author: Lansdon:

text:
    California Delta Farms, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9820.
    Promulgated May 11, 1927.
    1. Value of lands acquired for stock and other considerations determined as of date of acquisition and at March 1, 1913.
    2. Petitioner’s statutory invested capital for certain taxable years determined.
    3. Petitioner caused the formation of certain reclamation districts made up of lands of which it was the owner, under the laws of California, and accepted warrants of such districts in payment for easements for right of way purposes, for personal property owned by it, and for the purposes of completing the reclamation works which it had theretofore undertaken. Such warrants created valid statutory liens upon lands owned by the petitioner, and none other, for the face value thereof. Held, that the petitioner realized no taxable gain from the transactions.
    4. Amount of deductible loss resulting from exchange of properties determined.

      M. F. Mitchell, Esq., for the petitioner.

      George G. Witter, Esq., and A. Colder Maehay, Esq., for the respondent.
    The Commissioner has determined deficiencies in income and profits taxes for the years 1918, 1919, and 1921 in the respective amounts of $584,931.41, $57,243.96, and $5,885.98 or a total of $648,061.38. The issues are: (1) The value at date of acquisition of certain lands and personal property purchased by the petitioner for stock and other considerations at the date of incorporation, the value of such assets at March 1, 1913, and the value of certain of such lands in the years 1918, 1919, and 1921; (2) the amount of statutory invested capital to which the petitioner is entitled in the computation of its tax liability in the years 1918, 1919, 1920, and 1921; (3) whether the petitioner realized taxable income in the transfer of certain of its assets to reclamation districts in 1918 and 1919; (4) whether the petitioner realized taxable gain or sustained deductible losses by the transfer of certain of its lands to other parties and by the exchange of one tract of land for another similar tract of less acreage. The petitioner also raises certain issues concerning the Commissioner’s adjustments of its income and expenditures in the year 1920 and includes such year in the allegations of error in its petition for redetermination.
    FINDINGS OP FACT.
    Petitioner is a California corporation organized in 1912. Its headquarters are at Los Angeles and other offices are at San Fran cisco and Stockton. At the date of incorporation it acquired by purchase from C. H. Condee title to certain personal property and to approximately 37,980 acres of partly reclaimed swamp and overflowed land in San Joaquin and Contra Costa Counties, California, a short distance east of Stockton and all within the delta of the San Joaq'uin River, for which it paid the grantor 74,989 of its 75,000 shares of capital stock (par value $100) and $1,334,000 par value of 6 per cent gold bonds. It assumed the payment of outstanding bonds amounting to $1,550,000, covering certain of the personal and real property purchased, and such other indebtedness as existed against the property at the date of purchase. The personal property consisted of eleven dredges, one floating pumping plant, boats, barges, launches and tugs, and bills receivable amounting to $200,000 in excess of the bills payable assumed by tlie grantee. The cash value of the land so acquired was $7,627,400.
    On December 3, 1912, the directors of the corporation adopted a resolution providing for the issue of 3,500 one thousand dollar twenty-year gold bonds, and on the sixth of the same month all the stockholders filed with the secretary their written consent thereto. Two thousand seven hundred and fifty of such bonds were issued and outstanding at the close of 1917. One thousand three hundred and thirty-four of these were transferred to the grantor in satisfaction of the contract between him and the petitioner. Bonds in the amount of $1,050,000 were used in paying off mortgages on portions of the land, some of which were assumed by the corporation at the time of purchase and one or more others which were executed by its secretary a short time after the purchase was made.
    A large part of the land purchased had been reclaimed prior to the sale, and the company continued the work of reclamation immediately and as rapidly as possible thereafter. For convenience in reclamation the total" acreage was divided into ten divisions, as follows: Bacon Island, Bishop tract, Empire tract, Holland tract, King Island, Mandeville Island, McDonald Island, Medford Island, Orwood tract, and Webb tract. On March 1, 1913, no reclamation work had been done on the Medford tract and very little on Bacon Island and Mandeville Island. It cost $116.10, $64.07, and $78.94 per acre, respectively, to complete the work on these three tracts. The cost per acre for completing the work on three other partially reclaimed tracts was as follows: Bishop, $45.25; King Island, $25.44; McDonald Island, $34.69.
    The March 1, 1913, values of the several tracts owned by the company on that date, were as follows:

    The cost of reclamation work done between March 1, 1913, and the transfer of the reclamation works to the first reclamation districts organized was $1,192,652.82. Other than capital expenditures there was no increase in delta land values between March 1, 1913, and the first taxable year.
    At the beginning of 1917, the petitioner’s bonded indebtedness was $2,750,000. Under the terms of its bonds and mortgage, the taxpayer was required to deposit with the trustee under the mortgage, $100,000 per year beginning with the year 1917, for the creation of a sinking fund. It could not convey the title of its lands except by paying to the trustee $100 for each acre to be conveyed. There were certain other burdensome requirements in this instrument which led the petitioner to seek some method by which it could change the form of its evidence of indebtedness. For these and other reasons it worked out a plan to refinance its outstanding obligations and to secure funds for the completion of the reclamation works. It divided a large part of its land into seven separate tracts which it caused to be organized as reclamation districts, and thereafter secured the issuance of reclamation warrants amounting to $3,340,000 against the several districts. These warrants were liens against certain specified lands within each of the several districts, in amounts agreed upon by the petitioner according to the benefits to such lands from the reclamation works. They represented the expenditures theretofore made and certain estimated expenditures considered necessary for the immediate future to place the reclamation work in a thoroughly good condition. Following is a memorandum prepared by the petitioner and bearing the date of July 13, 1918, giving the number and name of each district and showing certain facts and estimates in detail:

    This memorandum became a part of an agreement dated July 29, 1918, entered into between the California Delta Farms, Inc., and certain bankers for the financing of the company and the payment of its existing bonded indebtedness. The following from pages two and three of the memorandum are material facts relating to the matters herein at issue:

