, its gross income should be adjusted as follows:
    (a) There should be deducted from the total gross profit on stock of The Insurance Corporation sold during the year $11,707.50, representing $7.50 a share on 1,561 shares of The Insurance Corporation’s stock which it had not sold at the close of the year 1919, for the reason that, if it did not pay The Insurance Corporation the remaining amount of $30 a share for these shares on or before January 1, 1922, The Insurance Corporation might, at its option, declare the $7.50 a share forfeited as liquidated damages and The Insurance Corporation would also retain such stock as the petitioner had not paid for.
    (b) The petitioner, having agreed to pay its sales manager a bonus of $25,000 upon the completion of the contract with The Insurance Corporation and the sale of 6,000 shares of the stock of that corporation, $16,245.83, or $4.16% a share, should be charged against the gross profit of $12.50 upon each share of stock sold during the year as an accrued expense to take care of its contingent liability to pay this bonus.
    (c) There should be excluded from gross income the amount of $2,562.50, representing promissory notes given by purchasers of stock which had not been fully paid at December 31, 1919.
    (d) There should be excluded from gross income the amount of $6,025, entered upon petitioner’s books as a profit as a result of the retirement of 201 shares of its preferred stock of the par value of $20,100 by delivering in exchange therefor 402 shares of stock of The Insurance Corporation costing it only $15,075.
    FINDINGS OP FACT.
    The petitioner is an Iowa corporation organized in August, 1918, with principal office at Dubuque. It kept its books on the accrual basis. The purposes for which it was created were stated in its articles of incorporation as follows:
    The business of tbe Corporation shall be the management, conduct and control of a general agency business. It may take over, continue, manage, control, conclude, dispose of, and close out the business of other agencies, corporations, associations, copartnerships or individuals. It shall have the right to buy and sell such stocks, bonds, securities as may be legally sold in this state, and evidences of indebtedness, for itself and for others. It may own, hold, sell, or encumber real and personal property, and do all things incident or necessary to the proper management and control of its business, and exercise and enjoy all the rights, privileges and franchises of corporations organized under the laws of the State of Iowa.
    Its .authorized capital stock was $50,000, divided into 250 shares of common and 200 shares of preferred stock. The preferred stock carried a dividend of 7 per cent. Fifty thousand dollars was paid in. On March 18, 1919, article 4 of the articles of incorporation was changed and the authorized capital stock was increased to $100,000 par value, consisting of 1,000 shares of the par value of $100 each, all common. On April 15,1919, a common stock dividend of $25,000 was declared and paid, making the total issued and outstanding common stock 500 shares. On the same date a resolution ivas adopted ordering the retirement of the outstanding preferred stock, consisting of 201 shares, and this stock was forthwith purchased by the corporation in the manner hereinafter set forth. •

      The names of the stockholders and the amount of stock owned (the preferred stock mentioned having been purchased by the corporation in April, 1919), the time devoted to the business by the stockholders, and the salary or commission paid to each in 1919 are as follows:

    The first four stockholders above mentioned, who owned 158 shares, devoted all of their time to the-conduct of the business and received compensation for services rendered in 1919, either as salary or commission. The next six stockholders in the order above given, who owned a total of 236 shares, or approximately 47 per cent of the total capital stock outstanding, served the petitioner either as officers and directors, or assisted it by suggesting the names of prospective purchasers of The Insurance Corporation stock and occasionally going with salesmen to see some of them. They were paid a small amount of compensation for the services rendered in the form of- “ Directors’ Fees.” They were not regularly engaged in the active conduct of the petitioner’s business. Each of these stockholders’ vocation was in a business unrelated to that conducted by the petitioner. The last fourteen of the stockholders above mentioned, who owned 106 shares of the total outstanding capital stock, rendered no service and devoted no time to the business of the petitioner. Salesmen who -were not stockholders were employed to sell stock, and they; sold or assisted in the sale of stock to the extent of about 15 per cent of the total stock sold. J. J. Howard severed his connection with the company in July, 1920, before the terms of the contract hereinafter mentioned had been carried out or terminated.

      The greater part of petitioner’s income for 1919 was derived from the sale of the capital stock of The Insurance Corporation which it purchased under an agreement reading as follows:
    This Agreement Made and entered into by and between Tbe Insurance Corporation, a corporation organized and existing under and by virtue of tbe laws of tbe State of Delaware, hereinafter described as party of tbe first part, and tbe Liberty Agency Company, a corporation organized and existing under and by virtue of the laws of tbe State of Iowa, hereinafter described as party of the second part.
    WITNESSETH :
    Whereas the Insurance Corporation has for sale Six Thousand (6,000) shares of its capital stock at Thirty-seven Dollars and Fifty Cents ($37.50) per share, and
    Whebeas, The Insurance Corporation has on file with the proper authorities in the State of Iowa a prospectus which states among other things that “ after a certain portion of that capital stock has been sold they would increase the price of their capital stock to an amount justified by the millions of insurance they are to receive as outlined by their prospectus, copy of which is on file with'the Iowa Banking Department.
    The Board of Directors of The Insurance Corporation have authorized their President to receive subscriptions for the capital stock of said corporation at Fifty ($50.00) Dollars per share on and after September Tenth, 1918, Twenty-five ($25.00) Dollars of said sum to be capital and Twenty-five ($25.00) Dollars surplus, and
    Whereas, the Liberty Agency Company, known as party of the second part, is organized under the laws of the State of Iowa and authorized by its charter to deal in the stocks of other corporations which are licensed by the State of Iowa, and •
    Whereas, the Insurance Corporation is licensed to sell its stock in the State of Iowa,
    Now, therefore, In consideration of the premises and the mutual agreements of the parties herein, each to be kept and performed, and the further consideration of One ($1.00) Dollar each to the other in hand paid, receipt of which is hereby acknowledged, the party of the first part herein mentioned agrees to issue to the party of the second part Six Thousand (6,000) shares of its capital stock under the following conditions and terms:
    The Six Thousand (6,000) shares shall be issued immediately upon the receipt of Forty-five Thousand ($45,000.00) Dollars in cash, receipt of which is hereby acknowledged. The Liberty Agency Company shall immediately endorse in blank the certificates for stock and return same to the Insurance Corporation to be held as a guarantee for the full payment of said Six Thousand (6,000) shares. The party of the first part hereby agrees to transfer any number of shares from one to six thousand to any person said second party may designate upon receipt of Thirty ($30.00) Dollars per share paid in cash or notes by the party of the second part or its said assigns. In accepting said notes of the said assigns of the party of the second part the party of the first part releases the party of the second part from any obligation of payment thereof.
    It is agreed That if by September 10, 1920, the party of the second part has not assigned the whole of the Six Thousand (6,000) shares herein mentioned and caused the same to be paid for in the manner aforesaid, the party of the first part, may at its option, declare that the portion of the Forty-five Thousand ($45,000.00) Dollars cash paid at the ratio of Seven Dollars and Fifty Cents ($7.50) per share for each of the Six Thousand (6,000) that have not been assigned and paid for as per the conditions of this contract forfeited as liquidated damages, and the party of the first part agrees that ¡it shall not hold the party of the second part or any of its officers for any further payments, but will accept the assignment back to the Treasurer of the Insurance Corporation of the number of shares left unassigned in full settlement for the payment of the Six Thousand (6,000) shares herein mentioned.
    In witness "whereof the party of the first part has caused these presents to be assigned by its President and the party of the second part has caused same to be executed by its Secretary this the 6th day of September, A. D. 1918.
    The Insurance Corporation
    By (Signed) Jno. S. Bardwell, President.

    The Liberty Agency Company of Iowa,
    By (Signed) A. J. Schmid.
    It is hereby mutually understood by the parties mentioned in this contract that it be extended to January 1st, 1922. . ■ .
    The Insurance Corporation
    By (Signed) Jno. S. Bardwell, Pres.

