author: Marquette :

text:
    Appeal of H. E. BRUBAKER.
    Docket No. 6651.
    Decided September 29, 1926.

      Held, that the taxpayer derived no taxable gain from the reorganization herein.

      J. W. Beams, Esq., and H. A. Mihills, C. P. A., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    This appeal is from the determination by the Commissioner of a deficiency in income tax for the year 1919 in the amount of $11,004.87.

      FINDINGS OF FACT.
    The petitioner is an individual residing at Shelby, Ohio.
    The Ohio Seamless Tube Co., hereinafter called the old company, was a corporation organized under the laws of the State of Ohio in the year 1912. Its principal office was at Shelby,, Ohio, and it owned and operated a seamless tube plant at that place. On or about December 1, 1916, its capital stock consisted of 17,220 shares of common stock of the par value of $100 each, of which the petitioner owned 235 shares.
    In December, 1916, the Ohio Seamless Tube Co., hereinafter called the new company, was organized under the laws of the State of Ohio, with a capital stock of 17,220 shares of preferred stock and 72,780 shares of common stock, each share having a par value of $100.
    In December, 1916, the stockholders of the old company contracted with the new company to transfer to the new company all of their shares of the old company and to accept in payment therefor one share of the preferred stock and four shares of the common stock of the new company for each share of the stock of the old company. The contract further provided that all the assets of the old company should be conveyed to the new company with the intention that the capital stock of the new company should be supported by the same assets as the capital stock of the old company. Pursuant to the contract of December, 1916, the assets of the old company were conveyed to the new company and the new company assumed all the liabilities of the old company. The new company thereafter owned and operated the same business that had been owned and operated by the old company.
    Pursuant to the contract of December, 1916, the stockholders of the old company exchanged their 17,220 shares of common stock, representing all of the stock of the old company, for 17,220 shares of the preferred stock and 68,880 shares of the common stock of the new company. Three thousand nine hundred shares of the common stock of the new company were not issued but were retained by that company and held in its treasury.
    The petitioner received in exchange for his 235 shares of the common stock of the old company, 235 shares of the preferred stock and 940 shares of the common stock of the new company. The preferred stock of the new company had, at the date of the exchange, a fair market value of $98 per share, and the common stock of the new company had at that date a fair market value of $55 per share.

      The petitioner subsequently purchased 217 shares of the preferred stock and 809 shares of the common stock of the new company for $20,946, and $35,758.25, respectively.
    During the year 1919, the petitioner sold 50 shares of the preferred stock and 1,749 shares of the common stock of the new company for the amount of $115,620.
    The Commissioner determined that the exchange of the capital stock of the old company for shares of stock of the new company in 1916 did not result in taxable gain to the stockholders of the old company, and that the basis for determining subsequent gain on the sale of the shares of the stock of the new company was the same as for the shares of the stock of the old company, and he has computed the petitioner’s gain on the sale of the shares of the stock of the new company made by him during the year 1919 on the basis of the March 1, 1913, value of the shares of the stock of the old company and the cost of such shares of the stock of the new company as were acquired by the petitioner subsequent to the year 1916, and determined that there is a deficiency in tax for the year 1919 in the amount of $11,004.87.
   OPINION.

Marquette :

The real question presented here is whether or not the petitioner realized taxable gain in the year 1916 from the exchange of his shares of the capital stock of the old corporation for shares of the capital stock of the new corporation. It is not disputed that if that transaction did not result in taxable gain the determination of the Commissioner should be approved. The petitioner however contends that upon the exchange of stock he realized income to the extent of the difference between the March 1,1913, value of his shares in the old corporation and the value of the new shares received therefor. In support of his contention he cites the cases of United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536. The Commissioner contends that the transaction in question did not result in taxable gain to the petitioner and relies on the case of Weiss v. Stearn, 265 U. S. 242.

The first three cases cited by the petitioner involve' facts distinctly different from those in this appeal, and they are clearly not authority for the conclusion which he seeks to impress upon the Board. The Phellis case and the Rockefeller case involved transactions whereby certain corporate assets, not exceeding accumulated surplus, were segregated and passed to individual stockholders, and the value of the segregated thing so received was held to constitute taxable income. In the CuTVmcm case the gain resulted from a dividend. in liquidation actually distributed in the stock of a holding company incorporated under the laws of another State, not organized for the purpose of carrying on the old business and which held no title to the original assets.

In the case of Weiss v. Stearn, the facts were that under a definite written agreement the taxpayer and other owners delivered the entire capital stock, $5,000,000 of the National Acme Manufacturing Co., an Ohio corporation, to the Cleveland Trust Co., as depositary. Eastman, Dillon & Co. deposited $7,500,000 with the same trust company. Representatives of both classes of depositors thereupon incorporated in Ohio the National Acme Co., the new corporation, with $25,000,000 authorized capital stock and powers similar to those of the old corporation. Pursuant to the purpose for which it was organized, the new corporation purchased and took over the entire property, assets and business of the old corporation, assuming all outstanding contracts and liabilities, and in payment therefor issued to the trust company its entire authorized capital stock. It continued to operate the acquired business and the old corporation was dissolved. The trust company delivered to Eastman, Dillon & Co. certificates for half the new stock — $12,500,000. To the owners of the old stock it delivered certificates representing the remaining half, together with the $7,500,000 • cash received from Eastman, Dillon & Co. The owner of each $100 of old stock thus received $150 cash, also $250 of new stock representing an interest in the property and the business half as large as he had before. The collector ruled that each old stockholder sold his entire holdings and assessed the taxpayer accordingly for resulting profits. The District Court and the Circuit Court of Appeals adopted a different view and held that the taxpayer really sold half of his stock for cash and exchanged the remainder, without gain, for the same proportionate interest in the transferred corporate assets and business. The Supreme Court of the United States, affirming the judgment of the Circuit Court of Appeals, said:

We agree with the conclusion reached below. Tbe practical result of tbe things done was, a transfer of tbe old assets and business, without increase or diminution or material change of general purpose, to tbe new corporation; a disposal for‘cash by each stockholder of half his interest therein; and an exchange of the remainder for new stock representing the same proportionate interest in the enterprise. Without doubt every stockholder became liable for the tax upon any profits which he actually realized by receiving the cash payment. If by selling the remainder he hereafter receives a segregated profit, that also will be subject to taxation.
Petitioner relies upon United States v. Phellis, 257 U. S. 156, and Rockefeller v. United States, id. 176; also Cullinan v. Walker, 262 U. S. 134, which followed them. As the result of transactions disclosed in the Phellis and Rockefeller Oases, certain corporate assets not exceeding accumulated surplus were segregated and passed to individual stockholders. The value oí the segregated thing so received was held to constitute taxable income. Cullman’s gain resulted from a dividend in liquidation actually distributed in the stock of a holding company incorporated under the laws of a foreign State, not organized for the-purpose of carrying on the old business, and which held no title to the original assets.
Eisner v. Macomber, 252 U. S. 189, gave great consideration to the nature of income and stock dividends. It pointed out that, within the meaning of the Sixteenth Amendment, income from capital is gain severed therefrom and received by the taxpayer for his separate use; that the interest of the stockholder is a capital one and stock certificates but evidence of it; that for purposes of taxation where a stock dividend is declared, the essential and controlling fact is that the recipient receives nothing out of the company’s assets for his separate use and benefit. The conclusion was that, “having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.”
Applying the general principles of Eisner v. Macomber, it seems clear that if the National Acme Manufacturing Company had increased its capital stock to $25,000,000 and then declared a stock dividend of four hundred per cent., the stockholders would have received no gain — their proportionate interest would have remained the same as before. If upon the transfer of its entire property and business for the purpose of reorganization and future conduct the old corporation had actually received the entire issue of new stock and had then distributed this pro rata among its stockholders, their ultimate rights in the enterprise would have continued substantially as before — the capital assets would have remained unimpaired and nothing would have gone therefrom to any stockholder for his separate benefit. The value of his holdings would not have changed, and he would have retained the same essential rights in respect of the assets.
We can not conclude that mere change for purposes of reorganization in the technical ownership Of an enterprise, under circumstances like those here disclosed, followed by issuance of new certificates, constitutes gain separated from the original capital interest. Something more is necessary — something which gives the stockholder a thing really different from what he theretofore had. Towne v. Eisner, 245 U. S. 418; Southern Pacific Co. v. Lowe, 247 U. S. 330; Gulf Oil Corporation v. Lewellyn, 248 U. S. 71. The sale of part of the new stock and distribution of the proceeds did not affect the nature of the unsold portion; when distributed this did not in truth represent any gain.

In the case of Marr v. United States, supra, the facts were that prior to March 1, 1913, Marr and his wife purchased 339 shares of the preferred and 425 shares of the common stock of the General Motors Company of New Jersey for $76,400. In 1916 they received in exchange for this stock 451 shares of the preferred and 2,125 shares of the common stock of the General Motors Corporation of Delaware which, including a small cash payment, had the aggregate market value of over $400,000. The exchange of securities was effected in this way.