      As fast as the aforementioned seven districts issue warrants and these warrants become the property of the Delta Farms in payment for the levees, canals, etc., these warrants, in the aggregate amount in face value of $2,850,000, will be deposited by the Delta Company with the Trustee as further security for the present outstanding bonds; which warrants may be used by the Delta Farms in payment, par for par, for all or any part of the seven Reclamation bonds purchased by the Delta Farms Company at the public sale thereof.
    The Delta Company to- agree to surrender to the Trustee $750,000 First Mortgage Delta bonds at par and accrued interest in exchange for a like amount of Reclamation District bonds at par and interest.
    The purchase, at the public sale, by the Delta Company at par and accrued interest of the entire amount of $2,850,000 of Reclamation District bonds and the deposit thereof with the Trustee under the Delta First Mortgage with instructions which will permit of the delivery of $750,000 as above and $2,100,000 pro rata for $2,000,000 Delta Company First Mortgage 5s from time to time, but in such a -way that the securities now held by Delta bondholders will not be depreciated. The bankers to enter into an agreement with the Delta Company and the Trustee, that the Bankers will deliver to the Trustee $2,000,000 Delta bonds in exchange for $2,100,000 Reclamation bonds, legal for savings banks, that is to say, for every $10,000 of Delta bonds delivered to the Trustee, or $10,500 of cash deposited to retire Delta Bonds, $10,500 of Reclamation bonds will be issued to the bankers, the accrued interest on each exchange to be adjusted in cash. In consideration of this agreement the Delta Company will pay the bankers a sum of money equal to $40,000 to be paid to the bankers in sums of $2,000, as each $105,000 of Reclamation Bonds are delivered by the Trustee. This agreement to continuo in force and effect until all the Delta Bonds have been surrendered to the Trustee, or the sum of $1,050 and accrued interest has been deposited by the Bankers with the Trustee for each outstanding Delta Bond undelivered.
    Recognizing the importance of the retirement of the Delta bonds to enable the Delta Company to subdivide and sell its land, the bankers agree to secure the surrender to the Trustee of the $2,000,000 Delta bonds within six months after they are advised that the Reclamation District bonds have been properly authorized and approved by the Banker’s attorneys and deposited with the Trustee under the mortgage, or to deposit the aforesaid $1,050 interest for each bond not so then delivered.
    The bankers shall have the option to purchase all or any part from time to time of the $2,100,000 Reclamation bonds deposited with the Trustee, by paying to the Trustee therefor, for the benefit of the Delta bondholders, a sum of cash equal to par and accrued interest of the bonds so purchased, on all of which purchases the bankers shall receive the same $2,000 payment from the Delta Company for each $105,000 Reclamation Bonds purchased as on the exchange of the Delta Bonds.
    Because of delay in the issuance of bonds for McDonald Island, the contract between the bankers and the company was modified somewhat in November, 1918, but the change does not affect the facts material to this appeal.
    The company’s deeds and bills of sale to the districts specify the consideration paid by each district as follows;

    The deed for No. 2030 is dated December 26,1918, but the acknowledgment was taken January 28, 1919.
    These deeds reserved the fee to the petitioner and conveyed only personal property jmd easements for reclamation purposes to the districts. The consideration received had no relation to the value of the property transferred, but was determined by the amounts deemed necessary by the petitioner to refinance its obligations and to cover the estimated cost of reclamation work that remained to be done.
    The reclamation district warrants were issued in payment of assessments made by three commissioners appointed by the boards of supervisors of the counties in which the land lies. The commissioners divided the reclamation districts into tracts, if deemed advisable, and apportioned and assessed the amount necessary to be raised for the complete reclamation of each district among these tracts in proportion to the benefit that each would receive. The warrants issued on each assessment became a lien on all the land of the tract against which the assessment was levied. No assessments were levied against any lands owned by any persons except the California Delta Farms, Inc., and the three trustees originally appointed in each district and warrants were issued against these only. The deeds conveying title to the reclamation districts recited that the payments on account of realty were for easements for right of way purposes as follows:
    For reclamation, including drainage and irrigation purposes, that strip of land 150 feet wide, extending around the entire district its outer line coinciding with the outer base of the levee.
    For levee purposes and as a source of water supply and for use in the maintenance and construction of reclamation and as sources of material for such work: All portions and parcels of land which lie outside of said 150 foot strip but within the district.
    For irrigation and drainage canals and purposes: Strips of land 75 feet in width and lying equally on each side of the center line of the main drainage canals of 20 feet or more in width as said main drainage canals now exist including said * * * canals.
    The district warrants were duly signed and issued by the district trustees. California Delta Farms District Reclamation $1,000 bonds aggregating $2,850,000 were issued and advertised to be sold at public sale. The secretary of the Farms Company bid them in for the company and gave district warrants, dollar for dollar, in payment therefor.
    The $2,850,000 of district reclamation bonds were deposited as required by the agreement with the trustees under the original Delta Company mortgage. Of this amount $2,100,000 was used for the retirement of the $2,000,000 Delta Company bonds held by parties not associated with the Farms Company. A commission of $40,000 due the bankers for financing and conducting the deal was paid in cash. The remaining bonds in the amount of $750,000 were exchanged for Delta Farms Co. bonds of equal par value. These transactions entirely liquidated the old mortgage indebtedness and substituted therefor a bond issue which was $100,000 greater in amount.
    In its income and profits-tax return for 1918 the petitioner rejiorted net income in the amount of $132,688.81. Upon audit of such return the Commissioner added to gross income the amount of $915,596.41 as profits realized from the sale of capital assets to reclamation districts, made other minor adjustments not in controversy, reduced the invested capital of the petitioner in the amount of $4,044,678.37, and asserted a deficiency of $584,931.44.
    In the year 1919 the petitioner caused its remaining lands to be organized into three reclamation districts, which issued warrants to it in payment for lands and chattels conveyed to them in deeds similar in terms to the conveyance made to the seven districts organized in 1918. The acreage of lands to which easements were granted for right of way purposes and the consideration therefor were as follows:

    The value at March 1, 1913, of the lands upon which easements were granted was as follows:

      Lee A. Phillips, president of the Empire Navigation Co., was a heavy purchaser of the San Joaquin River Delta lands. In 1910 he sought to purchase the whole of McDonald Island but found that Maurice Zuckerman held an option on that part of it known as the Henning tract. The two agreed that Phillips should acquire all the land and sell the Plenning tract to Zuckerman at $125 per acre. Phillips bought, but having secured the conveyance, delayed putting his contract with Zuckerman into writing. Two other neighboring tracts were for sale. Zuckerman knowing that Phillips intended to buy them secured an option on one of them. Phillips then put the verbal agreement of sale and purchase of the Henning tract into writing, naming himself as party of the first part and E. M. Weyl and M. Zuckerman as parties of the second part, and was permitted to purchase the other two. The writing was made in 1912; was an executory contract for sale and purchase, and the consideration named was $125 per acre. In October, 1913, a little more than a year subsequent to the purchase of the land by the California Delta Farms Company, Inc., the petitioner took up the Phillips contract and executed another in lieu thereof, which was identical except as to the names of the grantors and the number of acres. Each provided that title should pass after payment in full. Such payment had not been made when District No. 2030, McDonald Island, of which the Henning tract was a part, was organized; consequently no title deed in favor of Zuckerman bad been executed. Within the year 1919 final settlement of all indebtedness was made and a deed of conveyance in fee was executed by the company to Weyl and Zuckerman. This was the only conveyance executed in favor of Weyl and Zuckerman. The company retained the bonds assessed against the Henning tract and credited Weyl and Zuckerman with their par value ¡as part payment for the land. The consideration of $125 per acre agreed upon in the 1910 verbal contract and the two written contracts of 1912 and 1913, supra, was the price in full finally received.
    In May, 1919, the petitioner exchanged Mandeville Island containing 5,430 acres for King Island containing 3,290 acres. The value of Mandeville Island at March 1, 1913, was $170 per acre and reclamation improvements at a cost of $70 per acre were made prior to the exchange. The parties stipulated that the reclamation district including all the land on Mandeville Island at the date of exchange had an outstanding bonded indebtedness in the amount of $396,140 which the grantee assumed. The value of King Island at date of exchange was $250 per acre.
    In its income and profits-tax return for the year 1919 the petitioner reported net income in the amount of $253,663.04. Upon audit of the return the Commissioner added to gross income the amount of $223,488.08 as profits realized from the sale of capital assets and the amount of $378,862.84 as profit realized from the exchange of Mande-ville Island for King Island, made other additions and deductions not here in question, reduced the petitioner’s invested capital in the amount of $4,044,678.37 and asserted a deficiency of $57,243.96.
    In its income and profits-tax return for 1920 the petitioner reported an operating loss in the amount of $35,162.75. Upon audit of such return the Commissioner made many adjustments, ascertained a net loss in the amount of $63,370.32 and found no deficiency or tax liability.
    As a part of the procedure in organizing its lands into reclamation districts and for the purpose of conforming to the California Civil Code providing for the creation of such districts, the petitioner deeded separate tracts of its land of 2% acres each in each of the proposed districts to G. A. Atherton, George M. Burton and J. C. McCarty, and such deeds were duly recorded. Immediately after-wards such tracts were deeded back to the petitioner by the said grantees but such deeds were not recorded prior to the organization of the reclamation districts in which said tracts were severally situated.
    During the year 1921, the petitioner sold or contracted to sell numerous parcels of its lands to various purchasers, but included no profits from such sales in its gross income in its income and profits-tax"returns for' such year. Upon audit of such returns the Commissioner added the amount of $135,246.95 to gross income as profits on the sale of lands, made other minor adjustments not in controversy and asserted a deficiency in the amount of $5,885.98.
   OPINION..