    Petitioner used $45,000 of its capital paid in for making the original payment of The Insurance Corporation for 6,000 shares of its common stock in accordance with the terms of the above-mentioned agreement; the remainder of its capita] was employed.to pay commissions, salaries, and other expenses.
    The 6,000 shares of The Insurance Corporation’s stock of the par value of $25 a share were forthwith issued to the petitioner and it immediately endorsed the same in blank and returned it to The Insurance Corporation to be held as a guarantee for the payment, of the remaining $30 a share, and the petitioner immediately launched a campaign to sell 6,000 shares to the public. J. J. Howard who had promoted and organized the petitioner was sales manager. The petitioner was also engaged in writing fire, insurance, but this branch of its business produced only a small portion of its income. Upon the execution of the agreement with The Insurance Corporation here-inbefore mentioned, a special meeting of the petitioner’s directors, was held at which the following resolution was adopted: .
    Meeting called to order by President William Schroeder. On motion of S’. D. Ferring the purchasing of 6,000 shares of stock of The Insurance Corporation was bought, as per contract in the custody of the Secretary. It was agreed to pay J. J. Howard the sum of $25,000.00, said sum to be paid at the completion of said contract. The President ordered the Treasurer to draw check for $45,000.00 as per contract in the custody of the Secretary. There being no further business the meeting was adjourned.
    At some time subsequent to the adoption of this resolution the words “ purchasing of ” were crossed out and the words “ right to sell ” were inserted. These changes were made, without the knowledge or authority of the board of directors or any member thereof, by the then bookkeeper, C. Gr. Euhland, who was some time subsequently made secretary. No action was ever taken by the board of directors to approve the change made in the resolution by the bookkeeper.
    During the period from August to December, 1918, the petitioner sold 540 shares of The Insurance Corporation’s stock and during the calendar year 1918 it sold 3,899 shares; 402 shares of this number were given by the petitioner to its preferred stockholders in exchange for 201 shares of its preferred stock. Each share of the par value of $25 was sold to the public for $50 a share and every purchaser signed a contract specifying the number of shares for which he had subscribed. Many subscribers paid cash for the stock and in such cases the number of shares purchased were forthwith delivered. In other cases 25 per cent of the purchase price of $50 a share was paid in cash, and interest-bearing promissory notes falling due from 30 days to 12 months or longer, depending upon the circumstances, were given for the balance. The majority of the notes were for short periods. When the purchaser failed to pay the notes when due, petitioner was authorized to cancel the subscription contract and retain the cash payment of 25 per cent, and this course was pursued by the petitioner. No stock was delivered to the purchaser until the notes had been fully paid. In some cases the petitioner passed the notes along to The Insurance Corporation and they were applied by The Insurance Corporation against the balance due it by the petitioner for the 6,000 shares. When the petitioner made payment of $30 a share to The Insurance Corporation in cash or notes, the number of shares thus paid for were either delivered to the petitioner and by it assigned to the purchaser, or such number of shares were transferred and reissued by The Insurance Corporation to the person designated by the petitioner. So far as the record discloses the notes of purchasers of stock were the equivalent of cash; they were so treated by the petitioner on its books of account, that is to say, when a sale was made and notes given by the purchaser for three-fourths of the purchase price, a profit of $12.50 was accrued by the petitioner upon its books.
    The petitioner’s gross income for the calendar year 1919, after eliminating the amount of $5,025 treated by the petitioner as a profit' upon the purchase of its own preferred stock which it had theretofore sold for $100 a share at a cost of only $37.50 a share, and the deductions to which it was entitled for the calendar year 1919, were as follows:
    GROSS INCOME.
    Profit on sale to the public of 3,497 shares of The Insurance Corporation’s stock_$43, 712. 50
    Profit on F. D. Ferring, Trustee, stock sales_ 8,418.00
    Interest received_ 2, 753.29
    Insurance premiums_ 1, 593. 67
    Discount- 737. 65
    Total gross income-$57,215.01

      deductions.
    Commissions_ $2, 042. 50
    Officers’ salaries_ 5,441.60
    Salaries of employees_ 2, 949.10
    Exhaustion, wear and tear, furniture and fixtures_ 184.67
    Exhaustion, wear and tear, automobiles_ 800. 00
    Miscellaneous expense- 993. 95
    Interest paid to The Insurance Corporation_ 239. 84
    Miscellaneous interest paid_ 839.46
    Light and telephone_ 151. 87
    Office rent_¡_:_ 600. 00
    Stationery and postage_ 474.22
    Automobile expense_ 602. 63
    Total-$14,819.84
    Net income- 42,395.17
    At a meeting of the petitioner’s directors on April 12, 1920, the agreement contained in the resolution hereinbefore mentioned to pay J. J. Howard the sum of $25,000 upon the completion of the contract with The Insurance Corporation was rescinded by resolution as follows:
    It was moved and seconded that in order to clear the records that the $25,000.00 contract mentioned in the minutes of September 3, 1918, which has never been in force, be hereby declared rescinded. The motion was unanimously adopted.
    No part of the $25,000 was at any time paid to Howard.
    During 1920 and 1921 petitioner continued to sell the stock of The Insurance Corporation and to write fire insurance policies. In December, 1921, petitioner sold the fire insurance agency feature of its business and ceased operations altogether but did not dissolve. No further effort was made to dispose of the remaining unsold shares of stock of The Insurance Corporation and no further payments were made by the petitioner to The Insurance Corporation on the unpaid balance of $30 a share for the shares which it had not sold to the public. About the same time, December, 1921, The Insurance Corporation discontinued its business. The option mentioned in the contract between The Insurance Corporation and the petitioner was never exercised by the former, and no notice was ever given to the petitioner by The Insurance Corporation of its intention to forfeit the amount of $7.50 a share on the number of shares for which the petitioner had not paid the balance of $30 a share.
    At a special meeting of the petitioner’s directors on April 15,1919, a resolution was adopted ordering that the preferred stock “ be retired in accordance with change in Article 4 of the Articles of Incorporation,” which resolution increased the capital stock to $100,000 par value, all common. Immediately thereafter the petitioner delivered to its preferred stockholders 402 shares of the stock of The Insurance Corporation of the par value of $25 a share for which it had paid $37.50 a share in exchange for its 201 shares of preferred stock which its stockholders had theretofore purchased at $100 a share. The 402 shares of The Insurance Corporation’s stock were a part of the 6,000 shares required by. the petitioner under the contract. The market price of The Insurance Corporation’s stock at the time of its exchange for the preferred stock was $50 a share and the petitioner entered upon its books a profit of $5,025, representing $12.50 a share on each of the 402 shares delivered to its preferred stockholders in exchange for the preferred stock held by them in the petitioner corporation.
   OPINION.

Littleton:

The issues presented are (1) whether the petitioner was .a personal service corporation, (2) whether gross income for the year should be reduced in the amount of $11,707.50, representing $7.50 a share paid The Insurance Corporation on the number of shares which the petitioner had not sold to the public at the end of the year, (3) whether the gross income resulting from a profit of $12.50 a share on each share of The Insurance Corporation’s stock sold during the year should be reduced in the amount of $16,245.83, representing $4.16% a share, on account of the agreement to pay J. J. Howard a bonus of $25,000 upon the completion of the contract with The Insurance Corporation, (4) whether unpaid promissory notes given by purchasers of The Insurance Corporation stock in the amount of $2,562.50 at the end of the year should be excluded from gross income, and whether petitioner realized a taxable profit of $5,025 upon the exchange of 402 shares of The Insurance Corporation’s stock, costing it $37.50 a share, or $15,075, for its 201 shares of preferred stock which it had theretofore sold for $100 a share or $20,100.

The Board is of the opinion that the petitioner was not entitled to classification as a personal service corporation for 1919. The record discloses that stockholders owning about 32 per cent of stock outstanding during the taxable year devoted their entire time to the business; stockholders owning 47 per cent of stock were not regularly engaged in the active conduct of the affairs of the corporation. The services rendered by them consisted principally of suggesting the names of persons who might purchase stock. Some of this group served as officers and directors but each was engaged in business entirely unrelated to that of petitioner to which he devoted the greater part of his time. The balance of the stockholders, owning 21 per cent of the stock, devoted no time to petitioner’s business. The salesmen who were not stockholders were employed and were responsible for about 15 per cent of the stock sales during the year. In these circumstances, it can not be said that petitioner’s income may be ascribed primarily to the activities of its principal stockholders. Petitioner used $45,000 of its capital with which to make the initial payment on the purchase by it of 6,000 shares of stock of The Insurance Corporation without which it would not have had the stock to sell. In addition petitioner used its capital to pay commissions and salaries. In these circumstances, we are of opinion that capital was a material income-producing factor.

We fail to find merit in petitioner’s claim that gross income for 1919 should be reduced in the amount of $11,707.50, representing $7.50 a share paid The Insurance Corporation for stock which the petitioner had not sold at December 31, 1919. In 1918 the petitioner purchased 6,000 shares of stock at $37.50 a share and made a cash payment of $45,000 equal to $7.50 a share. This stock was issued to the petitioner and endorsed by it in blank and returned to the corporation as a guarantee for the payment of the remaining purchase price of $30,000. The option given The Insurance Corporation to declare a forfeiture of the cash payment in the event, the balance on the purchase price should not be paid on or before January 1, 1922, could not have been exercised under the- conditions existing during and at the end of the year 1919. The petitioner was not therefore entitled to reduce the profits on the sale of stock made to the public during the year by any portion of the amount which it had paid or obligated itself to pay for the shares of stock which had not been sold at December 31, 1919.