The New Jersey corporation had outstanding $15,000,000 of 7 per cent, preferred stock and $15,000,000 of the common stock, all shares being of the par value of $100. It had accumulated from profits a large surplus. The actual value of the common stock was then $842.50 a share. Its officers caused to be organized the Delaware corporation, with an authorized capital of $20,000,000 in 6 per cent, non-voting preferred stock and $82,600,000 in common stock, all shares being of the par value of $100. The Delaware corporation made to stockholders in the New Jersey corporation the following offer for exchange of securities: For every share of common stock of the New Jersey corporation, five shares of common stock of the Delaware corporation; for every share of the preferred stock of the New Jersey corporation, one and one-third shares of preferred stock of the Delaware corporation. In lieu of a certificate for fractional shares of stock in the Delaware corporation payment was to be made in cash at the rate of $100 a share for its preferred and at the rate of $150 a share for its common stock. On this basis all the common stock of the New Jersey corporation was exchanged and all the preferred stock except a few shares. These few were redeemed in cask. For acquiring the stock of the New Jersey corporation only $75,000,000 of the common stock of the Delaware corporation was needed. The remaining $7,600,000 of the authorized common stock was either sold or held for sale as additional capital should be desired. The Delaware corporation, having thus become the owner of all the outstanding stock of the New Jersey corporation, took a transfer of its assets and assumed its liabilities. The latter was then dissolved.

The value of the stock in the Delaware corporation received by Marr and his wife exceeded by about $325,000 the cost or March 1, 1913, value of their stock in the New Jersey corporation, and the Treasury Department ruled that this difference was income to them and assessed an additional tax which was paid under protest. The Supreme Court of the United States, holding that the exchange of securities in question resulted in taxable income, said:

In each of five eases named, as in the case at bar, the business enterprise actually conducted remained exactly the same. In United States v. Phellis, in Rockefeller v. United States and in Cullinan v. Walker, where the additional value in new securities distributed was held to be taxable as income, there had been changes of corporate identity. That is, the corporate property, or a part thereof, was no longer held and operated by the same corporation; and, after the distribution, the stockholders no longer owned merely the same proportional interest of the same character in the same corporation. In Eisner v. Macomber and in Weiss v. Stearn, where the additional value in new securities was held not to be taxable, the identity was deemed to have been preserved. In Eisner v. Macomber the identity was literally maintained. There was no new corporate entity. The same interest in the same corporation was represented after the distribution by more shares of precisely the same character. It was as if the par value of the stock had been reduced, and three shares of reduced par value stock had been issued in plaee of every two old shares. That is, there was an exchange of certificates but not of interests. In Weiss v. Stearn a new corporation had, in fact, been organized to take over the assets and business of the old. Technically there was a new entity; but the corporate identity was deemed to have been substantially maintained because the new corporation was organized under the laws of the same State, with presumably the same powers as the old. There was also no change in the character of securities issued. By reason of these facts, the proportional interest of the stockholder after the distribution of the new securities was deemed to be exactly tlie same as if the par value of the stock in the old corporation had been reduced, and five shares of reduced par value stock had been issued in place of every two shares of the old stock. Thus, in Weiss v. Stearn, as in Eisner v. Macomber, the transaction was considered, in essence, an exchange of certificates representing the same interest, not an exchange of interests.
In the case at bar, the new corporation is essentially different from the old. A corporation organized under the laws of Delaware does not have the same rights and powers as one organized under the laws of New Jersey. Because of these inherent differences in rights and powers, both the preferred and the common stock of the old corporation is an essentially different thing from stock of the same general kind in the new. But there are also adventitious differences, substantial in character. A 6 per cent, non-voting preferred stock is an essentially different thing from a 7 per cent, voting preferred stock. A common stock subject to the priority of $20,000,000 preferred and a $1,200,000 annual dividend charge is an essentially different thing from a common stock subject only to $15,000,000 preferred and a $1,050,000 annual dividend charge. The case at bar is not one in which after the distribution the stockholders have the same proportional interest of the same kind in essentially the same corporation.

It may be properly pointed out here that four of the nine justices of the Supreme Court dissented from the majority opinion and contended that the case was within the doctrine of Weiss v. /Steam and that the transaction did not result in taxable income.

We are of the opinion that the facts of the transaction involved in this appeal bring it within the doctrine of Weiss v. Steam, supra, and that it did not result in taxable income to the petitioner. Both the old corporation and the new corporation were organized under the laws of the State of Ohio. The powers of the new corporation presumably were the same as those of the old corporation; it owned the same corporate assets, and for all practical purposes may be regarded as a continuation of the old corporation. It is true that the old corporation had only common stock while the new corporation issued both common and preferred stock, but the new stock, both common and preferred, was distributed among the stockholders of the old corporation in proportion to the stock owned by them in that corporation so that upon the completion of the transaction their new stock evidenced the same proportionate interest in the same assets as did their old stock. In short, it appears that nothing was accomplished by the reorganization that could not have been done by an amendment of the charter of the old corporation, an increase of its capital stock and the declaration of a stock dividend.

It follows from what we have said that the determination of the Commissioner must be approved.

Judgment for the Gommmsioner.

MillikeN, Stekni-iauen, and Trammell dissent.


source: Caselaw Access Project

author: Phillips:

license: Public Domain

text:
    Appeal of IRON CITY ELECTRIC CO.
    Docket No. 6103.
    Decided September 29, 1926.

      Walter W. McVoy, Esq., for the petitioner.

      Percy S. Grewe, Esq., for the Commissioner.
   Phillips:

The taxpayer appeals from the determination of a deficiency of $2,389.66, income and profits tax for 1919, and alleges error in denying affiliation of the taxpayer with the Devon Electric Co. The petition assigns two other errors, one of which was waived and the other of which is governed by the decision of this Board in the Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

FINDINGS OF FACT.

Taxpayer was incorporated in 1909 and has since been engaged as a wholesale and retail dealer in electrical supplies. Prior to 1919 it had acquired the right within its district to sell a certain washing machine. This machine, as well as other electrical appliances, was sold by taxpayer to retail dealers within the district. It found that the sales obtained through the retail dealers in the City of Pittsburgh were unsatisfactory and decided to organize its own retail store. For this purpose it caused the incorporation in 1919 of the Devon Electric Co. (hereinafter referred to as the Devon Company) and purchased for cash all of the $50,000 par value capital stock of that company. It secured as manager of that company one Dalrym-ple, an employee of a competing concern. Pie was paid a nominal salary and, to give him an interest in the business, one-third of the capital stock was issued in his name. At the same time he executed to the taxpayer a demand promissory note for the par value of the stock and endorsed the stock in blank and left it with the taxpayer as collateral to the note. Payment of the note was to be made from the earnings of the company. During 1919 taxpayer sold merchandise to the Devon Company, of which $20,011.51 was billed to that company at the regular price to retailers and $56,459.95 was billed at cost to taxpayer without any addition for freight, overhead or other such charges. Dalrymple was president of the Devon Company, the president of the taxpayer was vice president of the Devon Company and another individual was secretary and treasurer of both companies.

In order to enable the Devon Company to obtain credit, the taxpayer endorsed its notes and the conditional sales contracts, under which goods were sold by the Devon Company, which the Devon Company discounted at its bank. Some of the employees of the taxpayer performed services for the Devon Company without receiving any compensation from that company.

Dalrymple had no contract of employment with the Devon Company covering any period of time. The operations of the company were not successful, he left its employ in 1921 at the request of officers of the taxpayer, and at that time the note was cancelled and the stock standing in his name was reissued to the taxpayer. This was done without any demand for payment of the note.

In the determination of invested capital for 1919, surplus at the beginning of the year was reduced by $37,143.27 on account of income taxes for the preceding year.

The taxpayer and the Devon Electric Company were affiliated during 1919 and the deficiency,, if any, should be computed upon the basis of a consolidated return. Order of rede-termination will be entered on 15 days’ notice, under Rule 50.


author: Sternhagen:

text:
    Appeal of JAMES A. BRADLEY.
    Docket No. 2012.
    Decided September 29, 1926.
    An opinion of a witness can have weight to prove value only if there is reason to believe that it is held by one whose general and specific knowledge and whose ability to form an opinion entitle him to speak with some measure of authority.

      II. E. Valentine, Esq., for the petitioner.

      Arthur J. Seaton, Esq., for the Commissioner.
    Deficiencies of income tax of $24.78 for 1919 and $103.60 for 1920, resulting from the disallowance of depletion deductions which the-Commissioner held were not substantiated by evidence submitted to him.
    FINDINGS OF FACT.
    Petitioner, a farmer and banker residing in Centerville, Iowa, was in 1919 the owner of coal underlying three separate tracts of land. The coal on these tracts was similar, and was being mined respectively by the Thistle Coal Co., the Monitor Coal Co., and the McCon-ville Coal Co.
    The coal in the Thistle tract was purchased by petitioner after 1913, for $6,300. The tract contained 150 acres. The Thistle Company paid petitioner a royalty of 6^4 cents a ton for coal actually removed. The mine was operated by the so-called room and pillar method, by which, in this territory, the removable coal is ordinarily estimated to be 2,400 tons per acre.
    The coal in the Monitor tract was acquired by petitioner by inheritance in 1896. The tract contained 65 or 70 acres. Mining operations were begun about 1908. On March 1, 1913, the coal was being mined by the Monitor Company upon a royalty to petitioner of 6% cents a ton. The tract was conveniently situated for economic operation.
    The McConville tract contained about 350 acres and was conveniently located near Centerville with a railroad running diagonally across it. Petitioner acquired it in 1896 by inheritance and on March 1, 1913, it was known that the tract contained coal. Mining began in 1918. On February 2, 1919, an agreement was executed by petitioner giving to the McConville Company the right for twenty years to mine coal for a royalty of 8y3 cents a ton and a guaranteed minimum of $800 a year.
    The petitioner’s 1919 return shows “ coal royalty ” $2,359.98, from which he deducted as depletion $354 described as “Boyalty 15% of coal mined.” His 1920 return shows royalty from McConville coal $4,679.75, from which he deducted as depletion $1,170, and shows royalty from Monitor coal $490.31, from which he deducted as depletion $125.
   OPINION.