Lansdon:

The issues involved in this proceeding are sufficiently set forth in our preliminary statement, sufra. We shall discuss and decide such questions in the order there stated, except to hold that we have no jurisdiction over any controversies relating to 1920, a taxable year in which no deficiency is asserted. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255; Appeal of W. H. Morefield, 4 B. T. A. 394.

The contending parties introduced many witnesses to prove value of the lands of the petitioner at the date of acquisition and at March 1, 1913. We have used great care in the consideration of the weight of the opinion evidence so adduced. We are convinced that the computation set forth in our findings of fact above represents the fair cash value of the assets acquired at date of purchase and at March 1, 1913. We are also convinced that there was no appreciation in the value of Delta Farm lands between March 1, 1913, and the dates of the transfers, sales and exchanges upon which the Commissioner bases his assertions of tax liability arising from gain realized from such transactions.

Having determined that the land taken into the petitioner’s assets at date of incorporation had a cash value in the amount of $7,627,400, and the parties having stipulated that the cost of reclamation work done by the petitioner between March 1, 1913, and the date of the first transfer to the reclamation districts in 1918 was $1,192,652.82, we conclude that the petitioner is entitled to have the sum of these two amounts less bonds and other evidence of borrowed capital assumed, included in the computation of its statutory invested capital for profits tax purposes in each of the taxable years. The petitioner' admits that the Commissioner correctly adjusted its invested capital for the taxable years except as to the value of the land acquired for stock at date of organization. The correct invested capital in accordance with our findings is left for determination under Rule 50.

It is not disputed that the reclamation districts in question were properly and legally organized under the laws of California. No shadow of invalidity darkens any of the processes either of organization or operation of such districts. We are of the opinion that the series of transactions relating to the organization and bonding of the reclamation districts; the sale of the easements and personal property to the several districts; the assessments against certain land owned by the company within the several districts; the issuance of warrants against the funds derived from the assessments; the issuance, sale and purchase of district reclamation bonds as provided for in section 3480, California Political Code of 1922, and the exchange of $2,850,000 face value of these reclamation bonds for outstanding Delta bonds amounting to $2,750,000 face value were in fact one business deal and should be so considered, as the facts clearly indicate they were intended by the petitioner as a means to extricate it from an intolerable situation and place the petitioner on a more efficient working basis. To effectuate this condition it incurred an additional bonded indebtedness of $100,000, paid $40,000 in cash to its brokers for financing and engineering the exchange of bonds, and incurred numerous other expenses. These amounts were sacrificed as a pawn for a better position on the board, and this better position seems to have been the only gain. Without it the petitioner would have been in no better condition at the end of the deal than it was at the beginning. Dor every cent it received from any one of these reclamation districts or otherwise as a result of these transactions it gave in return an obligation to pay a like or greater amount secured by a lien upon its lands within the districts.

The case comes clearly within the decision in Rindge Land & Navigation Co., 2 B. T. A. 1179. A quotation from that case is especially pertinent here. At page 1188 the Board said “ If we read the California statutes aright, it was not contemplated that the landowner should be deprived of anything by the organization of reclamation districts. On the contrary, the landowner, by its vote in dollars of value, was to control the district. The district was its agent, created at its request, and vested with certain powers by the State, only because those powers were necessary to perform certain acts for the benefit of the landowner. * * * Where there is but one landowner, as in this appeal, a reclamation district is nothing more than a legal fiction — an instrument created to permit the owner to issue bonds for its own purposes, and an entity which does not seem to come within any definition of person, partnership, corporation, or association, contained- in the Revenue Act of 1918.” In the present case the organization of the districts and all that followed up to and including the issuance of the warrants, was simply a means to the accomplishment of an end — one part of an operation as clearly related to the others as are the different acts of a surgical operation to each other — all parts of one harmonious whole.

It may be noted that the lands of each individual owner were assessed separately, even the 214-acre tracts of the trustees, and that the assessments were made in proportion to the benefits already derived and to be derived from the reclamation work. This necessitated a separate accounting with each of the then owners of the land and the payment to each owner of his share of the money for which his property was assessed, either in reclamation work or in specie. But every cent thus received must first be paid in by the owner, either directly or by the creation of a debt of equal or greater amount. Neither the sale of the property to the districts nor any other of these transactions, nor all of them ivas at the time productive of taxable income.

The only possible variation between the basic facts here and in the Eindge appeal is raised by the Commissioner’s contention that at the time of the organization of the districts and the transfer of the petitioner’s assets thereto in exchange for bonds, there was one considerable tract that was owned by Weyl and Zuckerman Avho were not parties to the organization and whose lands if then so owned were security for bonds issued against them.

It is disclosed by the evidence that the petitioner acquired the ■ Zuckerman land subject to a contract of sale at $125 per acre coupled with the condition that it must complete the reclamation works thereon at its own cost. This contract to sell was voluntarily renewed by the parties to it and provided that Weyl and Zuckerman should enter into possession and use in 1914, that they should make certain Xiayments specified as to due dates and amounts, that their total payments were to be reduced by the amount of outstanding reclamation bonds issued in payment of warrants assessed against the land, that the petitioner was to pay certain taxes on the land, and complete and maintain the reclamation works necessary to its use as a producing agricultural property, and that when all conditions had been met by both parties a deed conveying legal title from the petitioner to Weyl and Zuckerman would be made.