The agreement of the petitioner, embodied in the resolution adopted in 1918, to pay J. J. Howard $25,000 upon completion of the contract with The Insurance Corporation did not give rise to a deduction from gross income for 1919. The petitioner’s liability for any amount under this contract was dependent entirely upon future contingencies. The contract did not provide, and there is no evidence to show, that Howard was to receive $4.16% of the profit on each share of stock sold. The amount was payable in whole or not at all. The decision of the Board in the Appeal of Block & Kohner Mercantile Co., 4 B. T. A. 673, is to be distinguished from this case. There the contract provided that one-third of the profits for three years should belong to Weinbach, and that such portion of the profits, subject to adjustment on account of losses "over'the period, should be paid -to him upon the expiration of the contract. There was no such understanding between the petitioner, and Howard. The petitioner merely agreed that if Howard should succeed in selling the 6,000 shares of The Insurance Corporation stock it would, upon the happening of that contingency, pay him á bonus of $25,000. In the opinion of the Board no portion of the $25,000 was a proper deduction from gross income for 1919 as an incurred expense. Appeal of Wm. J. Ostheimer, 1 B. T. A. 18; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Appeal of Gude Brothers, Kiefer Co., 2 B. T. A. 1029.

We are of opinion that the amount of $2,562.50, representing the face value of interest-bearing promissory notes given by purchasers of stock and held by the petitioner on December 31, 1919, should be included in determining the profit upon the stock sold during the year. The petitioner had the right under its contract with The Insurance Corporation to endorse these notes to that corporation and receive credit on its obligations for their face value, and this was done in many cases. The petitioner entered the notes upon its books as “ accounts receivable ” and accrued a profit of $12.50 a share on each share of stock sold, and the Commissioner has made his determination upon this basis.

We are of opinion that the petitioner realized no taxable gain when it purchased its own preferred stock at a cost to it of $5,025 less than its stockholders had theretofore paid for it. This was wholly a capital transaction. Appeal of Simmons & Hammond Mfg. Co., 1 B. T. A. 803; Appeal of F. Tinker & Sons Co., 1 B. T. A. 799; Appeal of Farmers Deposit National Bank, 5 B. T. A. 520; Appeal of Interurban Construction Co., 5 B. T. A. 529; Appeal of Ruckman Coal Co., 5 B. T. A. 534.

The petitioner’s return for 1919 showed a net income of $55,354.53. The difference between this net income and the net income of $42,395.17 which we have found for the year 1919 consists of 1918 profits on the sale of The Insurance Corporation’s stock included in the 1919 return, failure to take the proper amount of depreciation for exhaustion, wear and tear of furniture and fixtures, and the $5,025 included by the petitioner as a profit on the purchase of its own stock.

The deficiency should be computed in accordance with the foregoing findings of fact and opinion.

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


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Appeal of C. Willenborg & Co., Carl Willenborg, Herman Zeiller, and Henry L. Erny.
    Docket No. 6334.
    Promulgated December 14, 1926.
    The evidence is insufficient to show that the Commissioner erred in valuing inventories at cost.

      Carl Willenborg for the petitioners.

      George G. Witter, Esq., for the Commissioner.
    This is an appeal from determinations for the fiscal years 1917 to 1921, inclusive, as follows:

    Only so much of the deficiencies as result from the Commissioner’s adjustment of the partnership inventories is in controversy.
    FINDINGS OF FACT.
    C. Willenborg & Co. is a partnership with place of business at New York, N. Y., where it is engaged in selling ladies’ dress trimmings. Carl Willenborg, Herman Zeiller, and Henry L. Erny were members of the partnership of C. Willenborg & Co.
    The partnership’s inventories for all of the years under consideration consisted of miscellaneous and sundry items for trimming ladies’ dresses. Most of the merchandise was seasonable and adapted to current fashions in ladies’ dress wear; some of it was obsolete.
    The inventories for the years under consideration were consistently valued at cost, and the cost of goods sold for each year was determined upon the basis of inventories so valued.
    At each inventory date each item appearing in the inventory was separately examined and valued by the members of the firm. In the case of obsolete merchandise, some of which had been accumulated and held for periods of time ranging from four to fourteen years, there was no purchase or. selling market to guide the partners in valuing this class of goods. The value which they placed upon each item in the inventory represented their opinion of its fair value based upon years of experience in dealing in merchandise of this character.
    The difference between the cost of merchandise and the value placed upon it by the members at each inventory date was credited to a reserve account. If the reserve account showed an increase for the year the amount thereof was deducted from gross income as depreciation of merchandise; on the other hand, if the reserve account showed a decrease for the year, the amount thereof was added to gross income, or otherwise accounted for as income, as appreciation of merchandise. As a result of this practice, there were deducted from or added to gross income, in each of the years under consideration, the following amounts:

      This method of computing net income has been consistently followed by the partnership since its organization in 1891.
    The Commissioner recomputed the net income of the partnership, for each of the years under consideration, upon the basis of inventories valued at cost and without any deduction therefrom or addition thereto on account of depreciation or appreciation, as the case might be, of merchandise, represented by the increase or decrease in the reserve account. This action of the Commissioner resulted in an increase in the partnership net income, for the years 1918 and 1920, in the amounts of $15,097.85 and- $91,725.20, respectively, and a decrease in the partnership net income, for the years 1917, 1919, and 1921, in the amounts of $1,722.29, $4,244.42, and $112,546.97,- respectively. The Commissioner determined the amount of each partner’s distributive share in the partnership net income upon the basis of the partnership net income for each year as adjusted by him.
   OPINION.

Littleton:

The Commissioner determined overassessments for the years 1919 and 1921, in the cases of Carl Willenborg and Henry L. Erny, and for the year 1921, in the case of Herman Zeiller. Upon authority of the decisions of this Board in the Appeals of Cornelius Cotton Mills, 4 B. T. A. 255, and R. P. Hazzard Co., 4 B. T. A. 150, the Board is without jurisdiction to make redetermination in those years.

The issue is whether the method of handling inventories on the partnership books, considering the basis of valuation and the function of the inventory reserve account, was such that the books clearly reflected the partnership net income. The petitioner, relying entirely upon the decision of this Board in the Appeal of The Buss Co., 2 B. T. A. 266, maintains that its methods having been long established and uniformly and consistently followed, ought not to be disturbed. On the other hand, the Commissioner contends that the effect of the treatment accorded the inventories on the partnership books was to value the inventories upon a basis which was neither cost, nor cost or market’, whichever was lower, and which is not sanctioned by statute.

The partnership’s inventories were valued consistently, during the years under consideration, upon the basis of cost. All items in the inventory were valued upon the same basis, whether seasonable or obsolete. The cost of goods sold was computed upon the basis of inventories so valued. Each item in the inventory was separately examined at each inventory date, and its value fixed by the partners in accordance with their best judgment. An inventory reserve was established in which there was recorded, at the end of each accounting period, the difference between the cost of the merchandise inventory and the value placed thereon by the partners. If the reserve account showed an increase for the year, the amount thereof was deducted from gross income as depreciation of merchandise; on the other hand, if the reserve account showed a decrease for the year, the amount thereof was added to income as appreciation of merchandise. The result of this method of valuing the inventories and computing net income was the same which would have obtained had the partnership valued its inventories, in the first instance, upon the basis of the partners’ estimated value, and determined the cost of goods sold upon the basis of inventories so valued. Such being the case, and since we are not so much concerned with the methods employed as with the results obtained thereby, our decision must turn on whether or not the basis of inventory valuation resulting from the methods of accounting employed is a valid basis.

Section 203 of the Revenue Acts of 1918 and 1921 provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Under this provision of the statute, a taxpayer has the right to value its inventories upon any basis, and there are several which are sanctioned under approved standard methods of accounting, which it chooses, provided that it is one of those which the Commissioner “ may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting income.” The statutes do not limit a taxpayer to the two bases of cost, or cost or market, whichever is lower, and we do not understand the Commissioner’s regulations to impose any such restriction. On the other hand, the Commissioner’s regulations require that, as a requisite to its use, the basis must conform with but two conditions, namely: “(1) It must conform as nearly as may be to the best accounting practice in the trade or business, and (2) it must clearly reflect the income.” (See art. 1582 of Regulations 62.)

Whether the basis adopted by the partnership for the valuation of its inventories meets the test laid down by the statute, we are unable to determine. All that the evidence tells us is that the values placed upon the inventories represented the partners’ best judgment as to their values based upon their experience in dealing in the class of merchandise of which the inventories consisted. We do not know, however, whether those estimates of values in any case exceeded the cost or whether they in any case represented market values. Furthermore, we have not been advised as to whether the method of valuation used by the partnership conforms as nearly as may be to the best accounting practice in the trade or business in which the partnership is engaged. Clearly, to the extent that the appreciation in the value of the inventory in any case exceeds the cost or the market at the date the inventory is taken, it does not reflect the income of that year, inasmuch as an appreciation has been included in income which has not been realized and such appreciation in value .reduces the income of the succeeding year. Without this knowledge we can hardly be expected to adopt the basis used in valuing the partnership’s inventories as a substitute for the Commissioner’s basis of cost.