Sternhagen:

The foregoing facts are substantially all that are contained in the record. The Commissioner traversed the depletion deduction in its entirety and thus placed upon the petitioner the burden of proving all the factors of depletion. That the facts are inadequate for this is manifest.

We have made no finding of value on March 1, 1913, because the bare expressions of opinion of the petitioner’s witnesses were not in our opinion sufficiently well founded to tend to establish a value. The witnesses merely said they thought the tracts were worth somewhere from $75 to $100 an acre. Such an opinion can have weight only if there is reason to believe that it is held by one whose general and specific knowledge and whose ability to form an opinion entitle him to speak with some measure of authority.

Although both counsel in brief submit computations of depletion, such computations include factors which are not in evidence — such, for example, as the tonnage of coal mined in the taxable years. Were these facts either proven or stipulated we could consider them; but their mere statement in brief must be disregarded.

Judgment for the Oommissio'ner.


text:
    MORRIS LICKUMOVITZ, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6842.
    Decided September 29, 1926.

      Meyer Bernstein, Esq., for the petitioner..

      Thomas P. Dudley, Jr., Esq., for the respondent.
   Phillips:

Petitioner appeals from the determination of deficiencies in income tax of $199.62 for 1920 and $73.59 for 1921, alleging as error the refusal of the Commissioner to allow $1,500 in each of such years as deductions for expenses of traveling and entertaining.

FINDINGS OF FACT.

During 1920 and 1921 petitioner was engaged in business as sole proprietor, dealing at wholesale in woodenware house furnishings, with his place of business in Rrooklyn, New York. He had then been engaged in such business for approximately fifteen years and during each of the years involved his sales amounted to approximately $200,000. The petitioner sold goods to some six hundred customers, most of whom were within New York City. He employed salesmen but no collectors. Among his other duties petitioner attended to the collection of delinquent accounts and to the adjustment of complaints. It was also his custom to call upon some of his customers in person as occasion might warrant or require. He spent the greater part of every day on business calls on his customers. During 1920 he expended $1,535.60, and during 1921, $1,522.91 for carfare, taxis, telephone and other ordinary and necessary business expenses, which were disallowed by the Commissioner in computing the deficiency.

Order of redetermination will be entered on 10 days' notice, under Rule 50.


author: Love :

text:
    Appeal of N. SHURE COMPANY.
    Docket No. 3655.
    Decided September 29, 1926.
    Under the terms of the sales contract in this appeal, providing for deferred payments with interest, held, that the compensation paid for deferment of principal was interest and not a part of original consideration for the stock purchased.

      Joseph W. Oox, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner,

      This appeal is from the determination of a deficiency of $1,013.06 in income and profits taxes for the years 1920 and 1921. There is no controversy in regard to the facts.
    FINDINGS OF FACT.
    In 1920 the petitioner paid $4,602.06, and in 1921 it paid $5,733.02, as it claimed, as interest on indebtedness evidenced by the contract hereinafter copied, and which it claimed as a deduction as interest from gross income. The Commissioner contends that under the terms and conditions of said contract said payments were not interest payments, but a part of the purchase price of the stock purchased by the petitioner and hence were capital investments and not deductible.
    The contract is as follows:
    Chicago, Illinois,
    May First, A. D., 1920.
    N. Shure Company,
    Chicago, Illinois.
    Gentlemen:
    I am the owner and holder of two hundred shares of the capital stock of your company and for the purpose of enabling you to acquire said two hundred shares of the capital stock of your company, I hereby make you the following proposition:
    (1) For and in consideration of the covenants and agreements hereinafter described to be performed by you, I agree to sell to you the number of shares on the dates and at the prices as follows:
    52 shares of the Capital Stock on the First day of July, 1921, at $647.25 per share. '
    37 shares of the Capital Stock on the First day of July, 1922, at $647.25 per share.
    37 shares of the Capital Stock on the First day of July, 1823, at $647.25 per share.
    37 shares of the Capital Stock on the First day of July, 1924, at $647.25 per share.
    37 shares of the Capital Stock on the First day of July, 1925, at $647.25 per share.
    You hereby agreeing to purchase and pay for the same upon the dates, at the prices and the amounts as hereinabove set forth.
    (2) I hereby agree that upon your acceptance of this contract I will deposit said two hundred shares of the Capital Stock of your company, duly endorsed, with Foreman Bros., Banking Company of Chicago, Illinois, as Trustee, to be held by the said Foreman Bros. Banking Company for the benefit and purpose of this agreement and subject to all.of the terms hereof.
    (3) All payments to be made to you for the stock shall be paid to me, or to the trustee, and the Trustee upon such payment to me, when proper and duly signed receipt is presented, or upon payment to it, should then deliver the number of shares of stock herein provided and paid for to you or to your order. .

      (4) I agree that you shall have the right at your option to take up and pay the purchase price of all of said stock, or any unpaid shares in blocks of thirty-seven shares at any time prior to the dates hereinabove stipulated upon first giving ninety days written notice to me and to the trustee and upon the expiration of such notice and the payment in full of the amounts payable as provided in this contract, the trustee shall deliver to you, or to your order, such of the remaining shares of stock of said Company as paid for under such notice.
    (5) In consideration of my agreement to sell and your agreement to purchase the stock as in this contract set forth, you agree to pay, semi-annually, an amount equal to six per cent (6%) per annum from date hereof until all shares are taken up under this contract, on the value of the number of shares not taken up and paid for, computing the value of said shares at $647.25 per share.
    (6) From and after the date of this contract, you having complied with all of the terms hereof, all rights and increments to all of said stock or any undelivered portion thereof shall insure [sic] to you, PROVIDED, HOWEVER, that in the event of a stock dividend being declared by your company, there shall be delivered to the Trustee an amount of shares of such stock dividend, or dividends, as declared as is proportionate to the number of shares still held by the Trustee and the total number of shares of capital stock on the date of this contract. Whenever the Trustee delivers to you any of the shares of the capital stock of your Company deposited with the Trustee, the sale whereof is provided in this contract, the trustee shall deliver to you the proportionate amount of stock dividend shares, if issued and delivered to the Trustee. In no case shall you be compelled to pay to the Trustee an amount that is in excess of the total amount hereinabove provided for to be paid.
    (7) In case you shall default in the performance of the covenants and conditions of this agreement or to make payments as and when they become due and payable, I will have the right, at my option, upon giving you ninety days written notice to declare this contract cancelled and at an end and the said Trustee upon demand in writing shall turn over and deliver to me, or my order, all of the stock in the [sic] possession under the terms of this contract; but such cancellation of this contract shall apply only to the stock not then paid for and delivered to you; or, I am, at my option, without notice elected to enforce the terms of this contract.
    (8) The remedies hereinabove provided to me are separate, distinct and additional remedies one to the other, and the election by me of one remedy shall not be a bar to any other remedy and shall not prejudice my rights to take any other action at law or equity for the protection and enforcement of my rights under this contract.
    (9) The Trustee shall have no personal obligation or liability other than to carry out the terms of this contract fully and in good faith, and shall be bound only to the exercise of due care on all questions and matters arising thereunder.
    (10) Any notice required to be given under the terms of this contract shall be given by registered mail to the last known address of such party.
    (11) This agreement shall be for the benefit of ourselves, our heirs, executors, administrators, successors and assigns, and all of the rights and obligations herein prescribed for either you or me shall inure to be binding upon our heirs, executors, administrators, successors and assigns.
    (Signed) HERMAN SHURE.
    The foregoing proposition was formally accepted by corporate action of the petitioner.
   OPINION.

Love :

The Commissioner contends that the provisions of the contract in question for the payment of 6 per cent per annum on the unpaid balance due on the stock was in effect a part of the purchase price or a guaranteed dividend and not interest. Clearly, the seller endorsed the stock and passed it out of his possession and control to the trustee. He retained only the right to the agreed money payments, at stipulated times, and the right to 6 per cent per annum for the unpaid balances. In case of default he had the right of recovery of the unpaid stock or specific performance of the contract. There clearly existed the simple relationship of debtor and creditor in which the total amount of the indebtedness, the time due, and the consideration for the deferred payments were fixed. To hold that the consideration for the unpaid balances constituted guarantee dividends or part of the consideration for the stock itself, in our opinion, would be a forced and unnatural construction of the plain meaning of the contract.

Judgment for the petitioner. Order of re-determination will he entered on 15 days’ notice, under Rule 50.


text:
    Appeal of ALBIA BOX & PAPER COMPANY.
    Docket No. 1907.
    Decided September 29, 1926.
    Depreciation charges made on the books of the petitioner prior to 1917 for a series of years on a systematic basis, will not, for invested capital purposes, be disturbed without evidence that the depreciation written off by the petitioner was not actually sustained.

      Robert 0. Poskanzer, Esq., for the petitioner.

      A. Tl. Fast, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies for the years 1919, 1920, and 1921, in the total amount of $6,940.14. The deficiencies arose from the action of the Commissioner in increasing the depreciation of the machinery, furniture, fixtures, and buildings, reported by the petitioner, thereby reducing invested capital and resulting in the deficiencies in controversy.
    BINDINGS OB BACT.
    The petitioner is a New York corporation with its principal place of business at Troy, and is engaged in the business of manufacturing-box board and paper boxes.

      In or about the year 1900, the petitioner purchased the plant and equipment of an abandoned woolen mill. It remodeled the building and reconstructed and installed machinery to meet the needs of the box board and paper box factory. From year to year it kept improving and adding to the machinery and charged the costs to operating expenses. It also improved the buildings but only charged the materials as a capital expenditure and charged the labor thereon to expenses. It pursued this policy in respect to the machinery until 1909, at which time it commenced to take depreciation. It took depreciation on the basis of diminishing values by taking a rate of 10 per cent of the net book value after taking from its machinery account the accumulated reserve on depreciation. For three of the years the petitioner took a reduced rate, as the mill was operated part time during those years, to wit, 5 per cent in 1910, 7% per cent in 1911, and 5 per cent in 1915. The rates each year were fixed by the board of directors and the action of the board was entered upon the minutes.
    A statement of the depreciation taken by the petitioner on its machinery as shown upon its books, is as follows:

      Maehmery.