This agreement to sell appears to have been nothing more than an executory contract, the completion of which depended on conditions that had to be met as undertaken by each of the parties thereto. The failure of the proposing purchasers to make the required payments or to meet any other obligations imposed on them would result in the forfeiture of their rights under the contract. Likewise the failure of the petitioner to pay the taxes and construct and maintain the necessary reclamation works would relieve Weyl ancl Zuckerman from any liability to make the payments for which they had obligated themselves. During all the time before the execution or completion of the contract by the discharge of the several obligations accepted by each of the parties thereto -the legal title of record was in the petitioner and so remained until after the organization of the reclamation district. We are of the opinion that in all these circumstances the petitioner was the owner of record, within the requirements of the reclamation laws of California, at the date of the organization of the districts.

The Commissioner also contends that in addition to Weyl and Zuckerman, there were other owners of lands included within the reclamation districts at the date of the organization thereof. Prior to the organization of the reclamation districts the petitioner deeded 2% acres of land in each of the proposed districts to each of three of its employees and such deeds were duly recorded. Subsequently, but still prior to the organization of the districts these parcels of land were deeded back to the petitioner but such deeds were not placed of record. It appears therefore that at the date of the formation of the districts the petitioner was both the beneficial and the legal owner of such tracts and that only a title of record which had been destroyed by subsequent unrecorded deeds remained in its agents as individual owners and that such title was sufficient to satisfy the requirements of the reclamation laws of California which provide that only owners of record shall participate in the organi-sation of reclamation districts. It appears also that there were other small tracts included within the boundaries of the several districts that were not owned by the petitioner at the time of the formation of the districts. The evidence is conclusive, however, that no assessments were placed on such lands. No assessments were placed against any lands not owned by the petitioner and for every dollar realized from the reclamation district bonds received by the petitioner m exchange for easements and other assets, its property was subject to a lien of like amount. These facts and conclusions also apply to the districts organized in 1919. We are of the opinion that our decision in the Rindge appeal, supra, is controlling here and that no taxable income was realized by transfers of the petitioner’s easements of real estate and title to personal property to the reclamation districts which it caused to be organized in 1918 and 1919.

All the terms and conditions of the contract for the sale of the Henning tract to Weyl and Zuckerman were met and discharged some time in 1919 and in that year the petitioner executed a deed conveying title to such lands to the purchaser. The petitioner contends that this transaction was completed at the date of the conveyance of title by deed. With this contention we have already agreed. We must now determine whether this sale completed in the year 1919 resulted in income to the petitioner, taxable in that year or whether a deductible loss was sustained. The petitioner contends that the fair market value or price of this tract at March 1, 1913, must be accepted as the basis for the computation of gain or loss from the completed transaction in the taxable year. If this is conceded there is a substantial loss.

It is true that the petitioner was the owner of record of the Hen-ning tract at March 1, 1913, and that we have found that the value of such tract at that date was $180 per acre. It is also true that the petitioner’s ownership at such date was subject to the conditions of a sales contract which fixed the sales price at $125 per acre, out of which the reclamation work was to be completed. All the coittractual obligations of the parties to the sales contract having been discharged, title passed in the taxable year. Gain or loss from that transaction must be determined by a comparison of the fair market value at March 1, 1913, plus capital expenditures thereafter with the purchase price received. At that date, entirely regardless of the actual fair market value of $180 per acre, the petitioner’s equity or interest in the tract was measured by the consideration set out in the sales contract. On the completion of that contract the petitioner received full payment in the amount determined by the terms thereof and realized from the transaction the full amount of value of his interest in the land at the basic date. We are of the opinion that within the meaning of the taxing statutes neither taxable gain nor deductible loss resulted from this transaction since the petitioner received from the completed sale neither more nor less than the value of its interest in the property at March 1, 1913, which, for the purposes of this proceeding, we hold was the fair market value of such interest at that date. The result we reach here is comparable to our decision in the Appeal of Charles P. Hewes, 2 B. T. A. 1279.

In May, 1919, petitioner exchanged Mandeville Island for King Island. The area of the former was 5,430 acres and of the latter 3,290 acres. Mandeville Island had against it a reclamation bonded indebtedness of $396,140 and no money to its credit in the treasury. The grantee assumed this debt. King Island was free from debt. The respondent alleges that a profit of $378,862.84 accrued to the company by this transaction. The petitioner claims that the transaction was merely an exchange of capital assets, from which no taxable gain can result, but suggests a method for the determination of the gain or loss if its contention be overruled.

Under the title “ basis foe DETERMINING gain OR loss,” section 202 of the Revenue Act of 1918 provides as follows:

(a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—
(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and
(2) In the ease of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.
(b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *.

These provisions govern as to this item. The properties both come within the purview of “(a)” and “(a) (1)”; they are real property. King Island comes within the purview of “(b).” No differentiation is made in the act as to kinds of real property or as to whether it constitutes capital assets or not. The Commissioner is clearly right in his contention that any ascertainable gain accruing to the petitioner in connection with the transaction is taxable; conversely, any loss is deductible. The act also provides the method of ascertaining the values of the properties exchanged.

We have found as a fact that the March 1, 1913, value of the land on Mandeville Island was $170 per acre and that the cost of the reclamation work added after that date and prior to the exchange was $70 per acre.

The Commissioner and the petitioner are agreed that the value of the land on King Island was $250 per acre at the date of exchange. We have, then, the value of Mandeville Island at March 1, 1913, was $923,100, which, with the cost of improvements made between that date and the exchange in 1919 in the amount of $380,100, gives a total basic cost of $1,303,200, against which there was a bond issue liability of $396,140 which was assumed by the grantee. For this property the petitioner received King Island with an area of 3,290 acres free from debt. The value of this tract at date of transfer was $250 per acre or a total of $822,500. It appears therefore that this transaction resulted jki a loss to tbe petitioner in the amount of $84,560 which the petitioner is entitled to deduct from its gross income for the year 1919.

There are controversies regarding profits from land sales made by the petitioner during the taxable years. We have found the value of all such lands at March 1, 1913, and such value plus the cost of subsequent reclamation work prior to date of sale is the basis for determining gain or loss resulting from sales thereof. The terms of such sales and the amounts received therefrom may be introduced by the petitioner as elements in the computation under Rule 50 of its tax liability for the years in question.

Judgment will be entered on 80 days' notice, under Bule 50.

AnuNDELL and Milliken not participating.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    H. D. & J. K. Crosswell, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7341, 10586.
    Promulgated May 12, 1927.
    1. The Board will disregard a question discussed orally at the hearing or on brief, when not pleaded in the original petition or raised by proper amendment thereto.
    2. Personal service classification denied.