While- consistency in the matter of taking the inventory is much to be desired and is to be given great weight, it alone is not sufficient to entitle the taxpayer to value its inventories for income-tax purposes upon such consistent basis. Where proof that the basis of valuing the inventory clearly reflected income is lacking, but little weight can be given to consistency.

Judgment will be entered for the Commissioner.


author: Trussell:

text:
    Appeal of Norfolk Knitting Mills Corporation.
    Docket No. 4341.
    Promulgated December 14, 1926.
    1. Return fob fractional tear. — The petitioner’s income-tax liability for the period of six months ended June 30,1918, should be computed on the basis of a separate return for that fraction of a year. Following Appeals of Henry D. Weed, 2 B. T. A. 84, and CoghUn Electric Co., 3 B. T. A. 1071.
    2. Combination of returns for two short periods. — The making of separate returns by the petitioner, one for the first six months of 1918, and one for the second six months of 1918, were in accordance with the law and the petitioner’s accounting methods, and there is no provision of law or of the regulations requiring that the two returns should be combined into one.
    3. Net loss, allocation of. — The petitioner’s net loss for the year 1919 should be credited first against the net income of the last six months of the year 1918 and the balance against the net income of the first six months of 1918.

      Elmer 0. Gray, O. P. A., for tbe petitioner.

      WilUs D. Nance, Esq., for tbe Commissioner.
    Tbis is an appeal taken from a determination respecting income and profits taxes for tbe year 1918 and the finding of a deficiency of $236.79 for the last six months of said year and an overassessment for the first six months. The petition asserts three errors committed by the Commissioner as follows:

      (1) That the method of computing income-tax liability for the six-month period ended June 30, 1918, was erroneous.
    (2) That the Commissioner now refuses to permit the petitioner to combine two separate returns made for six-month periods of the year 1918 in one calendar year return.
    (3) That the Commissioner erroneously credited a 1919 net loss against income of the period from July 1, 1917, to June 30, 1918.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of New Hampshire, having an office at Littleton in that State and another office in association with William Iselin & Co. in New York City.
    For some years prior to 1918 the petitioner had had an established practice of keeping and closing its books of account on the basis of fiscal years ending June 30 of each year. .All of the capital stock of the petitioner and also all of the capital stock of another corporation, known as the Atlantic Eealty Corporation, was owned by William Iselin & Co., a partnership which kept its books and closed its accounts on the basis of calendar years. .
    Under the Department regulations effective respecting excess-profits taxes for the year 1917, the said William Iselin & Co., the Atlantic Eealty Corporation, and this petitioner were, by agreement between the Commissioner and the said parties, permitted to haye their liability to excess-profits taxes computed on the basis, of a consolidated return. The income of the petitioner for the calendar year 1917 was ascertained by taking one-half of its income for the twelve-month period ended June 30, 1917, and adding thereto one-half of the income for the period from July 1,1917, to June 30,1918, thus producing a basis for computing this petitioner’s tax liability for the calendar year 1917.
    The assets and the business of. the Atlantic Eealty Corporation were taken over in June, 1918, by this petitioner.
    According to its regular accounting practice, the petitioner closed its books as of June 30, 1918, and thereafter made an income and profits-tax return for the six months from January 1 to June 30, 1918. Sometime later it applied for and received from the Commissioner permission to change its accounting periods from fiscal to calendar years, and in pursuance thereof it' again closed its books of account as of December 31,1918, and made an income and profits-tax return for the said six months from July 1 to December 31,1918. For the year 1919 and subsequent years the petitioner has kept its accounts and made its income-tax returns on the basis of calendar years.

      For the six-month period ended December 31,1918, the petitioner’s net income as adjusted by the Commissioner was $11,477.40. For the calendar year 1919 it is admitted that the petitioner sustained a net loss of $21,530.26.
   OPINION.

Trussell:

When the petitioner, in conjunction with its associated organizations, joined in a consolidated excess-profits-tax return for the calendar year 1917, it was then for all income and profits-tax purposes upon a calendar year basis and its liability for the year 1917 was thus closed and settled. The Eevenue Act of 1918 required corporations to make income-tax returns on the basis of their established accounting periods. It was, therefore, necessary for this petitioner to make an income-tax return for the six months from January 1 to June 30, 1918, and such return should be made as a return separate and distinct from any prior year or period, in accordance with decisions of the Board in the Appeals of Henry D. Weed, 2 B. T. A. 84, and Coghlin Electric Co., 3 B. T. A. 1071, and during the same six-month period it should have its income and profits taxes computed on the basis of a return consolidated with the Atlantic Realty Corporation.

Petitioner’s returns for the six months ended June 30, 1918, and the following six months ended December 31, 1918, appear to have been properly made in accordance with its then established periods of accounting, and there is no provision of law or of Department regulations which can be interpreted to require the combination of such separate returns into one calendar-year return.

The Revenue Act of 1918 was enacted on February 24, 1919, a little more than three months after the practical closing of the World War. During the period of that war substantially all commodity prices had risen to heights theretofore unknown in this country, and it was the general belief that such conditions could not continue and that there would quickly follow a great deflation in commodity values. In recognition of this situation, and conscious of the fact that all manufacturing and mercantile businesses had closed the year 1918 with inventories valued at war prices, and anticipating that the coming deflation would result in severe losses, Congress put into the Revenue Act of 1918 section 204, defining the term “ net loss ” and providing, in subdivision (b) thereof, as follows:

If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon tbe production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. * * *

We are here concerned with the application of the provisions last above quoted to the situation in which this petitioner finds itself. The purpose of Congress in enacting this provision seems too obvious to be a matter of debate; its purpose was to provide that taxpayers suffering losses during the period between November 1, 1918, and December 31,1920, were to be allowed relief from taxation by crediting such losses first against 1918, when taxpayers were believed to have enjoyed the benefit of war prices and to have made large profits and carried proportionately heavy burdens of income and profits taxes, and, in the event that profits of 1918 were insufficient to absorb the loss, the balance thereof, or so much of it as possible, should be absorbed by profits of the year 1920, when it was expected that business conditions and commodity prices might again become normal.

The petitioner’s net loss was sustained during the calendar year 1919, which was all within the period prescribed by the Act, and we are of the opinion that a proper application of said Act to this petitioner’s situation requires that so much of the 1919 net loss as can be absorbed by the net profits of the six months from July 1 to December 31, 1918, should be so allocated, and that the balance of said net loss should be credited against the gains and profits of the period from January 1 to June 30, 1918.

The deficiency, or overassessment, as the case may be, will be determined upon 15 days’ notice pursuant to Rule 50, and judgment will be entered thereon in due course.


author: Morris:

text:
    California Vegetable Union, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5209.
    Promulgated December 14, 1926.

      E. E. Tooley, G. P. A., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This appeal is from a determination of deficiencies of $14,028.26 in income and profits taxes. The Commissioner asserts a deficiency for the eight-month period ended August 31, 1917, of $4,212.10; for the fiscal year ended August 31, 1918, an overassessment of $1,418.63; and for the fiscsal year 1919, a deficiency of $9,816.16. The allegations of error are the disallowance of deductions for depreciation on certain capital items which had been charged to expense, failure to include such depreciated items in invested capital, failure to allow any amount for good will in computing invested capital, a denial of special assessment for the years 1918 and 1919 and an excessive profits tax for the period ended August 31, 1917, although determined under section 210 of the Eevenue Act of 1917, and a reduction of invested capital by the amount paid as income and profits taxes for the preceding taxable period.
    FINDINGS OF FACT.
    The petitioner is a California corporation located in Los Angeles. It was organized in 1903 to take over the vegetable interests of the Fay Fruit Co., the Earle Fruit Co., and the Golden West Celery & Produce Co. The corporation was capitalized for $100,000, $15,000 of which was issued for tangible assets of the three companies.
   OPINION.

Morris:

There is no evidence to sustain any of the allegations of fact made by the petitioner. The Commissioner’s determination will therefore have to be sustained. As to the proposition of law relative to reduction of invested capital because of taxes for the preceding taxable period, Congress has definitely settled any question in this regard by section 1207 of the Revenue Act of 1926. See Russel Wheel & Foundry Co., 3 B. T. A. 1168.

Judgment will be entered for the Commissioner.


author: Murdock:

text:
    Wise Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3770.
    Promulgated December 14, 1926.
    1. Salaries for the year 1919 were neither paid nor accrued during that year and are not deductible under section 234(a) (1) of the Revenue Act of 1918.
    2. As to other items in controversy, action of the Commissioner has been approved as correct for lack of evidence to the contrary.