    In 1917 and the following years, on advice of the revenue agent examining the petitioner, it took a flat uniform rate of 10 per cent on the gross machinery account but no adjustments or changes were made for prior years. In the year 1917 the accumulated reserve for depreciation amounted to approximately $39,000, and instead of carrying it as a reserve against gross machinery account, as in former years, it was credited to said account. In the following year it was restored to its original condition with the gross machinery remaining in the machinery account and the reserve for depreciation as a liability account against it.

      A statement of the depreciation taken by the petitioner on its furniture and fixtures as shown on its books is as follows:

      Furniture and fixtures.

    The petitioner, since its inception, was at all times conservatively managed,'maintained its physical assets in good condition, and had always paid dividends.
    The petitioner did not take depreciation on its buildings until the year 1915, from and after which date it has taken approximately 5 per cent each year. The Commissioner depreciated the building from 1900 to 1921 at the rate of 8 per cent. The main building, at the time of its acquisition in 1900, was used as a warehouse by an abandoned woolen mill. The petitioner remodeled and improved it from year to year and maintained it in good condition. In later years new floors were laid and heavy timbers 14 inches square that went across the entire building were put in. Modern doors and ventilating shafts 60 inches in diameter were installed to take up the moisture and preserve the building. These principal improvements continued until the year 1915, at which time the building was in better condition than in any of the prior years. The amount of depreciation taken by the petitioner as shown upon its books, is as follows:

      Real estate

   OPINION.

Love :

The issue in this appeal comes squarely within the principle laid down in the Appeal of Russell Milling Co., 1 B. T. A. 194, Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87, and Appeal of Rub-No-More Co., 1 B. T. A. 228. We are not disposed to disturb the amount of depreciation shown on the books of the petitioner in the absence of evidence that the depreciation written off was not actually sustained. The evidence ■ is clear that the petitioner was conservatively and successfully managed; that since the year 1909 it kept complete book accounts; that said depreciation was in fact charged off its books on a uniform basis determined by its board of directors each year. While it is true the petitioner, prior to 1917, used a diminishing value method of depreciation, not now in good repute in income-tax accounting, that method, nevertheless, in this case did in fact more nearly reflect the true condition than the method used by the Commissioner. According to the Commissioner’s method a substantial portion of the machinery still in daily use has been fully depreciated.

The petitioner did not take depreciation in a haphazard manner or as an afterthought. On the contrary, the evidence discloses that not only was the depreciation taken on a systematic basis but that each year the board of directors of the petitioner deliberated and then fixed the rate to conform to their best judgment of the actual depreciation sustained, and their action was recorded on the minutes of the meetings. In our opinion, not only has the Commissioner failed to present any evidence to disturb the amount of depreciation set up on the books of the petitioner, but there has been sufficient affirmative proof to establish the fact that the amount of depreciation taken more truly reflected the actual condition than the amount of depreciation obtained by the rates sought to be imposed by the Commissioner.

The above reasoning also applies to the buildings upon which the petitioner did not commence to depreciate until 1915, and then took a rate of approximately 5 per cent. The Commissioner depreciated the buildings from 1900 at 8 per cent. Even though the counsel for the petitioner finds no fault with a rate of 3 per cent from 1909, we are of the opinion that the amount of depreciation should be as shown upon the books. The evidence discloses that during the period 1900 to 1915, the petitioner had gradually remodeled and renovated an old abandoned woolen mill building used as a warehouse to such an extent that it became suitable for a modern box board and paper box factory. The labor for conditioning the building was not capitalized but carried as an expense. In the judgment of the directors, instead of deteriorating, the building was being made stronger and more durable until 1915. The directors were in a position to know the actual conditions and we believe from the evidence that their judgment in respect to the building was sound and in keeping with their good judgment in respect to all the business affairs of the petitioner.

To the extent that the amount of depreciation affects invested capital. we are of the opinion that such amounts as appear on the books of the petitioner should not be disturbed.

Order of redetermination will he entered on 15 days’ notice, under Rule 50.


author: Lansdon :

text:
    HENRY FINCK COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 4339.
    Decided September 29, 1926.
    Value of farm land at Mareb 1, 1913, determined.

      Stephen N. Blewett, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    The Commissioner asserts a deficiency in income and. profits taxes for the year 1918 in the amount of $17,206.01. The issues are the fair market value of a tract of farm land at March 1, 1913, and the exact acreage involved.
    BINDINGS OB BACT.
    The petitioner is a California corporation with its principal office at Stockton. It was organized in 1912, and, from that date until its dissolution subsequent to the taxable year, was engaged in farming in San Joaquin County. The authorized capital was $100,000. It was a family affair, incorporated to carry on .the agricultural operations of Henry Finck and his children. The capital stock was allotted and issued as follows: Henry Finck, 520 shares; each of the six children, 80 shares. Henry Finck and two of his sons, Fred H. and Harry C. Finck, were the directors named in the articles of incorporation.
    The entire authorized capital stock of the petitioner was issued, pursuant to proper corporate action, for' real estate and personal property taken into the accounts of the corporation at valuations of $112,600 and $15,350, respectively, or a total of $127,950. Liabilities of Henry Finck, in the amount of $30,000, were assumed and entered on the books of the petitioner as its obligations. The Commissioner included the full par value of the stock issue of the petitioner in his computation of its invested capital for the year 1918.
    During the year 1918, the petitioner sold 1,179.79 acres of its land for $90 an acre and received therefor the amount of $106,181.10. It included no profits from this transaction in its income and profits-tax return for the taxable year. Upon audit of such return, the Commissioner determined that the petitioner had sold 1,186 acres of land and had realized a net profit in the amount of $38,408.60, and, on March 26, 1925, mailed the notice of deficiency which is the basis of this proceeding. The parties agree that the value of the land in question at March 1,1913, was greater than cost, and that such value is the proper basis for the computation of any gain realized from the sale in 1918.
    Henry Finck became a resident of California about 1850. In the course of years he acquired the land in question and other tracts located in. the delta of the San Joaquin River. This land was nearly all subject to overflow. Reclamation for agricultural purposes required the building of levees to prevent flooding and the construction of irrigation works to secure adequate moisture for growing crops during the dry season that occurs yearly in that locality. At March 1, 1913, the 1,179.79 acres of farm land transferred by Finck to the petitioner were all protected from flood by levees and about 200 acres were under irrigation, and the entire tract was in cultivation as a grain and dairy farm.
    The petitioner sold 1,179.79 acres of land in the year 1918, and received therefor $90 an acre, or a total of $106,181.10. The fair market price or value of such land at March 1,1913, was $85 per acre.
   OPINION.

Lansdon :

The petitioner proved by the uncontradicted testimony of'a licensed land surveyor, who surveyed the tract in question for the purpose of determining the total sales price at $90 an acre, that the land sold had a total area of 1,179.79 acres. We sustain its contention as to the number of acres in question.

The determination of the main issue in this proceeding requires us to find the fair market value or price at March 1, 1913, of the land sold by the petitioner in the taxable year. The deficiency asserted by the Commissioner is based on a valuation of $55 per acre at the basic date. The taxpayer contends that such value was not less than $90 per acre. Each party relies largely on the opinions of farmers, real estate operators, and others, familiar with lands and land values in the so-called delta district near Stockton.

On the question of value the petitioner produced six witnesses. Amos Jones and J. Henry Smith, real estate operators at Stockton, testified, respectively, that at March 1, 1913, the land was worth $90 and from $85 to $90 an acre, and that there was no increase in land values in that locality between the years 1913 and 1918. J. W. Preston, agent for an estate owning a large adjoining area of similar lands testified to a value of $100 an acre at the basic date. Louis Moreing, the purchaser, placed the value at $100 per acre at March 1, 1913, and stated that he would have bought the land at that time for that price if it had then been for sale. He was also of the opinion that there was no increase in the value of land in that locality between 1913 and 1918. W. H. Hubbard, probate and inheritance tax appraiser for San Joaquin County for the past sixteen years testified to familiarity from boyhood with the land in question and that in his opinion it was worth $85 per acre at March 1, 1913. He has appraised many tracts of similar land for inheritance and probate purposes, and has often served as an appraiser for banks making loans on such lands. Henry C. Finck, one of the incorporators of the petitioner, testified as to the material facts of the incorporation of the petitioner and the sale from which the alleged deficiency arises, but declined to offer any opinion as to the value of the land at March 1, 1913. Fred H. Finck, also an incorporator, testified that he had lived on and farmed the land in question or similar land all his life, and that, in his opinion, the tract sold was worth at least $100 an acre at March 1, 1913, and that there was no increase in value from that date to 1918.

In addition to the opinion testimony of its witnesses the petitioner also proved that an adjoining tract of similar land was leased in 1913, with an option to the lessee to purchase the entire tract of 13,000 acres at any time during the term of the leasehold for $1,200,000, and that such option was exercised in 1920.

Three witnesses were called by the Commissioner. N. Y. Egan and Francis Cutting, real estate operators at Stockton for many years, testified, respectively, that the land in question was worth $50 and $55 an acre at March 1, 1913, and that between that time and the date of sale there was an increase in the market value of similar land in that locality of 5 per cent to 30 per cent. G. A. Atherton, a civil engineer familiar with the land, interested in irrigation projects in the delta district for forty years, and general manager of a corporation owning large nearby tracts of similar lands, testified that in his opinion the value of the tract in question at the basic date was $55 to $60 per acre.