      Adrian G. Humphreys, Esg., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    These proceedings are for the redetermination of deficiencies in income and profits tax in the amounts of $5,728.70 for 1918, $14,-837.13 for 1919, and $4,116.84 for 1920. The errors alleged are the denial of personal service classification and the refusal to compute the petitioner’s profits tax under section 328 of the Revenue Act of 1918, after having held that the petitioner was not a personal service corporation.
    FINDINGS OF FACT.
    In 1903 J. K. and H. D. Crosswell purchased, from one Lucy D. Douglass for $5,500 cash, a contract conveying certain rights in regard to the bottling and selling of Coca-Cola within certain territorial limits and formed a partnership for the exploitation thereof. The brothers advanced .the cash necessary to purchase the contract, in equal amounts. The work on the outside was done by J. K. Crosswell, who was on the road at that time selling groceries on a commission basis. In 1905, J. K. Crosswell gave up his grocery line and devoted his time to the Coca-Cola business. H. D. Cross-well looked after office detail, billed the customers, received checks, made monthly settlements under their contract, and supervised the general affairs of the business. In 1911 H. D. Crosswell died and his one-half interest was taken over by his widow, who performed the duties previously handled by her husband.
    From the inception of the business until 1915 no salaries were paid to the Crosswells, the profits of the business being- divided equally, between them at irregular intervals. The widow shared the profits on the same basis as her husband had prior to his death. The gross income of the partnership from 1904 through 1914, without deducting expenses or compensation of the partners, was as follows:

    The partnership kept no record of actual expenses during these years, but paid expense items as they were incurred. The office rent amounted to approximately $400 per year, bookkeeping costs amounted to $300 per year, and miscellaneous expenses aggregated another $800 per annum. The petitioner had no plant or equipment to be maintained. The office equipment consisted of such articles as a desk, file cases, .and equipment necessary to maintain an office.
    In 1915, the petitioner was incorporated, under the laws of South Carolina, to take over the partnership business, with a capital stock of $5,000, par value $100 per share. The stock was issued for the contract and good will, the shares being divided equally between the two stockholders. The business was conducted by the corporation in the same manner as formerly. The duties of the former partners were unchanged in their new capacity as stockholders. However, after incorporating, salaries were paid the two stockholders in the following amounts:

    The net income of the petitioner for the same years was:

    On February 19, 1911, the Douglass contract was surrendered and a new agreement substantially the same, was entered into between the petitioner and The Coca-Cola Bottling Co. of Atlanta, Ga., hereinafter referred to as the Atlanta Company,
    The pertinent provisions of said contract are:
    Party of the first part does hereby select party of the second part as its sole and exclusive customer and licensee for the purpose Of bottling and selling the Bottlers’ syrup Coca-Cola, in the territory heretofore acquired by said party of the second part.
    # * * * * * *
    Party of second part agrees * * *
    (d) To buy of or through said first party all Coca-Cola syrup required or used by said second party in the preparation for market of its bottled goods aforesaid, and at the price of $1.20 per gallon delivered at any point in the above mentioned territory, where a bottling plant is established by party of the second part, or by any sub-bottling contractors under contract with party of second part, the purchase price of said syrup to accompany all orders for same; or if cash does not accompany said order, then party of the first part is to have the right to draw on party of the second part, with bill of lading attached. * * *
    The principal change was a provision requiring bottlers to use a patented Coca-Cola bottle and a distinctive crown for capping the bottles.
    The petitioner did not bottle Coca-Cola, but entered into contracts with others granting them the right to bottle and sell all Coca-Cola in a part of its territory. The subcontracts were similar to the principal contract between petitioner and the Atlanta Company except that the price to be paid the petitioner by the subcontractors v as $1.40 a gallon for the syrup, except in those cases where the subcontractor ordered direct, when the price was $1.35. In the case of two or three small bottlers the syrup was sold at $1.50 a gallon. Petitioner had arrangements with certain plants to order direct from Atlanta. In those cases the shipments were made direct and the billing was done by the Atlanta Company to the subcontractors, who paid direct to the Atlanta Company, which credited the differential to the petitioner. When the orders came through the petitioner, it received the bills from the parent company and billed the subcontractors. The petitioner generally collected its bills before remitting to the Atlanta office. It did not keep any syrup on hand, and did not buy any until it had received an order from a subcontractor.
    Under the subcontracts, 28 bottling plants wore in operation. The petitioner was responsible for the product which was being bottled and sold as Coca-Cola. As a result, J. K. Crosswell visited those plants once or twice a month, inspecting them as to sanitary conditions and the bottled product, offered suggestions for increasing business, checked up the bottler with respect to the terms of his contract, solicited orders for additional syrup, and pushed the business by advertising and personal effort. The advertising was provided for by the principal contract, a provision of which allowed the petitioner 10 cents per gallon on each gallon of syrup purchased from the Atlanta Company.
    In addition to being president of the petitioner, J. K. Crosswell was also president of a wholesale grocery concern located at Sumter, S. C. He lived in Sumter, while the petitioner’s office was in Columbia, S. C. The trip from Sumter to Columbia, or vice versa, required approximately an hour by auto or train. His duties with the wholesale business consisted of presiding at meetings, the active management being carried on by the other officers.
    Mrs. Crosswell devoted part of her time to other business, interests. She was president of the Coca-Cola Bottling Co. of Columbia; its office and that of the petitioner were located in the same building, adjoining one another. She devoted her time to the interests of both concerns, but in what proportion does not appear. Her duties with the petitioner were to supervise and manage the office. She had an assistant, employed on a part-time basis, who was also employed in her other enterprise. The principal part of the office work consisted of keeping the books, receiving orders, forwarding them for shipment and delivery by the Atlanta Company, billing customers, receiving their remittances or orders, making monthly settlements with the Atlanta Company, and handling the usual details incident to an office.
    During the period 1904 to 1920, with the exception of a period of several months beginning in November, 1919, and ending some time in 1920, the commissions which the petitioner received were practically constant. The commissions varied in the last two months in 1919 and through a j)art of 1920 because of economic and business conditions and shortage of sugar. During these months, the Atlanta Company, the petitioner, and the subcontractors by mutual agreement waived their contract prices, so that commissions, costs, and selling prices varied with the economic conditions and were not constant.
    The following table shows the business done by the petitioner during each of the taxable years:

    The gross income, expenses, and net profits for the taxable years were:

      1918.
    Gross income:
    Income from sales_$35, 372. 65
    Interest received_ 120.09
    Miscellaneous receipts_ 2.48
    Gross income_ 35,495.22
    Expenses:
    Salary, secretary (nonstockholder)_$1,000.00
    Kent_ 600.00
    Traveling expenses_ 350. 00
    Miscellaneous_ 129.22
    J. K. Crosswell_ 8, 000. 00
    S. W. Crosswell_ 7, 000.00
    City, state and county taxes_ S10. 00
    - 17,889.22
    Net profits_ 17, 606.00
    1919.
    Gross income:
    Income from sales_ 63,426.20
    Interest received_ 426. 67
    Gross income_ 63, 852. 87
    Expenses:
    Salary, secretary (nonstockholder)_$1,050. 00
    J. K. Crosswell_ 10, 000. 00
    S. W. Crosswell_ 9, 000. 00
    Rent_ 600. 00
    Taxes_ 918.50
    Traveling expenses_1_ 531.27
    Miscellaneous_ 63.71
    Total expenses_ 22,163. 48
    Net profits_ 41,689.39
    1920.
    Gross income:
    Income from sales_ 40, 399. 55
    Interest received_ 65.25
    Gross income- 40,464. 80
    Expenses:
    Salary, secretary (nonstockholder)-$1,400.00
    J. K. Crosswell_ 10, 000. 00
    S. W. Crosswell-Lumpkin_ 9, 000.00
    Rent_ 600.00
    Traveling expenses- • 775.43
    Telephone and telegrams_ 142.11
    Printing_ 29. 65
    Auditing_1- 244.30>
    Taxes_ 837. 00
    Miscellaneous_ 90. 44
    Total expenses_ 23,118.93
    Net profits--- 17, 345.87