      H. H. Shelton, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    The Commissioner determined the following deficiencies:
    For 1919_$6,121.80
    For 1920_ 2,174.04
    For 1921_ 1,226.60
    Total_ 9,522.44
    For 1918 there was no tax due and for 1922 there was an over-assessment.
    Not all of the total deficiency is in controversy. The petitioner alleged that in arriving at the gross profit from the sale of lots, the Commissioner did not deduct a sufficient amount for the cost of the lots; that he placed an excessive value on the unsold land and had not considered lands used in streets and alleys in his computation of gross profit; that he erred in refusing to allow a deduction of $10,400 in 1919, as claimed on an amended return for that year, representing accrued salaries of officers for services rendered in 1919 and prior years; and that he erroneously increased the taxable income for the year 1921 by the sum of $684.44.
    FINDINGS OF FACT.
    The petitioner was incorporated under the laws of Virginia in August, 1913, with its principal office at Bristol, Va. The original stockholders were four personal friends and business associates.
    In 1913 the corporation purchased 331 acres of land adjacent to the town of Appalachia, Va., from the Interstate Coal & Iron Co. for $50,000. Part of-the land is in a flat, narrow valley and the remainder is on-the sides of hills and mountains. The Powell Pi ver runs through the land and occupies 13 of the total number of acres. There is no valuable coal deposit in the land.
    One hundred and eighteen acres were subdivided into 444 town lots with the appropriate streets and alleys. All of the fiat land, amounting to 30 or 35 acres, was included in this subdivision. Some of the lots were on steep hills. Few lots were sold until the year 1918, and most of the lots were sold in the years 1919 to 1921, inclusive. In many of the sales the petitioner received small initial payments and the balance at intervals thereafter.
    Appalachia is a town of 2,800 people, situated in the Virginia coal fields. It is served by three railroads. The demand for the above lots decreased as the coal operations in the vicinity of the town decreased. Since 1922 a few lots have been sold, but the market has been inactive. Each lot sold since 1922 has brought $200 or more, but these were the best lots unsold at the the time. About one-half of the 444 town lots have been sold.
    The revenue agent, upon the basis of whose report the deficiency was determined, assigned a value of $10 an acre to the unsold acreage. The portion of this land situated upon the mountain sides had a value of not more than $1 an acre.
    J. H. McCue, president, did the office work, wrote all deeds, carried on all correspondence, and wrote the minutes of all meetings. He was assisted by his secretary. J. A. Guntner had direct charge of subdividing the land, of making the improvements, and of selling the lots. Neither of the other two stockholders ever did any work in connection with the corporation’s business. The four stockholders had, from the year of incorporation, an informal understanding that Guntner and McCue should receive reasonable salaries for their services, but no salaries were paid and no entries in regard to salary were made on the books or on the minutes until July, 1919, when the minutes show that salaries were fixed at $1,000 a year for J. A. Guntner and $500 a year for J. H. McCue. No salaries were paid in 1919, but in a later year salaries for the years 1913 to 1919, inclusive, in the amount of $10,400, were entered in the books as of 1919.
   .OPINION.

Murdock:

Salaries for Guntner and McCue for the year 1919, totaling $1,500, were reasonable allowances for personal services actually rendered, but were not paid in the taxable year and are not proper deductions from gross income in that year in the absence of satisfactory proof that the books were kept on the accrual basis and that the amount of the salaries was entered thereon in 1919, from which we could conclude that the amount was accrued in that year. The remaining $8,900 was specifically for salaries for prior years, was unrelated to compensation for services rendered during the year 1919, and is disallowed as a deduction in that year. Appeal of H. T. Cushman Mfg. Co., 2 B.T.A. 39; Appeal of Columbia Textile Co., 2 B.T.A. 472; Appeal of Green Oil Soap Co., 3 B.T.A. 467.

The Commissioner admitted that in his calculation of the deficiency “ the cost of lots ” for the year 1919 should be $17,646.72, and that for the year 1921 it should be $8,199.49, instead of the figures used. These errors should be corrected in the redetermination of the deficiency in accordance with this opinion.

We are unable to find any satisfactory evidence to convince us that the determination of the Commissioner was otherwise in error. There is not sufficient data in evidence from which we can compute a cost of the lots in excess of that computed by the Commissioner, nor from which the Commissioner’s computation can be tested. So far as the record discloses, the unsold land consists of about 200 acres, worth not more than $1 an acre, and an unknown number of lots, worth an unknown amount. We are in ignorance of the value which the Commissioner placed upon the unsold land. How, then, can we say that it was excessive, or how can we say what the correct amount should be? There was no evidence offered in regard to the item of $634.44, and that offered to prove that the Commissioner neglected to consider land used for streets and alleys was not convincing.

Judgment will be entered after 15 days’ notice, under Rule 60.


text:
    Alexander Krauss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3611.
    Promulgated December 15, 1926.
    Amount of traveling expenses deductible under section 214(a) (1) of the Revenue Act of 1921 determined.

      Alexander Krauss pro se.

      A. H. Murray, Esq., for the respondent.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $135.32. The deficiency arises from the Commissioner’s refusal to allow a deduction of $3,338.23, alleged traveling expenses.
    findings of fact.
    The petitioner is a resident of New York City. During the year 1923 he was employed as a traveling salesman by G. & H. Fuld and Gardner and Moll, carrying laces, embroideries and ribbons.
    The petitioner worked on a commission basis, paying his own expenses with the exception of a contribution by his employers of $10 per week. The sum contributed by his employers toward traveling expenses was included in the petitioner’s return as income.
    His traveling expenses included railroad and Pullman fares, hotel bills, charges for sample carriers, baggage transfers, excess baggage, automobile hire, telegraph and telephone, sample rooms, and entertainment of customers.
    Starting in each instance at New York, the petitioner made about 12 or 14 business trips during the taxable year. He visited numerous Virginia, West Virginia, Maryland, and Delaware points, spending approximately 38 weeks on the road. In the course of these travels he made 3 direct trips from New York to Charlottesville, Va. The railroad and Pullman fares between the cities named were $12.19 and $3.75, respectively.
    Records of the petitioner’s traveling expenses, itemized in detail, were lost or destroyed after the filing of his 1923 tax return.
   OPINION.

Murdock:

The petitioner undoubtedly had traveling expenses during the year 1923, and we are convinced that most of them would be proper deductions. But in only one instance has he given satisfactory evidence of an amount of money spent and of the p'urpose for which it was spent, and in that instance only can we decide that the determination of the Commissioner was incorrect. The petitioner is entitled to deduct $47.82 for railroad and Pullman fare for 3 trips from New Tork to Charlottesville, Va. Otherwise the determination of the Commissioner is approved.

Judgment will be entered after 15 days’ notice, v/nder Rule 50.


author: Trammell:

text:
    Lafayette Hotel Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1332.
    Promulgated December 15, 1926.
    Evidence held insufficient to show that leases for which capital stock of $10,000 par value was issued had that or any other value.