In cross examination counsel for the Commissioner elicited the fact that Henry Finck bought 429.24 acres of delta land in 1913 for $18.54 per acre, and that in 1918, he sold 102 acres of that tract at $150 per acre. In redirect examination counsel for the petitioner established the facts that such land is situated at least seven miles from the property of the petitioner, and that the purchaser was willing to pay more than market value because he needed that acreage for the construction of ditches necessary to the economic completion of irrigation and drainage works on a much larger adjacent tract that he owned at that time. To our minds this transaction is without probative value to support the contentions of the Commissioner.

In the light of all the evidence the Board is of the opinion that the land in question had a fair market value of $85 per acre at March 1,1913.

Order of redetermination will be entered on W days’ notice, under Rule 50.


text:
    Appeal of WALTER D. BROWNELL.
    Docket No. 4937.
    Decided September 29, 1926.

      Charles II. Eden, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
   Love :

This is an appeal from the determination of deficiencies for the years 1919 to 1921, inclusive, in the sum of $1,381.41. The deficiencies arose from the refusal of the Commissioner to allow deductions for exhaustion of certain leaseholds.

FINDINGS OF FACT.

The petitioner is an individual and was engaged in the business of buying and selling leaseholds at Providence, R. I. Prior to March 1, 1913, he acquired three leaseholds, one of which was known as “Butts Estate,” terminating January 1, 1920; one of which was known as “ Crowell Building,” terminating May 1, 1929; and one of which was known as “Wood Estate,” terminating September 1, 1949.

The leaseholds in question were appraised as of March 1, 1913, by William H. Draper and James H. Hurley, expert real estate appraisers, as follows:

On March 1, 1913, the value of the several leaseholds was as follows:

Butts estate-$8, 111. 25
Crowell Building- 58,465.25
Wood estate_ 26,026.75

The petitioner in his income-tax returns for 1919, 1920, and 1921, deducted as exhaustion on the leaseholds, as follows:

The Commissioner refused to allow any exhaustion on the leaseholds on the theory that leaseholds are not subject to deductible exhaustion. The proper exhaustion on the several leaseholds is as follows:

Butts -estate-$1,187.00
Crowell Building_ 1, 601.78
Wood estate- 1,609. 90

Order of redetermination will be entered on 15 days’ notice, under Bule 50.


author: Phillips: Teammell,

text:
    Appeal of A. L. VOYER.
    Docket No. 5453.
    Decided September 29, 1926.
    1. Amounts received from a lottery, although such lottery is illegal, are taxable. Appeal of James P. McKenna, 1 B. T. A. 326.
    2. Payments made to an attorney for his client, and retained in part by the attorney to secure payment of his fees and disbursements, are taxable income to the client on a cash basis in the year in which paid over by the attorney.

      W. W. Bpodding, Esq., for the petitioner.

      J. W. Fisher, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for 1922 in the amount of $619.55. The questions involved are (1) whether the amounts received by the taxpayer in settlement of his claim for lottery winnings are taxable, and (2) in the event they are held to be taxable, the year or years in which such amounts should be returned as income.

      FINDINGS OF FACT.
    In 1921 the Northern Hotel, located in Chippewa Falls, Wis., was owned by a corporation. The local Elks Lodge occupied the upper floors. The hotel company was in financial difficulty, there being approximately $70,000 of outstanding mechanics’ liens and other claims against the hotel which the company could not pay. An agreement-was entered into under which the hotel company agreed to deed the property to the lodge upon payment of all obligations existing against the property. In order to raise the necessary money the lodge sold tickets to a Mardi Gras or carnival to be held on July 4, 1921. The ticket contained on its face the following:
    ELKS Mardi Gras and Historical Pageant, Ohippewa Falls, Wls., June 28, to July 4, 19&1. Fstahlishecl Price $1.00 War Tax Panel 10 cents. Total $1.10.

    ADMIT ONE TO ALL FUNCTIONS
    Chippewa Falls Lodge No. 1326, will make a present of the Hotel Northern and Elks Club House at Chippewa Falls, Wisconsin, and the real estate upon which it is situated, valued at $300,000, to the original purchaser and owner of the designated admission ticket sold for the functions of the Elks Mardi Gras and Historical Pageant.
    Over
    No. J 3424.
    On the back of each ticket was printed the following:
    All admission tickets sold for said functions shall be numbered consecutively and upon July 4, 1921, a FREE GIFT will be made and the original purchaser and owner of an admission ticket shall be given a deed to said building and the real estate upon which it is situated, free and clear of all liens and incum-brances, except leases outstanding, which will be assigned to the owner of said ticket; it is understood, however, that the said Chippewa Falls Lodge No. 1326, B. P. O. E., reserves the right to retain possession of and occupy and use the fifth floor of said building, free of rent, for and during the term of fifteen years from and after the date upon which said gratuitous gift shall be made together with all approaches, appurtenances, rights of way for ingress or egress connected with the use and occupancy of said fifth story. It is understood that the sole and only consideration for the price paid for this admission ticket is and shall be admission to the said Mardi Gras and Historical Pageant and that the gift of the property and real estate herein mentioned is and in every respect shall be gratuitous and that the purchaser hereof purchases and takes the same with the full understanding and agreement that the gift of the property is not and shall not be considered any part of the consideration for the price paid for this ticket and constitutes no part of the consideration for said admission price.
    The lodge then conducted a ticket-selling campaign throughout the State. The tickets were sometimes sold in blocks of eleven, it being agreed among the purchasers in the pool that if any one of the purchasers of such blocks of eleven tickets held the winning ticket. the others in the pool would share in the prize in the proportion to the number of tickets purchased in that block of eleven.
    The taxpayer purchased fotir tickets in a pool of eleven. One Peter Layman purchased two and the remainder of the block of eleven were purchased by friends of the taxpayer. At the Mardi Gras held July 4, 1921, numbers corresponding to those upon the tickets sold were placed in a large churn and the winning number was drawn out in the presence of the spectators by a girl selected from the audience. She drew the number of the ticket held by the said Peter Layman, and a telegram was immediately sent him advising him thereof. Under the terms of the raffle or lottery Peter Layman became entitled to the prize, but under the terms of the pool agreement the taxpayer became entitled to four-elevenths interest therein.
    Shortly after July 4th the winners retained counsel, who went to Chippewa Falls and met the representatives of the lodge. It was suggested at that time that the State of Wisconsin might start action for forfeiture of the property under section 4528 of the Wisconsin Statutes of 1921, which provided:
    All sums of money and every oilier valuable thing drawn or received by any person who is an inhabitant or resident of this state at the time, as a prize or share or part of a prize derived in, by or through any lottery or pretended lottery, contrary to the provisions of the preceding sections of this chapter, shall be forfeited to this state and may be recovered by any proper action brought by the attorney-general or any district attorney in the name and behalf of the state.
    Action under the statute was instituted by the Attorney General of Wisconsin in the early fall of 1921. The defendants, including the taxpayer, interposed a defense and contested the action. A decision was rendered in June, 1922, in which the court held that the forfeiture provision was unconstitutional, and that the property should therefore not be forfeited, but also stated that the transaction was a lottery and illegal.
    No further action in the matter was taken by taxpayer’s counsel until the attorney general had reached the conclusion that the court’s decision was correct and that he would not prosecute an appeal.
    Although the court decided that the property could not be forfeited to the State, it was the opinion of taxpayer’s counsel that the statement of the court that the transaction was a lottery and illegal precluded any successful legal action to obtain the property.
    In September, 1922, the taxpayer’s counsel attempted to secure a settlement. The hotel company still held the legal title to the property. A committee was appointed by the lodge to undertake a settlement but nothing was accomplished. In December, 1922, the lodge appointed a new committee. Counsel for the taxpayer met this committee at Cbippewa Falls in December and negotiations were entered into. The lodge, through this committee, finally offered to pay $25,000 in cash and $25,000 in bonds. Counsel for the taxpayer offered a counter proposition to the effect that if the lodge would also offer $15,000 in stock of the hotel company, in addition to the cash and bonds, he would recommend that his clients accept the offer. The committee of the lodge agreed to submit the proposition to the lodge and to the hotel. At that time the committee paid counsel for the taxpayer and others interested $25,000 in cash. He deposited it in the bank in his own name as trustee and immediately distributed $11,000 of it to the winners of the prize, of which amount the taxpayer received $4,000 in 1922. The balance was retained by counsel as a fund out of which should be paid his attorney’s fees and expenses and future contingencies.
    Resolutions of substantially the same effect were adopted by both the lodge and the trustees of the hotel on January 8, 1923, and January 11,1923, respectively. That adopted by the hotel company read:
    Resolved tlvat, whereas the land contract existing between this Company and the IflHrs Lodge of Chippewa Falls for the sale to the said Lodge of the Hotel Northern property has not been fully carried out by the said Lodge; but said Lodge has paid all mechanics liens outstanding against this company and its said property at the date of said land contract; and has purchased bonds issued by this Company to the par or face value of $25,000.00; and a settlement and compromise agreement has been reached with said Lodge whereby said Lodge is to forfeit to this Company all moneys paid by said Lodge in payment and satisfaction of said mechanics liens; and is to reconvey said premises to this Company by guit claim deed and release this Company from carrying out the terms of said land contract on its part to be performed;
    It is therefore, in consideration of the mutual promises and agreements and as a part of said settlement and compromise, hereby agreed and understood that all outstanding bonds issued by this Company against its said property and pledged as collateral to notes which have been paid by said Lodge and the bonds thereupon delivered to said Lodge (said bonds amounting to the par or face value of $25,000.00) be and are hereby declared to be the property of said Lodge and its assigns as outstanding, valid, subsisting obligations of this Company and liens on its said property; and it is further, for said considerations, agreed that said Lodge upon carrying out this agreement on its part shall be and is hereby released from further carrying out the terms.of said land contract on its part; and the President and Secretary of this Company are hereby authorized and directed to carry out said settlement and compromise on the part of this Company, and to that end do and perform any and all acts and things whatsoever expedient or necessary to that end, including the signing of a formal agreement with said Lodge (or its assigns) incorporating the provisions thereof; and any person or corporation now having physical possession of said bonds are thereby authorized to deliver said bonds (with all past due coupons detached) to the said Lodge or its assigns upon said Lodge complying with the provisions of said settlement and compromise on its part to be performed; and when said settlement and compromise have been completed and consummated, the attorney for this company is authorized to enter into a stipulation for dismissal of the action now pending in the Circuit Court for Chippewa Falls brought by the State against this Company and others.