      The assets and. liabilities of the petitioner from 1917 to 1920, as shown by its balance sheets, were:

    On July 17,1917, the capital stock of the petitioner was arbitrarily written up from $5,000 to $30,000, the write-up being credited against good will. On December 29, 1920, the petitioner arbitrarily reduced capital stock to the original $5,000. The additional stock while outstanding was held equally by J. K. Crosswell and Mrs. II. D. Crosswell.
    The petitioner filed returns for the taxable years in question as a personal service corporation. The Commissioner disallowed such classification, denied special assessment on the ground that its profits tax was not in excess of the average profits tax of representative concerns, and computed its profits tax under 302 of the Revenue Act of 1918.
   OPINION.

MoRRis:

The pleadings present but two issues for our determination— (1) whether the petitioner is entitled to personal service classification; (2) if such classification is denied, whether its profits tax should be computed under section 328. At the hearing and by brief, counsel for the petitioner suggested that if personal service classification is denied, then the actual value of its contract with the Coca-Cola Bottling Co. as of the date of incorporation, should be included in invested capital, but no motion to amend the petition so as to include this issue .therein was made. The primary purpose of pleadings is the joinder of issues between the parties. Issues attempted to be raised by brief, or orally at the hearing, will be disregarded. Appeal of Dixie Manufacturing Co., 1 B. T, A. 641; Appeal of W. P. Weaver, 2 B. T. A. 709.

The principal contention of the petitioner is its claim for personal service classification. Where a corporation seeks benefits conferred by the statute, it must bring itself within its provisions. One of the requirements for a personal service classification is that capital shall not be a material income-producing factor. The actual investment in the business in 1903 by the partners was $5,500. The table of gross earnings shows the development of the vending of bottled Coca-Cola in the territory in which petitioner had the contractual rights. By 1915, this contract had become very valuable, due to a large extent to the efforts of the partners, and could no doubt have been sold for a most substantial profit. Just what the actual value of the contract was at the time the same was turned in for stock, we are unable to state. Only $5,000 of capital stock was issued for the contract and good will in 1915, whereas the contract alone had been purchased in 1903 for $5,500 cash. Between 1903 and 1915 the partners had netted substantial profits through the subcontracts which they had secured for the bottling and selling of Coca-Cola in the territory covered by their principal contract. Their principal asset was the contract under which they were assigned the right to bottle and vend Coca-Cola. They did no bottling or vending of Coca-Cola themselves. Their services consisted in seeing that the contracts were carried out and in advertising and pushing bottled Coca-Cola. Such personal services as they rendered were for the purpose of further capitalizing their contract. Their profits were limited only to the extent which they were able to exploit the contract within their prescribed territorial limits. There can be no doubt, therefore, that this. contract constituted capital, that it had value in 1915 much in excess of its original cost; and that it was a material income-producing factor.

Under the contract the petitioner agreed to buy Coca-Cola syrup from the Atlanta Company at $1.20 per gallon which it sold to its subcontractors at prices ranging from $1.35 to $1.50. The differential constituted the petitioner’s profits. In other words it is the difference between what the syrup cost and what it sold for that made the operating profit. Under such circumstances it is our opinion that the petitioner was dealing as a principal.' Considering only the syrup which the petitioner ordered, however, the facts show that the gross income therefrom exceeded that from the syrup ordered by the subcontractors directly from the Atlanta Company, the -figures for the years in question being for 1918, $23,901.20 and $11,471.45, respectively; for 1919, $45,510.70 and $17,915.50, respectively; and for 1920, $25,388.56 and $15,010.99, respectively. To the extent of that business at least there can be no question but that the petitioner was dealing as a principal, and therefore not entitled to personal service classification, as 50 per cent or more of its gross income was derived therefrom.

The remaining contention of the petitioner is that it should be granted special assessment. We find no evidence in the record of an abnormality. The only evidence from which such a finding could be inferred is the statement of earnings and a comparison of the .same with the capital invested, but large profits from a small amount of capital invested is not such an abnormality as is contemplated in the statute.

It also appears that the Commissioner made a comparison with representative concerns and found that the rate of profits tax computed under the provisions of section 302 of the Revenue Act of 1918 is less than that paid by such representative concerns. The petitioner offered no comparatives so we are unable to determine what relief, if any, it would be entitled to, if - its profits tax were computed under section 328 of the Revenue Act of 1918.

Judgment will he entered for the respondent.


author: Sternhagen :

text:
    Empire State Finance Corporation, Finance Exploration & Development Corporation of America, and Alfred C. Coxe, Jr., Edgar L. Kerstetter, William R. Jones, and John W. Dixon, Trustees of Empire State Finance Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6805.
    Promulgated May 12, 1927.

      Lyle T. Alverson, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
   Sternhagen :

Deficiency of $3,958.11 income tax for 1921. The Commissioner refused to allow affiliation between the two petitioner corporations.

FINDINGS OF FACT.

The petitioner, the Empire State Finance Corporation, was during 1921 a Delaware corporation engaged in the business of financing automobile time paper, with its principal place of business in New York City. The corporation was dissolved in 1924. It had an authorized capital stock of 5,000 shares of preferred stock having a par value of $100 a share, and 5,000 shares of common stock of no par value. Both the common and the preferred stock had voting rights.

The petitioner, the Finance Exploration & Development Corporation of America, is and was during 1921 a holding company. It had a'capital stock of 5,000 shares of. common stock, with no preferred stock.

The petitioners, Alfred C. Coxe, Edgar L. Kerstetter, William it. Jones, and John W. Dixon, are the trustees of the petitioner, the Empire State Finance Corporation, dissolved.

The 5,000 shares of preferred stock of the Empire State Finance Corporation were owned during the taxable year involved by the Finance Exploration & Development Corporation. Of the 5,000 authorized shares of common stock of the Empire State Finance Corporation, 3,200 shares were also owned by the Finance Exploration & Development Corporation. A part or all of the remaining common stock was owned by W. H. Tucker, George Merryfield, and Charles T. Stuart.

Of the 5,000 shares of common stock of the Finance Exploration & Development Corporation, one William It. Jones owned 250 shares, one Burt Brown Barker owned 125 shares, and a partnership under the name of Jones & Baker owned 4,500 shares. The partnership of Jones & Baker consisted of William R. Jones, who owned a nine-tenths interest, and Jackson B. Sells, who owned a one-tenth interest.