      Eldon S. Lazarus, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes of $1,105 and $920 for the fiscal years 1919 and 1920, respectively. The deficiencies result from the respondent disallowing for each year a deduction of $2,000, representing exhaustion of five-year leases for which the petitioner had issued common stock of a par value of $10,000.
    FINDINGS OF FACT.
    The petitioner is a Louisiana corporation with its principal office at New Orleans. During the years involved in this proceeding it operated a hotel which contained 80 guest rooms and 56 baths.
    During the latter part of 1915, or in the early part of 1916, Albert Aschaffenburg, who was a real estate operator, promoter of business enterprises and builder of hotels and apartment houses, began negotiations with Adam Wirth, a builder, an owner of real estate, and a man of considerable means, for a lease on a building which Wirth proposed to construct on property located in the best retail section of the commercial district of New Orleans and near the leading hotel and one of the largest parks in the city.
    Wirth’s original plans were to erect an apartment hotel to consist of housekeeping apartments. Upon being advised by Aschaffenburg that he would take a lease on the property if the plans were changed and certain adjustments made so that it could be used as a commercial hotel, Wirth modified his plans accordingly. On August 15, 1916, Wirth and Aschaffenburg signed an agreement whereby the upper floors of the building and a portion of the lower floor were leased by Wirth for a period of five years from October 1, 1916, at a rental of $730 per month for the first three years and $780 per month for the remaining two years. Provision was made for renewal for an additional five years at a monthly rental of $855. On August 25, 1916, the parties signed another agreement whereby an additional part of the lower floor was leased by Wirth for a period of five years at a monthly rental of $75, with the privilege at the expiration of five years of renewing the lease for another five years at the same rental. Inasmuch as the building was not completed, the agreements contained certain provisions relating to plans and specifications for completion. Notes payable on the dates the rent was due and for the amounts due on each date were given by Aschaffen-burg at the time the agreements were signed. The agreements also provided that the leased property was to be used for hotel purposes.
    Each of the agreements contained a provision that when “Lafayette Hotel Company, Incorporated, is duly established as a corporation, and furniture installed as intended in the building and ready for possession and use to carry on the business under its said title, the said lessor consents and agrees that this lease may and shall be transferred by the said lessee to the said Lafayette Hotel Company, who shall assume all obligations thereunder, especially the payment of the rent notes executed under this lease, and the said Albert Aschaffenburg, individually, shall be released from any and all obligations as lessee.”
    Some thirty to sixty days prior to August 30, 1916, Aschaffenburg had conferred with some of his acquaintances relative to the formation of a corporation for the purpose of operating a hotel in the building being erected by Wirth.
    On August 30, 1916, the proposed company was incorporated under the name of the “ Lafayette Hotel Company, Incorporated.” The objects and purposes of this corporation were:
    To purchase, lease, or otherwise acquire, for cash or on terms of credit, real estate in the City of New Orleans, or elsewhere; to erect thereon hotels or other buildings, and to sell, lease or otherwise dispose of same; to own, lease and operate in the City of New Orleans and elsewhere one or more hotels, and all adjuncts and accessories thereto, including restaurants, bar rooms, barbershops, baths, news and cigar stores, roof gardens, and to furnish amusements therefor ; to do and perform any and all things for the pleasure, comfort, convenience and amusement of guests in said hotels; to promote immigration and travel to the City of New Orleans; to own the stocks and bonds of other corporations and particularly of corporations engaged in buying, selling and leasing real estate and hotels and in operating same; and generally to do any and all things necessary, pertinent or convenient to the powers herein and hereby conferred.
    The articles of incorporation provided for a capital stock of $20,000, consisting of 200 shares of a par value of $100 per share. The capital stock was divided into 100 shares preferred and 100 shares- common. The respective rights of the two classes of stock were as follows:
    Both kinds or classes of stock shall enjoy the same privileges of voting for the election of officers or any business of the company, the only restriction or Qualification being that before any dividends are set apart or paid on the common stock, the holders of the preferred stock must have received in dividends an amount equal to 50 per cent of the amount of the original subscription. When dividends equal to 50 per cent of the amount of the original subscription to the preferred stock shall have been paid, thereafter the common and preferred stockholders shall stand on an equal footing, and such dividends as shall be declared and paid, shall be declared and paid on the total amount of capital stock, to wit, ⅜20,000 or any increase thereof.
    Relative to the payment for Aschaffenburg’s stock subscription, the articles of incorporation provided-:
    The subscription to the capital stock of this corporation by Albert Aschaffen-burg, being for one hundred shares of stock, of the par value of One Hundred Dollars consists of property, and shall be payable by said Albert AschafCen-burg by the assignment by him to this corporation of certain leases made and entered into between him and Adam Wirth dated the 15th and the 25th days of August, 1916, being for a certain five story brick building situated on St. Charles Street, between South and Oirod Streets, consisting of the entire four upper floors or stories, together with a main entrance on the St. Charles Street front and the portion of the ground or first floor described as store No. 3 and 4 adjoining said entrance on the lower or South Street side, with privilege to rear entrance to alley way. This lease is for a term of five years commencing on the first day of October, 1916, and ending on the 30th of September, 1921, at the rate of $730 per month, for the first three years, and $780 per month for the remaining two years, with the privilege for a renewal of another five years. The directors of this corporation hereby appraise the said leases at the value of $10,000 accepting the assignment of same, and authorizing the issuance of said stock to said Albert Aschaffenburg in full payment thereof.
    Common stock amounting to $10,000 par value was issued to Aschaffenburg, in accordance with the articles of incorporation, for the leases upon the organization of the corporation, while the preferred stock amounting to $10,000 was issued for cash.
    At a special meeting of the board of directors on November 17, 1917, the petitioner corporation by resolution assumed full liability for the payment of the rent notes given by Aschaffenburg to Wirth and obligated itself to pay all rentals due or to become due on the leases assigned to it by Aschaffenburg.
    Aschaffenburg was the moving spirit in the organization of the petitioner corporation, and because of his previous success was influential in forming it. He was president and supervised the operation of the hotel during the first year.
    The petitioner, in its returns for the fiscal years 1919 and 1920, deducted $2,000, representing the exhaustion of the leases it had acquired from Aschaffenburg. These deductions were disallowed by the respondent upon the ground that the leases were acquired for the corporation and without initial cost and had no value for depreciation purposes.
   OPINION.

Trammell:

At the hearing the petitioner produced a real estate dealer who claimed that he assisted Aschaffenburg in negotiating the leases. He could recall nothing as to the offers and counter offers made during the several months that the negotiations were in progress. He could tell nothing as to the development of negotiations in the different steps. He testified that in his opinion the leases acquired by Aschaffenburg were worth $10,000 in excess of the rental payments due under them. He also testified that this was a retrospective appraisal and that he did not place a value on the leases in 1916. ,

Another real estate dealer, who had no personal knowledge of conditions and circumstances existing at the time of the execution or transfer of the lease, testified as to a value substantially the same as the preceding witness, but qualified his testimony to the extent of saying that this value is dependent upon the discount the owner of the lease was willing to accept.

We are asked to find that the leases made after several months of negotiations between men dealing at arm’s length and experienced in real estate operations and dealings had a value of approximately 25 per cent in excess of the rentals payable thereunder.

After a consideration of the evidence in the case, we are unable to find that the leases had a value of $10,000 or any other amount in excess of the rentals due thereunder. The rental value of the leased premises as determined by the lessor and the lessee, Aschaffenburg, less than three weeks before the transfer of the leases to the corporation, both parties being familiar with the conditions and circumstances, is stronger evidence than the opinions of expert witnesses who are not shown to have had a personal knowledge of conditions as they existed when the leases were transferred or executed. No evidence was introduced to show that the property had a greater rental value on August 30, when the leases were turned over to the corporation, than it had on August 15 and August 25, when the leases were signed. The leases were not effective until October 1, 1916, which was after the date of the organization of the corporation, and from all the evidence it appears that they were acquired for the purpose of being transferred to the corporation.

Judgment mil be entered for the Commissioner


text:
    Chas. W. Slater, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4134.
    Promulgated December 15, 1926.
    Tbe evidence fails to show that the Commissioner was in error when he included, in the calculation of the 1920 deficiency, income received from the sale of notes in 1920 at a price which was greater than their fair market value in 1919.

      Samuel V. Markley, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    Income taxes for the calendar year 1920, in an amount less than $10,000, are in controversy.
    The petitioner complains that his income, as shown in his return for the year, has been increased by $23,000, an amount which he did not receive, and alleges that he is entitled to deduct $19,000 expended in carrying on his business, which amount was not claimed as a deduction in his income-tax return.
    FINDINGS OF FACT.
    The petitioner, an individual residing in Washington, D. C., has been engaged for many years in promoting various enterprises. He spent money each year in conducting his business.
    For five years the petitioner had been engaged in acquiring a one-fourth interest in a mining lease in Utah. In 1919 he sold his interest in the lease through L. R. Robinson of New York City, and received in payment five unsecured promissory notes, dated June 9, 1919, for $10,000 each. One note matured on the 9th day of each of the months of January, February, March, April, and May, in the year 1921. There was written on the face of each note “ This note has privilege of a 20 per cent curtail at each maturity. Renewal note for balance.”
    In 1919, in attempting to dispose of these notes, the petitioner went to Pittsburgh a number of times; to New York, to Philadelphia, and to Washington, but could find no market for them at any price, at banks or elsewhere. In 1920 he sold them to H. Lamson, of Washington, D. C., for checks in the amount of $30,000. Some of these checks were dated ahead as much as nine months and all were given a future date. In the same year the petitioner received $27,000 for the checks from H. W. Van Senden, Washington, D. C.
    On his income-tax return for 1920, in Schedule D. — Profit From Sale of Land, Buildings, Stocks, Bonds and Other Property, and From Liquidating Dividends — under the following headings, he made the following entries:

      1. Kind of Property_Mineral Lease.
    2. Name and Address of Purchaser or Broker_L. It. Robinson, New York, N. Y.
    3. Sale Price or Liquidating Dividends (All in notes)_$50,000
    4. Date Acquired_ Blank
    5. Cost, or if Acquired Prior to Mar. 1, 1913, the Pair Market Value on that Date_$19, 000
    6. Cost of Subsequent Improvements, if any_$23, 000
    7. Depreciation_:_ Blank
    Net Profit from Sales (total of columns 3 and 7 minus total of columns 5 and 6)- $8,000
   OPINION.

Murdock:

The petitioner has failed to produce evidence to show that he is entitled to a deduction of any amount under section 214(a) (1) of the Revenue Act of 1918.

There was evidence to show that the sale of the interest in the lease took place in 1919, instead of in 1920, as shown in the return; that the notes received had no market value in 1919; but that in 1920, the petitioner exchanged them for $30,000 in checks, which he then sold for $27,000 in cash or its equivalent.

When property is exchanged for notes of a third party, income is realized in the year in which the transaction takes place to the extent that the fair market value of the notes exceeds the cost of the property, where that property was acquired subsequent: to March 1, 1913. Appeal of Aaron W. Wolfson, 1 B. T. A. 538; Appeal of E. Alice James, 1 B. T. A. 548.