      After the passage of the above resolution there was more difficulty with respect to the settlement on account of objections raised by certain of the stockholders of the hotel company. On January 26,1923, these objections were overcome and $25,000 in bonds and $15,000 par value of stock, which had a market value of $3,000, were delivered to the counsel for the winners, who distributed the same to the taxpayer and others interested. After deducting the expenses and counsel fees the taxpayer, in addition to the $4,000 received by him on December 21, 1922, received additional amounts as follows:
    Cash_$2,100.00
    Bonds (market value)_ 6, 528. 90
    Stock (market value)_ 1,040.00
    The above additional amounts were received in the early part of February, 1923. The attorneys’ fees and expenses were settled in 1923 by the attorneys retaining $3,000 in cash, $7,500 par value in bonds and $700 par value of stock. Practically all the expenses had been incurred before the end of 1922. The $2,100 turned over to the taxpayer in February, 1923, was a part of the'cash received by his counsel in December, 1922. Such books as were kept by the taxpayer were on the basis of cash receipts and disbursements.
    The taxpayer, in his return, reported a loss of $1,430.67 for 1922 and did not include any of the amounts received as winnings from the lottery. The Commissioner, in computing the deficiency, has included as income for 1922, cash of $6,100, bonds of $6,528.90, and stock of $1,040, a total of $13,668.90.
   OPINION.

Phillips:

The taxpayer contends (1) that the amount received from the settlement of his claim for the lottery winnings is not taxable, and (2) that a portion at least should be allocated to the year 1923, if the amounts are held to be taxable.

As to the first contention, we are of the opinion that said amounts are taxable. Appeal of James P. McKenna, 1 B. T. A. 326.

Respecting the second contention, it is clear that it was not until 1923 that a settlement was reached, and that the Commissioner is clearly in error in treating the bonds and stock as having been received in 1922.

During that year, however, $25,000 was paid in cash to counsel for the taxpayer and others concerned. This sum counsel deposited in his name in trust. Fie paid $11,000 to his clients, taxpayer receiving $4,000 thereof, and retained the balance to secure payment-of his fees and expenses. This ivas well within his legal rights, the counsel having the right to assert an attorney’s lien upon the proceeds. The question arises whether taxpayer is liable to report as income the $4,000 received by him from his counsel, or four-elevenths of the $25,000 received by counsel.

It is urged that receipt by an agent is receipt by the principal, and that taxpayer received four-elevenths of the amount paid over to his counsel. This rule, however, has its limitations. No one would contend that the agent, if sued, could invoke the rule for the purpose of saying that, as between the agent and his principal, payment to the agent discharged him from accounting to his principal. And the Government is in no better position, for it can tax only the amount which the taxpayer has received in fact, since he is on a cash basis.

The agent asserted his right to retain a portion of the proceeds. To this money both parties have a claim. It is perfectly clear that the taxpayer has not in fact received and has no right to receive the full amount paid to his counsel and that he never will receive such amount. It is not until settlement is made that he will know how much he is to receive. While as between the lodge and taxpayer, taxpayer had received $9,091, as between taxpayer and his counsel and also as between taxpayer and the Government he received only $4,000 in 1922, and is taxable on that amount.

Order of redetermination will be entered on 10 days' notice, wider Rule 50.

Teammell,

dissenting While only $4,000 in cash was actually paid over to the taxpayer by Ms counsel in 1922, it is a well established principle of law that receipt by an agent is receipt by the principal. Maryland Casualty Co. v. United States, 251 U. S. 342. Of the $25,000 received by the attorney in 1922, $9,091 belonged to the taxpayer. The fact that it was not paid him by his attorney in 1922 is not material. The amount of the expenses and attorneys’ fees is deductible from gross income. They should be deducted when paid and not when incurred, since the taxpayer .was on the basis of cash receipts and disbursements. The expenses were not only not paid, but they were not determined and not determinable in 1922. While it is true that the attorney may have had a lien on the fund for his fees and expenses incurred by him in collecting it, such items are properly deductible by the taxpayer as ordinary and necessary expenses in the year when paid. The entire amount received by the attorney for the taxpayer was a part of the gross income of the taxpayer. Ordinarily, when such items of expense are paid out in the same years in which the amount was received, it would make no difference in the result whether such items be held to reduce gross income or be held deductible from gross income in determining net income. The fact that in this case it does make a difference should not prevent the application of what seems to be a plain provision of the statute. Expenses incurred in producing income do not reduce the amount of gross income but are deductible from gross income in determining net income.


author: Morris:

text:
    Appeal of CHARLES L. SUHR.
    Docket No. 6406.
    Decided September 30, 1926.
    1. The placing of a value upon certain stock by the District Court in a suit not involving parties before the Board does not render the question of value res adjudicata. See Appeal of Union Metal Manufacturing do., 4 B. T. A. 287.
    2. The taxpayer, having a 20 per cent distributive interest in the Henry F. Suhr Trust Estate, and both being on the cash receipts and disbursements basis, is not taxable for the year 1917 on the interest for 1917 on certain bonds received in 1921.
    3. Under the circumstances of this appeal, certain director’s fees and compensation as managing trustee of the Henry E. Suhr Trust Estate are not taxable under section 209 of the Revenue Act of 1917.

      J. M. Gumming, G. P. A., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax in the amount of $9,957.68 for the calendar year 1917.
    The questions for determination are (1) the fair market value of certain stock as of March 1, 1913, December 21, 1914, and January 4, 1917, and the consequent gain realized upon the sale of stock in 1917; (2) whether the interest for 1917 on certain bonds received in 1921 is taxable for 1917; (3) whether certain of the taxpayer’s income for 1917 is taxable under section 209 of the Revenue Act of 1917.
    FINDINGS OF FACT.
    The taxpayer is a resident of Oil City, Pa., and during the year 1917 was an oil refiner.
    Prior to March 1, 1913, the taxpayer purchased 964 shares of common stock of the Pure Oil Co. On June 26, 1917, he sold this stock at $24.50 per share. The Commissioner computed a profit on this transaction on the basis of the stock having a March 1, 1913, value of $15.25 per share.
    In December, 1914, Henry Suhr, father of the taxpayer, died leaving'his property, consisting principally of stocks and bonds, to his wife and children. They entered into an agreement under which they pooled their property under the name of the Henry F. Suhr Trust Estate and designated the taxpayer managing trustee. Under the agreement the income from the trust estate was to be distributed, the taxpayer’s distributive share being 20 per cent. Included in the property were 20,500 shares of common stock of the Pure Oil Co. which were turned in to the trust estate on December 21, 1914. On January 4, 1917, the trust estate acquired 17,106 additional shares of this company. All of this stock was sold on June 26, 1917, at $24.50 per share. The Commissioner computed a gain on the taxpayer’s 20 per cent interest in this stock by attributing to it as of December 21, 1914, a value of $15.75, and as of January 4, 1917, a value of $21.75 per share.
    About 1915 or 1916 the Henry F. Suhr Trust Estate purchased through New York brokers a number of United States railroad bonds and Japanese bonds which were owned and held in Germany. Due to the War the bonds were not delivered until 1921, and the interest thereon was not received until that year. The books of both the estate and of the taxpayer were kept on a cash receipts and disbursements basis. The Commissioner increased the taxpayer’s income for 1917 in the amount of $245, representing his 20 per cent of the interest on these bonds for 1917.
    In 1917 the taxpayer was president of the Penn American Eefining Co. and the Oil City Oil & Grease Co. and a director of the Pure Oil Co. He was paid a salary by each of these corporations for his services and he also received a salary for his services as managing trustee of the Henry F. Suhr Trust Estate. The amounts received from these sources were as follows:
    Oil City Oil & Grease Oo-$3,000.00
    Pean American Refining Oo- 7,100.00
    Pure Oil Oo- 2, 350.00
    Henry Sulir Trust Estate_13,642. 35
    Total_ 26,092.35
    He devoted practically all of his time to his duties as president of the first two companies above mentioned, which were located in Oil City. He also attended all the executive and directors’ meetings of the Pure Oil Co. in Philadelphia.
   OPINION.

Morris:

The principal item in controversy is the taxable gain derived from the sale of Pure Oil Co. stock on June 26, 1917. The values of this stock as found by the Commissioner and claimed by the taxpayer are as follows:

The taxpayer offered no evidence to support his claimed value, but called to our attention the decisions of the United States District Court for the Western District of Pennsylvania in the cases of Phillips v. United States, 12 Fed. (2d) 598; and Crosby v. Heiner, 12 Fed. (2d) 604. In the Phillips case the court found that the March 1, 1913, fair market value of stock of the Pure Oil Co. was $22.50; that the company was in substantially the same financial condition from March 1, 1913, to July 16, 1914; and that on the latter date, July 16, 1914, parties of unquestioned financial ability made an offer of $22.50 per share for the controlling interest in the stock. In the Crosby case the court relied on the Phillips decision and found the value of the stock of the Pure Oil Co. on July 21, 1913, to be $22.50.