Under date of April 1, 1920, a voting-trust agreement was entered into whereby all the stock of the Empire State Finance Corporation was deposited in trust with William R. Jones, Burt Brown Barker, and W. H. Tucker, as voting trustees. The provisions of the voting-trust agreement are in part as follows:

Title to the shares of stock of the Corporation, certificates for which shall be deposited hereunder with the Voting Trustees, or their said Agent, or shall be issued directly to the Voting Trustees by the Corporation as aforesaid, shall be vested in the Voting Trustees and unless issued in their names as aforesaid may be transferred to the names of the Voting Trustees on the books of the Corporation but as holders of said stock, the Voting Trustees assume no liability as stockholders, their interest therein and hereunder being that of Trustees merely. At every election of directors, the Voting Trustees shall vote all stock held by them subject to this agreement in favor of the election of Wilson Hatch Tucker, George Edward Merryfield and Charles T. Stuart, and of each of them, as long as his contract of employment with the corporation shall continue, as Directors of the corporation, and in case of the death or incapacity of any or either of said individuals, or in case a vacancy or vacancies shall have been created by the termination of the contract of employment of any or either of said individuals with the corporation, the Voting Trustees shall vote in favor of the election of such person or persons to fill the vacancy or vacancies so created, as shall be designated by such of said three individuals as shall remain and continue to be directors, or either of them, or by the Finance Exploration & Development Corporation of America, if and according as such remaining directors, or either of them, or said Finance Exploration & Development Corporation of America shall have purchased the stock of the corporation, or Voting Trust Certificates representing the same, or any part thereof, of the individual or individuals by reason of whose death, incapacity or termination of employment, a vacancy or vacancies shall have been created. In case such stock or voting trust certificates representing the same, or any part thereof, shall have been acquired by said remaining directors in unequal proportions, or if part thereof shall have been acquired by said remaining director or directors and part by the Finance Exploration & Development Corporation of America, the Voting Trustees shall vote in favor of the election of such person or persons to fill the vacancy or vacancies so created as shall be designated by the holder or holders of a plurality of the stock or Voting Trust Certificates representing the stock so acquired, at a meeting of such holders of such stock or Voting Trust Certificates. In case such stock or Voting Trust Certificates shall not have been acquired by any or either of said remaining directors, or by the Finance Exploration & Development Corporation of America, then the Voting Trustees shall elect such individual or individuals for said vacancy or vacancies as they may in their discretion desire. The Voting Trustees shall vote such stock in favor of the election of Wilson Hatch Tucker and George Edward Merryfield, as members of said Executive Committee, and in case of the death, resignation or incapacity of either of said members of the Executive Committee, they shall vote in favor of the election of Charles T. Stuart to fill the vacancy created by such death, resignation or incapacity, and they shall vote for said Charles T. Stuart as a member of the Executive Committee at each and every election of members of said Executive Committee thereafter until the termination of this agreement. In case at any time any or either of said Tucker, Merryfield and Stuart shall cease to be a member or members of the Board of Directors, he or they shall also, ipso facto, cease to be a member or members of the Executive Committee, and the Voting Trustees shall vote in favor of the election of such individual or individuals as shall have been elected to fill the vacancy or vacancies upon the Board of Directors, as a member or members of the Executive Committee, to fill the vacancy or vacancies therein so created. The Voting Trustees shall, in respect of all stock so held by them, possess and be entitled to exercise all stockholders rights of every kind and character, including the right to vote such stock and to take part in or consent to any stockholders’ action, to vote for, consent to or authorize at any time and from time to time, any amendment of the Certificate of Incorporation, except as therein provided, and/or the By-Laws of the Corporation, in any way deemed by them in their unrestricted discretion desirable, and do or perform any other act or thing which the stockholders of the Corporation are now or may hereafter be entitled to do or perform, provided that the Voting Trustees shall not, without the unanimous consent of such Voting Trustees, but with such unanimous consent they may, vote the shares of Common Stock so held by them in favor of, or consent to the doing by the Corporation of any or all of the acts or things specified in paragraph Fifth of the Certificate of Incorporation of the Corporation, and which the Corporation is prohibited from doing except with the unanimous consent of all of the holders of the Common Stock; or the doing by the Corporation of any or all of the acts or things specified in paragraph Sixth and subdivisions 1 and 2 of paragraph Eleventh of the Certificate of Incorporation of the Corporation, and which the Corporation is prohibited from doing except with the consent of the holders of 90 per cent of the shares of Preferred and Common Stock outstanding. The Voting Trustees, in respect of all stock so held by them, are entitled to receive dividends on said stock, and it is expressly understood and agreed that the holders of Voting Trust Certificates shall not have any right by or under said Voting Trust Certificates, or under this agreement, or any agreement expressed or implied, or otherwise, with respect to any such stock held by the Voting Trustees, to vote such stock, or to take part in, or consent to, any corporate or stockholders’ action of the corporation, including the above, or to do or perform any other act or thing which stockholders of the Corporation are now or may hereafter become entitled to do or perform.
The Voting Trustees shall not sell, pledge, hypothecate, mortgage or place any lien or charge upon the shares of stock subject hereto, except that they may deliver preferred stock to the Corporation upon receipt of the redemption price therefor as herein provided.
The registered holder of each Voting Trust Certificate shall be entitled, until distribution of stock in the Corporation as hereinafter provided for, to receive from time to time, payments equal to the dividends, if any, received by the Voting Trustees upon a like number of shares of stock of the Corporation as is specified in such Voting Trust Certificate and of the same class, whether declared in respect to income or principal and the registered holder of each Voting Trust Certificate representing preferred stock shall in addition be entitled to receive a sum equal to the redemption price of such preferred stock, or such part thereof as may be redeemed if said stock, or any part thereof, be redeemed during the continuance of this agreement as provided in the Certificate of Incorporation of the Corporation, upon surrender to the Voting Trustees, or their Agent, of his Voting Trust Certificate or Certificates representing such preferred stock to be redeemed, and, in the event of such redemption, the Voting Trustees shall deliver the preferred stock so redeemed to the Corporation upon receipt of the redemption price therefor.
In case the Voting Trustees shall receive any stock certificates of the Corporation issued by way of dividend upon stock held by them under this agreement, the said Voting Trustees shall hold such stock likewise subject to the terms of this agreement, and shall issue Voting Trust Cerificates representing such stock certificates to the respective registered holders of the then outstanding Voting Trust Certificates entitled to such dividends.
On April 1st, 1923, or upon the earlier termination of this agreement, as herein provided, the Voting Trustees shall distribute the stock of the Corporation held by them to the registered holders of the Voting Trust Certificates representing the same as follows, that is to say: They shall upon presentation and surrender, on and after said date or such earlier termination of this agreement, of Voting Trust Certificates accompanied by properly executed transfers thereof to the Voting Trustees if required by the Voting Trustees, and payment of any transfer taxes deliver certificates of stock of the Corporation (except to extent redeemed) for the shares specified in the Voting Trust Certificates so surrendered and of the same class.
In ease on or after the termination of this agreement the Voting Trustees shall deposit with any trust company of the City of New York stock certificates so held by them, properly endorsed in blank for transfer, representing the number of shares of stock in the corporation called for by the Voting Trust Certificates outstanding and of the proper class or classes, with authority in writing to the Trust Company to deliver all said stock certificates in exchange for Voting Trust Certificates when and as surrendered for exchange as herein provided, then all further liability of the Voting Trustees or any of them for the delivery of stock certificates in exchange for Voting Trust Certificates or otherwise hereunder shall cease and determine.
All questions arising among the Voting Trustees shall be determined by a majority of them. The Voting Trustees may adopt their own rules of procedure and may, in all matters, act either at a meeting or by writing or otherwise with or without a meeting, and the decision or act of a majority of the Voting Trustees, or their proxies, shall, in all matters including the exercise of the voting power, be deemed the decision and act of all of the Voting Trustees, except as hereinbefore provided. Any one or more of the Voting Trustees, may act as a director or an officer of the Corporation or* ’of any corporation affiliated with the Corporation, and may vote for himself as such and may be interested in the stock of, or otherwise interested in, the Corporation or any such other corporation and may be the holder of or interested in Voting Trust Certificates issued hereunder.
Any Voting Trustee may at any time resign by mailing to the other Voting Trustees, or Trustee, or if there be no remaining Trustee, to the Corporation, his resignation in writing; and in every case of death, resignation or incapacity of a Voting Trustee, the vacancy so occurring shall be filled as follows: any successor to William K. Jones and/or Burt Brown Barker, and such successor’s successor, and so on in the line of succession, shall be appointed by the Finance, Exploration and Development Corporation of America, or its successor. Any successor to Wilson Hatch Tucker, and such successor’s successor, and so on in the line of succession, shall be appointed by a majority of the following individuals: Wilson Hatch Tucker, Charles T. Stuart and George Edward Merryfield, or their successors, as Directors of the' Corporation to be appointed as hereinbefore provided. If any vacancy cannot be filled as above indicated, it shall be filled by the remaining Voting Trustees or Trustee. If the remaining Voting Trustees cannot agree within thirty days, as to a person to fill the vacancy, or there be no remaining Voting Trustee, the vacancy shall be filled by the Corporation.
Every successor trustee appointed in accordance with the foregoing provisions shall, from time of such appointment, be deemed a Voting Trustee hereunder, and shall have all the estate, title, rights and powers of a Voting Trustee hereunder, and all acts and instruments shall be done or executed which shall be necessary or reasonably requested for the purpose of effecting such succession and of making the Voting Trustees as they shall exist upon such appointment the owners of record of the stock delivered as aforesaid to the Voting Trustees. Until the appointment of a successor, as aforesaid, the surviving Voting Trustees shall have all the estate, title, rights and powers of the original Voting Trustees. The term “ Voting Trustees ” as used in this agreement, and in said Voting Trust Certificates shall apply to the parties of the second part and their successors at any time hereunder.
In voting upon said shares of stock or doing any act with respect to the control or management of the Corporaton or its affairs, or otherwise acting hereunder, as holders of the stock of the Corporaton, the Voting Trustees shall exercise their best judgment in the interests of the Corporaton, to the end that its affairs shall be properly managed, and its interests be properly promoted, but the Voting Trustees assume no responsibility in respect thereto or of any action taken by them or taken in pursuance; of their consent thereto, or in pursuance of their vote so cast.
Each Voting Trustee may vote on said stock or take part in or consent to any corporate or stockholders’ action or may do or perform any other act or thing hereunder or by virtue hereof, in person or by such person or persons as he shall at any time and from time to time select as his proxy or proxies. This power of acting in person or by proxy, however, shall not be construed to enable any Voting Trustee or his proxy to act otherwise than as in this agreement provided in conjunction with the other Voting Trustee or Trustees or his proxy or their proxies.
Any notice to be given to the holders of Voting Trust Certificates hereunder shall be sufficiently given if mailed to such of the registered holders of Voting Trust Certificates as shall have furnished their addresses to the Yoting Trustees or their Agent.
No Voting Trustee, as stockholder, Trustee or otherwise, shall he liable for any error of judgment or mistake of law or other mistake, or for any act or omission of any agent or attorney, or for anything save only his own individual willful misconduct. The compensation and expenses of the Yoting Trustees shall be paid by the Corporation or the Stockholders.
This agreement may at any time before April 1st, 1923, be terminated by the unanimous vote of the Yoting Trustees.