We are not concerned with the petitioner’s income for the year 1919, and we do not know whether or not it was correctly determined. There is nothing to indicate that the Commissioner has not excluded the items indicated on Schedule D of the 1920 return in his calculation of income for that year. The deficiency letter for 1920 is not before us and we do not know just how the deficiency was determined, but there is no satisfactory evidence to show that it was not correctly calculated upon income received from the sale of notes in 1920 at a price which was greater than their fair market value in 1919.

Judgment will be entered after 15 days’ notice, under Bule 50.


author: Korner, Chairman:

text:
    Gray Knox Marble Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7263.
    Promulgated December 15, 1926.

      H. H. Shelton, Esq., for the petitioner.

      A. B. Marrs, Esq., for the respondent.

      The taxes in controversy in this proceeding are income and profits taxes for the calendar year 1919 in the amount of $3,144.07.
    FINDINGS OP PACT.
    Petitioner is a Tennessee corporation with its principal office at Knoxville. It was organized in May, 1917. The corporation was organized by J. B. Jones and others who, in return for its shares of capital stock, transferred to it certain property of the value of $86,314.18, which represents the correct amount of the petitioner’s invested capital.
   OPINION.

Korner, Chairman:

In its petition the petitioner alleged that the respondent erred (1) in denying its application for special assessment, and (2) in refusing to include in its invested capital the value of leasehold properties transferred to it for its shares of capital stock at the value of $100,000. At the hearing the petitioner expressly abandoned its first assignment of error, and by agreement of the parties, the value of the property received for its shares of capital stock was fixed at $86,314.18. The tax should be recomputed by the allowance of the latter amount as invested capital.

Judgment will he entered on 10 days’ notice, under Rule 50.


text:
    Leroy G. Evans, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7347.
    Promulgated December 15, 1926.
    Upon a sale of personal property, tbe receipt of an agreement from tbe purchasers to execute promissory notes in a subsequent year, in part payment of purchase price, does not constitute the receipt of cash or its- equivalent to the seller who accounts on a basis of cash receipts and disbursements.

      James C. Stewart, Esq., for the petitioner.

      F. O. Grmes, Esq., for the respondent.
    The taxes in controversy are income taxes for the calendar year 1920 in the amount of $10,664.68.
    FINDINGS OF FACT.
    Petitioner is a citizen of Ohio. On November 29, 1920, he entered into an agreement with E. N. Miller and R. E. Tulloss to sell to them 60 shares of the capital stock of the Springfield Abattoir Co., of Springfield, Ohio, represented by Certificates Nos. 33, 34, and 49, for a total consideration of $60,000. Of this amount, $5,000 was to be paid in cash and $15,000 in United States Government bonds. For the balance of the consideration due, viz, $40,000, Miller and Tulloss agreed to execute and deliver on the 2nd day of January, 1921, two promissory notes of that date in tjie amount of $20,000 each, payable to the order of the petitioner, one on or before one year from date and the other on or before two years from date, with interest at 6 per cent per annum until paid. Miller and Tulloss further agreed that at the time of the execution and delivery of the notes they would deposit with the First National Bank of Springfield, Ohio, as collateral security for the payment of said notes, the three certificates of stock of the Springfield Abattoir Co. which were purchased by them, said stock to be returned to them when the notes were paid, and that in the event of the nonpayment of such notes, the petitioner should have the right to sell said stock for the payment of any balance due upon the notes.
    It was further agreed that Miller would deliver to the petitioner his passbook No. 19050 of the Merchants & Mechanics Savings & Loan Association of Springfield, Ohio, which showed a balance due Miller of $10,000, and also his passbook No. 18858 of the Springfield Building & Loan Association of Springfield, Ohio, which showed a balance due Miller of $20,000, for the faithful performance of the agreement by Miller and Tulloss, but that, when said notes were executed and delivered by Miller and Tulloss to the petitioner and the stock deposited as collateral with the bank to secure such notes, these passbooks should be returned to Miller; and, in the event that Miller and Tulloss failed to execute and deliver such notes and to deposit the stock as collateral thereto, then the petitioner should have the right to withdraw the money represented by these passbooks and apply the same upon the indebtedness owing to him by Miller and Tulloss and to have the further right to proceed against them and the property of each of them for any balance that might be due the petitioner on the purchase price of the stock, with interest thereon from January 2, 1921.
    The entire transaction between the parties to this agreement was carried out strictly in accordance with the terms thereof. On November 29, 1920, petitioner transferred the 60 shares of stock in question to Miller and Tulloss and on that date received $5,000 in cash and $15,000 in Liberty bonds, and he also received the passbooks of the associations mentioned above, the property of Miller. On January 2, 1921, Miller and Tulloss executed and delivered two notes to the petitioner in the amount of $20,000 each, in accordance with the terms of their agreement, and placed the stock which the petitioner had transferred to them in the hands of the First National Bank of Springfield, Ohio, as collateral security for the payment of the notes. At that time the petitioner returned to Miller the passbooks mentioned above.
    The two notes executed and delivered by Miller and Tulloss on January 2,1921, were afterwards paid during the year 1921 and due return was made of the profit accruing therefrom in the petitioner’s return for the year 1921.
    The petitioner has always kept his books and made his returns upon the basis of cash receipts and disbursements.
    The respondent held that, upon the execution of the agreement and the payment of the $20,000 in cash and Liberty bonds, the transaction was closed. Accordingly, he determined that the entire profit thereon was returnable during the year 1920, which resulted in an additional tax of $10,664.68 for the year 1920, and a reduction of the petitioner’s tax liability for the year 1921 in the amount of $4,585.64.
   OPINION.

Korner, Chairman:

The petitioner kept his accounts and reported his income on the basis of cash receipts and disbursements. When he sold the 60 shares of stock to Miller and Tulloss he received two things. One was $20,000 (of which $5,000 was cash and $15,000 was United States Government bonds); the other was an agreement that on the 2nd day of the following January, Miller and Tulloss would execute and deliver to petitioner their promissory notes in the amount of $40,000, payable one and two years after date.

The agreement was carried out. Miller and Tulloss executed their notes as they had agreed to do. Petitioner gave back to Miller the passbooks of the latter. This occurred on January 2, 1921. The promissory notes were executed that day and were discharged by payment some time during the year 1921.

The petitioner reported the receipt of $20,000 in his tax return for 1920, and of $40,000 in his tax return for 1921, and reported the profits accordingly. The respondent, in his determination of the deficiency in question here, treated the entire $60,000 as received in 1920 and the entire profit on the transaction as realized in 1920.

When a taxpayer properly accounts on a basis of cash receipts and disbursements, income must be received. Section 213 (a) of the Revenue Act of 1918 provides:

Tie amount of all such items [items included in the term “gross income”] shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.

Section 212 (b) provides that the net income shall be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. The petitioner’s regularly employed method was that of cash receipts and disbursements.

The question before us is thus narrowed to the single issue of whether, petitioner received cash or its equivalent in the amount of $60,000 in the year 1920 out of the transaction herein referred to. We do not need to discuss here what would be the effect if he had received the promissory notes of Miller and Tulloss in 1920. The fact is he did not receive such notes until 1921. What he did receive in 1920 was' a promise to execute such notes the following year. In our opinion, this was not the receipt in 1920 of cash or its equivalent.

But it is argued that the promise to execute the notes in futuro was secured by collateral and. that there was thereby a receipt of cash or its equivalent. We do not think so. Under the terms of the agreement, the petitioner had no right to withdraw any moneys on the passbooks of Miller until there had been a default by Miller and Tulloss. There could not be a default by them until January 2, 1921. In the meantime, the passbooks were held by petitioner as the property of Miller, as a pledge. If Miller had placed a diamond ring in petitioner’s hands under the same circumstances, we can not believe that it could be deemed to be income to the petitioner. As a matter of fact, petitioner never had a right, under the agreement, to draw out, dispose of, or reduce to possession the moneys represented by the passbooks, because- Miller and Tulloss did not default their agreement. Accordingly, it was obligatory on petitioner to return the passbooks intact to the petitioner which, in fact, he did in 1921. Since we are here concerned only with the calendar year 1920, it is apparent that there could not have been a default by Miller and Tulloss in that year, nor was there any means by which petitioner could realize or receive income on the passbooks in that year. It is equally true that he did not receive any additional sums by reason of the- promise of Miller and Tulloss to execute and deliver promissory notes in a subsequent year. We do not believe the theory of installment sales has any application here, one way or another. Under any theory, there must be a receipt of something which represents cash or its'equivalent, or which may be made available to the seller as such. In the circumstances of this case, we do not believe these conditions to be met. Even if it should be held that the petitioner received property by reason of the transaction in question, nevertheless, such property had no fair market value at the time of its receipt.

Our opinion is that the petitioner received, in cash or its equivalent in 1920, the amount of $20,000 on the transaction here in question.