The taxpayer contends that these decisions render the question of value of the Pure Oil Co. stock res adjudicata.

Stating the rule generally, it is that .in order to render a matter res adjudicata there must be identity of the thing sued for, identity of the cause of action, and identity of the parties in the character in which they are litigants. Washington, etc., Steam-Packet Co. v. Sickles, 24 How. 333, 341, 342; Lyon v. Perin & Gaff Mfg. Co., 125 U. S. 698, 700. That identity of the parties is essential is settled by Aspden v. Nixon, 4 How. 467, where it was held that two suits, one in England, between the executor and administrators of a deceased claimant, acting under English letters, and the other in Pennsylvania, between the executor and another administrator of the claimant, acting under Pennsylvania letters, were suits between different parties, and that neither the decree nor proceedings in the English suit were competent evidence in the American suit.

None of the parties to the present appeal were parties to either the Phillips or the Crosby case; hence, one of the essentials for the application of the doctrine of res ad judicata — identity of parties— is lacking. Consequently, the doctrine is not applicable here and the findings by the court in the cases cited by the taxpayer are not determinative of the facts in this appeal. See also Appeal of Union Metal Manufacturing Co., 4 B. T. A. 287. As no evidence was offered by the taxpayer to prove that the values of the Pure Oil Co. stock on the dates involved — March 1, 1913, December 21, 1914, January 4, 1917—were other than the values found by the Commissioner, we must sustain the Commissioner’s valuations and the consequent gain derived on the sale of the stock.

The second question is whether the interest for 191Y on certain bonds received in 1921 is taxable for 1917. The bonds had been purchased in 1915 or 1916, but neither they nor the interest coupons were delivered to the trust estate of which the taxpayer was a beneficiary until 1921. As a result of its inability to present the . interest coupons, tbe estate did not collect, nor was it able to collect, the interest on the bonds in 1917. In view of these facts, and as both the estate and the taxpayer were on a cash receipts and disbursements basis, we must hold that the Commissioner was in error in adding to the taxpayer’s income for 1911 the amount of $245, representing interest on bonds held in Germany.

The sources of compensation paid the taxpayer, aggregating $26,092.35, are set forth in the findings of fact. It appears that the Commissioner has taxed this entire amount under section 209 of the Revenue Act of 1911, which reads as follows:

Sec. 209. That in the ease of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case' of all other trades or business, no deduction.

The determination of the correctness of the Commissioner’s action depends upon what is meant by “ trade or business,” which, as defined by section 200 of the Act, includes “ professions and occupations.” The court, in discussing this section in Lederer v. Cadwalader, 274 Fed. 153, used the following language:

Taxes on income from a “ trade or business ” clearly mean taxes on the income from the trade, business, profession, or occupation of the taxpayer himself. This is the plain meaning of the statute, and any other construction distorts the simplicity of the language and requires that we read into the language something it does not contain. A single, isolated activity of the character of the executorship of the plaintiff does not constitute a trade, business, profession, or vocation under the facts of this case. We agree with the Secretary of the Treasury and the learned trial judge in the interpretation of this section.

The interpretation of the Secretary of the Treasury referred to is found in article 8 of Regulations 41, as follows:

“ Trade ” in the case of individuals. — In the case of an individual, the terms “ trade,” “ business,” and “ trade or business ” comprehend all his activities for gain, profit, or livelihood, entered into with sufficient frequency, or occupying such portion of his time or attention as to constitute a vocation, including occupations and professions. When such activities constitute a vocation they shall be construed to be a trade or business whether continuously carried on during the taxable year or not, and all the income arising therefrom shall be included in his return for excess-profits tax.
In the following cases the gain or income is not subject to excess-profits tax, and the capital from which such gain or income is derived shall not be included in “invested captal”: (a) Gains or profits from transactions entered into for profit, but which are isolated, incidental, or so infrequent as not to constitute an occupation, and (6) tbe income from property arising merely from its ownership, including interest, rent, and similar income from investments except in those cases in which the management of such investments really constitutes a trade or business.

The salaries received from the Penn American Refining Co. and the Oil City Oil & Grease Co. clearly come within the. above interpretation. In our opinion, however, the director’s fees of $2,850 received from the Pure Oil Co. and the compensation of $13,642.35 as managing trustee of the Henry F. Suhr Trust Estate are not income from “ trade or business.”

The Commissioner admits error in the inclusion in income of $38.72, representing interest on tax-free covenant bonds, and the amount should accordingly be excluded in the recomputation.

Order of redeterminaMon will be entered on 15 days’ notice, under Bule 50.

MilliKEN dissents.


author: Moeris :

text:
    Appeal of LOUIS WALZ.
    Docket No. 6489.
    Decided September 30, 1926.
    /. M. Gumming, O. P. A., for the petitioner.

      Robert A. Littleton, Esg., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax in the amount of $16,934.15 for the calendar year 1917. The only question involved is the March 1, 1913, value of the stock of the Pure Oil Co.
    FINDINGS OF FACT.
    The taxpayer is a resident of Oil City, Pa. In 1917 he sold 11,750 shares of the common stock of the Pure Oil Co. at $24.50 per share, which had been acquired by him prior to March 1, 1913.
    The Commissioner fixed the March 1, 1913, value of this stock at $15.25 per share.
   OPINION.

Moeris :

The taxpayer contends that the common stock of the Pure Oil Co. had a fair market value of $22.50 a share on March 1, 1913. He offered no evidence to support that value but called our attention to the decision of the United States District Court for the Western District of Pennsylvania in the case of Phillips v. United States, 12 Fed. (2d) 598, in which the court found that the March 1, 1913, value of that stock was $22.50 a share, He contends that that decision renders the question of value of the Pure Oil Co. stock res adjudicata.

The same question was raised and decided adversely to the taxpayer in the Appeal of Charles L. Suhr, 4 B. T. A. 1198, and for the reasons therein given we render

Judgment for the Commissioner.


author: MoReis:

text:
    C. R. DAVIS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1956.
    Decided September 30, 1926.

      Stanley Jackson, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This proceeding is to redetermine deficiencies in income taxes for 1919, 1920 and 1921, amounting to $7,004.83. The deficiencies result from including in the taxable income of petitioner salaries for the respectiye years alleged to have been earned by the petitioner’s wife. The proceeding was submitted on the pleadings.
    FINDINGS OF FACT.
    The petitioner is president of the Wisconsin Furniture Co. of San Francisco, Calif., and resides in that city.
    For the years 1919, 1920 and 1921, the petitioner’s wife reported as taxable income salaries for the respective years of $6,000, $12,000 and $12,000, and paid income taxes thereon.
    The Commissioner added these alleged salaries to petitioner’s taxable income for the respective years and determined the deficiencies in controversy.
   OPINION.

MoReis:

The allegations of fact in the petition from which it might be inferred that the wife had separate earnings or income that would allow her to file a separate return were denied by the Commissioner. No evidence was adduced by the petitioner in support of the allegations, nor were there any admissions which would show that the salaries reported by the wife were her separate earnings.

In view of the Board’s position in the Appeal of D. Cerruti, 4 B. T. A. 682, and for the reasons therein stated, the determination of the Commissioner must be affirmed.

Judgment for the Commissioner.


author: Littleton:

text:
    Appeal of AMERICAN VALVE CO.
    Docket No. 4696.
    Decided September 30, 1926.
    1. Late in December, 1917, due to increased production and the discontinuance of water transportation facilities theretofore used, it became necessary for petitioner to acquire a new site and to construct new and more modern buildings in which to carry on its operations. In June, 1920, it began operations in its new plant and permanently abandoned the use of the old site and buildings. Held, that petitioner was entitled to deduct for obsolescence the unextinguished cost of its buildings on December 31, 1917, ratably over the years 1918 and 1919 and the first six months of 1920.
    2. Dor the purpose of determining the depreciated value of buildings on December 31, 1917, held, upon the evidence, that 2 per cent per annum was a reasonable allowance for the exhaustion, wear and tear thereof for 1917 and prior years.

      F. Morse Hubbard, Esq., for the petitioner.

      R. P. Smith, Esq., for the Commissioner.
    The Commissioner determined deficiencies of $10,673.75, $863.09 and $1,291.61 for the years 1918, 1919 and 1920, respectively. The issues are, first, the period over which the petitioner was entitled to deductions for obsolescence of its plant facilities, and, second, the rate at which the cost of such facilities should be exhausted over the period from the date acquired to the beginning of the obsolescence period for the purpose of determining their unextinguished value at that time.