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

GREEN dissents.


text:
    Appeal of Fox River Iron Co.
    Docket No. 4743.
    Promulgated December 15, 1926.
    1. Invested capital. — The true cost of petitioner’s buildings and foundry equipment is the amount at which such properties must be reflected in invested capital and form a basis for depreciation deductions.
    2. Depreciation. — Upon buildings a reasonable allowance for exhaustion, wear and tear held to be 3 per cent, and upon equipment, furniture, fixtures, etc., a reasonable allowance held to be 7½ per cent.
    3. Prewar invested capital. — A promissory note written by one of the principal stockholders in favor of the taxpayer corporation and carried in its safe from date of organization in 1906 until February, 1916, held, not to have been a paid-in surplus for the purposes of prewar invested capital.
    4. Reasonable compensation or officers. — Fifteen thousand five hundred dollars held to have been a reasonable aggregate of compensation for four officers of taxpayer company during the year 1920. Amounts paid or credited in excess of that above mentioned disallowed as a deduction.

      R. M. Opilara, Esq., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax for the years 1918 and 1920 in the sums of $6,121.14 and $5,689.18, respectively. The petitioner asserts errors on the part of the Commissioner as follows:
    (1) Surplus in both the years 1918 and 1920 has been reduced by the amount of $16,255.72, representing erroneous and arbitrary additions to the Depreciation Reserve Account at December 31, 1916.
    (2) There has been applied as a charge against Surplus in computing invested capital for both years the amount of $2,276.83, representing a replacement cost incurred by the taxpayer in 1912, which amount, should the Commissioner’s addition to Depreciation Reserve at December 31, 1916, be sustained, would constitute a proper charge to Depreciation Reserve instead of to Surplus.
    (3) In the computation of the War Profits Credit in 1918, there has erroneously been considered as a part of pre-war invested capital the amount of $15,000.00, representing the par value of unissued stock.
    (4) In the computation of the Depreciation deduction in both 1918 and 1920 Depreciation on foundry equipment has erroneously been deducted at the rate of 5% per annum instead of 7½% per annum.
    (5) There has been erroneously disallowed as a deduction in 1920 accrued salaries of officers in the amount of $15,000.00.
    (6) The Commissioner has erroneously failed to compute the Excess Profits Tax for 1920 under sections 327 and 328; and in the application of those sections in the determination of the 1918 deficiency, has used a rate higher than one which would be justified on the basis of the proper comparative data.

      At the hearing Commissioner’s counsel admitted assignments of errors numbered 2 and 3 in so far as the same may be found to be material in determining the appeal.
    BINDINGS Or FACT.
    The petitioner is an Illinois corporation organized in 1906 and engaged in the business of operating a foundry in Lockdale.
    Throughout the period of the petitioner’s existence it has been its practice to enter in its capital account only such cost of building improvements and factory equipment as consisted of materials purchased outside.- A great deal of the equipment was made by the petitioner’s own employees and no charge to capital account was made on account of such additions to equipment. Year after year such additions, replacements, and renewals of equipment were made without any additional amount being entered to capital account.
    In the year 1916 the plant and equipment account appeared upon the books in the amount of $102,190.34. Toward the close of that year the petitioner made an actual inventory of all the buildings and foundry equipment then found to be existing and in use, and from an examination of the books of account ascertained that the cost of all the buildings and equipment then on hand aggregated the amount of $125,038.85, and against this total cost set up a reserve in the amount of $36,064.48, leaving the net asset value in the amount of $88,914.31, and the books of account were on December 31, 1916, adjusted in accordance with the foregoing figures.
    The Commissioner, for the years 1918 and 1920, determined a depreciation rate on the foundry equipment at 5 per cent and refused to allow a depreciation rate of 7½ per cent claimed by the petitioner.
    The petitioner for the period 1916-1920 paid annual salaries to its officers as follows:
    1916---'-$1, 300
    1917_'- 2,800
    1918-•-- 4, 522
    1919_ 1,875
    1920_15, 500
    The officers consisted of Joy Love, president, Albert Love, vice president, G. A. Linington, secretary and treasurer. These men, with John Love, and one George, constituted the board of directors. Joy Love, the president and general manager, was a successful foundry man and directed the foundry work of the petitioner. He also managed and drew salaries from two other foundries in which he owned a substantial interest. He spent approximately half of his time with the petitioner. G. A. Linington, the secretary and treasurer, superintended the office work, contracts, legal work, and the production and sales end of- the business. He was also a stockholder and director in another foundry. The amount of work or the individual salaries of the other Love brothers do not appear in the record. The director George took no active part in the business.
    On or about April 16, 1920, Joy Love, the president and manager, directed the secretary and treasurer to enter additional salaries of $15,000, of which sum $10,000 was for the president and $5,000 for G. A. Linington, the secretary and treasurer. These amounts were in addition to the regular salaries of $15,500 already authorized. The entries were made on the books of the petitioner as directed. These sums were not drawn from the business until the year 1921. There was no formal meeting of directors or minutes authorizing these additional sums, but it was informally discussed, approved, and acquiesced in by the five directors. The matter of salaries was usually left to the president and general manager, although there was no formal resolution giving this authorization. It was the practice of the directors of the petitioner to increase and diminish the salaries each year according to the prospects of the business. For the year 1919 the petitioner suffered a loss but early in 1920 the amount of business and contracts on hand indicated a prosperous year. This sum of $15,000 was intended to include additional salaries for the fourteen lean years in which the officers had drawn small or no salaries, but there was no allocation to any particular years. It was understood among the officers that they would not actually draw salaries unless the financial condition of the petitioner warranted the withdrawal.
    Early in the year 1920 the aggregate of salaries of the four officers of the company was fixed at the sum of $15,500. Later, on April 16, 1920, as a result of consultations among the directors, the president and general manager authorized and caused to be credited as additional compensation for the year 1920 the further amount of $15,000, of which $10,000 was on that date credited to the account of the president and $5,000 to the account of the secretary and treasurer.
    The petitioner kept its books of account upon the accrual basis.
   OPINION.

Trussell:

1. Section 326 of the Revenue Act of 1918 provides that invested capital shall mean (1) actual cash, (2) actual cash value of tangible property paid in for stock or shares, and (3) paid-in or earned surplus and undivided profits, exclusive of profits earned during the taxable year. The petitioner found at the close of 1916 by actual inventory of its physical properties that it had capital and profits represented by physical properties such as buildings and foundry equipment which had cost $125,038.85. It also found that the accrued depreciation upon such properties at that time amounted to $36,064.48.

These properties must be reflected in invested capital at the amount of $88,974.37.

2. The second assignment of error has been admitted by the Commissioner, but having taken the view of the invested capital issue as set forth above, the matter of the reinstating of the replacement account of $2,276.83 will be found to be wholly immaterial.

3. The record does not show why the $15,000 note was deposited with the taxpayer corporation. It appears, however, that this note lay in the files of the petitioner from 1906 to 1916 without ever having been used in any manner and during the latter year was withdrawn from its files and destroyed. We, therefore, agree with the Commissioner’s admission of error, that the amount of such note can not be included in the pre-war invested capital.

4. For the purposes of determining net taxable income for the years under consideration, the statute provides for, and there must be allowed, a reasonable deduction for exhaustion, wear and tear of buildings and equipment used in the petitioner’s business. The testimony of officers of the taxpayer corporation furnishes a general description of the buildings, and, accepting such descriptions, we are of the opinion that a reasonable allowance for exhaustion, wear and tear may properly be computed at 3 per cent. The testimony concerning the foundry equipment discusses the classes and the uses of such equipment, but does not furnish the values of the several classes, and, taken as a whole, we are of the opinion that the total equipment account may be properly depreciated on the basis of 7½ per cent a year.

5. Early in the year 1920 the managing officers of the taxpayer corporation apparently appreciated that that year was to be one of unusual prosperity in the petitioner’s business. And, in view of the fact that salaries previously paid had been comparatively small in amount, they determined upon what appears to be a generous increase in officers’ salaries and fixed the total of four salaries at the sum of $15,500. A few weeks later another $15,000 was assigned to this salary account. When inquiring as to the reasonable compensation for services of a corporation’s officers we may properly consider the duties performed, the responsibilities assumed, and the volume of business handled, and a comparison of these facts in respect to the corporation under inquiry with like facts respecting other taxpayers similarly circumstanced. In view of this petitioner’s business, as disclosed by the record, the volume of business done and the results thereof, as shown by net income, we are of the opinion that the salaries as first fixed at $15,500 for the four officers were reasonable and fair, and that the further amount proposed to be deducted was properly disallowed.

6. The petitioner produced no evidence tending to prove that any abnormality either as to invested capital or net income, or other reason, for the application of the provisions of sections 827 and 328 of the Revenue Act of 1918 were present during the year 1920, and we are, therefore, of the opinion that the tax liability for the year 1920 should be computed in accordance with the provisions of section 301 of the Revenue Act of 1918.

The deficiencies will be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will be entered in due course.