      FINDINGS OF PACT.
    Petitioner is a New York corporation engaged in the manufacture of brass and iron valves at Coxsackie. From the time of its organization in 1901 to June, 1920, its plant was located on the banks of the Hudson River. The land, which was acquired in 1901, together with the subsequent improvements thereto, cost $9,999.18. The buildings erected on this location consisted of a two-story main factory building and other buildings, as follows: iron foundry, brass foundry, power plant, office, pattern shop, and grinding and core shop. All of these buildings with the exception of the core shop were of brick construction, with slate roofing and concrete foundations resting on bed rock. The core shop was a frame building-erected in 1917 at a cost of $2,804.15. The other buildings mentioned were erected from time to time from 1901 to 1919, the principal additions subsequent to the construction of the original building in 1901 having been made in 1906 and 1908. The total cost of all the buildings and additions to December 31, 1917, was $53,-058.89. The cost of a wharf constructed in 1911 was $3,237.50. The total cost of land, buildings, and wharf to December 31, 1917, was $66,295.57. At the time petitioner erected its plant in 1901, and for several years thereafter, there was regular freight service by boat from Coxsackie, by which petitioner was able to transport its product to its distributing agent in New York City. Subsequently boat service became irregular and infrequent, and at the same time the company’s volume of business increased to such an extent that in 1917 the practice of shipping its product to a sales agent in New York City for distribution had to be discontinued and shipments instead had to be made direct to dealers by rail. As a result, the location of the plant, which was a considerable distance from the railroad, became economically undesirable. Furthermore, the output in 1917 had increased to such proportions that the buildings in use no longer afforded sufficient space for the manufacture and handling of the product of the company. The main factory building, which was an old style two-story structure, had by 1917 become unsuitable for the company’s use, inasmuch as the increased production of relatively heavy articles demanded a one-story structure of more modern type, that would allow the entire product to be handled on the ground floor, avoiding thereby the necessity of hoisting it to the second floor for a portion of the manufacturing processes. By reason of these circumstances, the petitioner determined near the end of 1917 that the old plant had outlived its usefulness and that it would be necessary to abandon it for a new location, with new buildings near the railroad. Up to this time petitioner had been transporting its product to the railroad by trucks.
    When the petitioner definitely determined in the latter part of 1917 to abandon its old site and plant, it entered into negotiations for the purchase of two certain adjoining parcels of land contiguous to the tracts of the West Shore Bailroad. The owner of one of these parcels expressed a willingness to sell. The other tract had been conveyed to a producer of moulding sand subject to an option to repurchase as soon as the sand had been removed. The person who had so conveyed it and who held the option to repurchase expressed his willingness to sell the property to the petitioner as soon as he could reacquire it. Upon investigation, the petitioner concluded that this property could in all probability be acquired during 1918. Thereupon, it began negotiations in January, 1918, with a construction company, resulting in the submission of plans and estimates for the factory. These negotiations were continued for several months. In the meantime, about September, 1918, before the owner of the option above referred to was at liberty to exercise the same, the owner of another tract of land, consisting of about 30 acres adjoining the railroad, died, and this land was placed upon the market. Inasmuch as it in many respects afforded a more desirable location than the property for which the petitioner had been negotiating, the petitioner began negotiations which resulted in the purchase of the 30 acres on April 1, 1919. The acquisition of this: property necessitated a revision of the plans for the new plant and,, after receiving bids, the contract for the erection of the new plant was let on July 18,1919. The construction was completed in December, 1919, and the petitioner immediately began moving from the old to the new plant with as little interruption in operations as possible. The process of moving was completed in June, 1920, whereupon the old plant was entirely abandoned and was not thereafter used for any purpose.
    The buildings at the old plant were, except for ordinary wear and tear, in reasonably good condition. However, in 1917, the petitioner entertained no hope of finding a purchaser and concluded that it would be necessary to salvage the buildings. It estimated that the salvage value of the buildings and the value of the land would approximate $20,000. Before the petitioner had undertaken to salvag;e the buildings, the Coxsackie Board of Trade succeeded in finding a. purchaser and the land and buildings were sold in December, 1920, for $20,000.
    For the purpose of obsolescence deductions, which were allowed for only 1919 and 1920, the Commissioner determined that the exhaustion sustained upon the buildings to December 31, 1918, amounted to $20,482.80, and that of the wharf to $906.50, computed at the rate of 4 per cent per annum upon cost. The basis used is not in controversy. The exhaustion determined, plus the proceeds of the sale, amounted to $41,389.30. The Commissioner deducted this amount from the cost of all the property to December 31, 1918, of $67,880.30, resulting in an obsolescence allowance of $26,491,, which he spread over the years 1919 and 1920, allowing in each year an obsolescence deduction of $13,245.50.
    Two per cent per annum was a reasonable allowance for the exhaustion, wear and tear of the buildings and 4 per cent for the wharf for 1917 and prior years. Petitioner made no entry upon its books on account of exhaustion, wear and tear of property prior to 1917.
   OPINION.

Littleton:

In December, 1917, petitioner definitely determined that its plant, in which its operations were then being carried on, had served its usefulness and would have to be abandoned within ¡approximately two years. In addition, it determined that the salvage value of the entire properties was approxima'tly $20,000. The use of the properties was abandoned in June, 1920, and later, through the efforts of the local board of trade, they were sold for $20,000. The petitioner therefore was entitled to an obsolescence deduction over the period from January 1, 1918, to June 30, 1920, of the December 31, 1917, depreciated cost of its buildings and wharf.

Judgment for the 'petitioner. Order of re-determination will be entered on 15 days’ notice, under Rule 50.


text:
    Appeal of OHIO GREASE CO.
    Docket No. 6023.
    Decided September 30, 1926.

      Held, that the deduction for exhaustion, wear and tear of property during the taxable years should have been computed upon the basis of the value of the property on March 1, 1913, and upon the cost of additions subsequent thereto.

      W. J. Kogan, Esq., and Rufus W. Pearson, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    The Commissioner determined deficiencies in income and profits tax for the fiscal years ending February 28, 1919 and 1920, in the amounts of $12,583.77 and $15,079.17, respectively, and overassess-ments for the ten-month period ending December 31, 1920, and the calendar year 1921, in the amounts of $586.12 and $389.40, respectively.
    The controversy concerns the matter of exhaustion, wear and tear of lubricators. The petitioner valued the lubricators on hand on March 1, 1913, at $10 each, totaling $107,000. Thereafter it entered upon its books the cost of additional lubricators manufactured during the years. It was the practice of the company to write down the value of the lubricators each year in lieu of entering upon its books a depreciation reserve. By this method the value of lubricators at March 1, 1918, was shown by its books to be $61,859. The Commissioner used this figure as the basis for .computing the deduction for exhaustion, wear and tear of lubricators for the fiscal years at the rate of 15 per cent per annum, and computed the deduction upon the cost of additions during each year from the beginning of the succeeding year. The useful life of the lubricators and the rate of exhaustion, wear and tear is not in controversy. Petitioner claims that the lubricator account should be adjusted and the deductions for exhaustion, wear and tear for the taxable years determined by depreciating the March 1,1913, value of lubricators at 15 per cent per annum and the cost of additions in subsequent years at the same rate, averaged for such years. It is further alleged that the Commissioner made certain mathematical errors in computing the income for the periods in question.
    FINDINGS OF FACT.
    Petitioner is an Ohio corporation organized in 1909 to engage in the manufacture of lubricating grease and lubricators for the efficient use thereof. The lubricator had been patented by the petitioner. It was not manufactured for sale, but a large supply was kept on hand to lend to purchasers of its lubricant, same to be returned in the event the use of its grease should be discontinued. Ownership and title remained in the petitioner and, when a customer ceased to purchase the petitioner’s lubricant, he was asked to return the lubricator. If he failed to do so within a reasonable time, petitioner made it a practice to send him a bill for $25. As a rule, the bill was either paid or the lubricator returned. A number of lubricators were lost or destroyed each year.
    On March 1, 1913, petitioner had on hand 10,700 lubricators having a fair market value on that date of $10 • each, or a total fair market value of $107,000. The cost of lubricators manufactured subsequent to March 1,1913, which included materials and labor, was as follows:
    Value Mar. 1, 1913-$107, 000. 00
    Additions: Material_ 5, 363. 04
    “ Labor- 11,734.77
    Total Mar. 1, 1914_ 124, 097. 81
    Material_ 2, 097. 81
    Labor_ 10, 491. 41
    Total Mar. 1,' 1915_ 137,151. 39
    Material_ 9, 442. 35
    Labor_ 12, 420. 07
    Total Mar. 1, 1916_ 159,013. 81
    Material and labor- 25, 369.26
    Total Mar. 1, 1917_ 184, 383.07
    Material and labor- 20, 909.16
    Total Mar. 1, 1918_ 205, 292. 23
    Material and labor_ 15, 360.29
    . Total Mar. 1, 1919_ 220, 652. 52
    Material and labor- 16, 396. 29
    Total Mar. 1, 1920- 237,048.81
    Material and labor- 17, 495.60
    Total Dee. 31, 1920_ 254, 544.41
    Material and labor- 19,787. 95
    Total Dec. 31, 1921. 274, 332.36

      Prior to 1916, the cost of labor in the manufacture of lubricators was charged to expense. For 1916 and subsequent years such labor was included in the cost of lubricators,
    The additions mentioned were made regularly throughout the whole year, weekly and monthly, and accurate records were maintained, but the total cost thereof was' not entered upon the regular books of account until the end of the year. Due to the fact that the cost of additions was entered on the last day of the year, the Commissioner declined to allow any deduction for exhaustion, wear and tear on such additions for the year in which made.
   OPINION.

Littleton:

The deficiencies for the fiscal years ending February 28, 1919 and 1920, should be redetermined by computing exhaustion, wear and tear of lubricators upon the basis of the March 1, 1913, value thereof, amounting to $107,000, and upon the cost of subsequent additions as set forth in the findings of fact, at 15 per cent per annum upon a straight-line basis. The deduction for exhaustion of the cost of additions made during the years should be averaged for the year in which such additions were made.

The mathematical errors complained of will be automatically eliminated upon the recomputation in accordance with this opinion.

The Board is without jurisdiction to redetermine the amount of overassessments for the ten-month period ending December 31, 1920, and for the calendar year 1921. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

Order of redetermination will he entered on 15 days’ notice, under Bule 50.