Certificates evidencing the deposit of shares of stock under this agreement were issued to the owners of the stock.

The fifth paragraph of the certificate of incorporation referred to in the voting trust agreement set forth above imposes certain restrictions on the declaration of dividends and on the retirement of preferred stock and sets forth that the voting power shall be vested in both classes of stock. The sixth paragraph relates to the declaration of dividends, to the distribution of assets upon liquidation or dissolution of the corporation, and further provides as follows:

’The corporation shall not, except with the consent of the holders of ninety per cent of the shares of the Preferred and Common Stock outstanding, but may with such consent,
(1) Sell, lease or otherwise dispose of all of the assets and business of the corporation, or substantially all thereof, which it is essential or advisable for the corporation to retain in connection with the continuance of its regular business;
(2) Voluntarily dissolve, or liquidate, or consolidate or merge;
(3) Increase or decrease the number of Directors of the corporation, or of the members of the Executive Committee, or amend in any particular the provisions of subdivisions 1 and 2 of paragraph “ Eleventh ” of this Certificate of Incorporation.

Subdivisions 1 and 2 of paragraph 11 are as follows:

1. The Board of Directors shall consist of seven members. As hereinbefore provided, the number of Directors shall not be increased or decreased without the consent of the holders of ninety per cent (90%) of the number of shares of Preferred and Common Stock outstanding. Eive Directors shall constitute a quorum, and all action by the Board of Directors must be by the affirmative vote of five members.
2. There shall be an Executive Committee composed of three Directors. The members of the Executive Committee shall be appointed by the Stockholders of the corporation at the annual meeting of said Stockholders. All action taken by the Executive Committee must be by the unanimous vote of all of the' members hereof.

W. H. Tucker, George Merryfield and Charles T. Stuart, owners of a portion of the stock of the Empire State Finance Corporation, were employees of that company who had been given the privilege of purchasing stock for a nominal consideration. The funds necessary for the operation of that company were provided by the Finance Exploration & Development Corporation and the purpose of the voting-trust agreement was to protect tbe interests of tbe Finance Exploration & Development Corporation.

Barker had known Jones for 23 years and bad been his attorney for the major part of that time. He became one of the voting trustees at the solicitation of Jones and acquiesced in Jones’ decisions. During the taxable year involved Jones had complete charge and management of both the Finance Exploration & Development Corporation and the Empire State Finance Corporation.

The Finance Exploration & Development Corporation and the Empire State Finance Corporation were affiliated during the year 1921.

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


author: Littleton :

text:
    Alexander Silverman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10389.
    Promulgated May 12, 1927.
    Amounts expended by petitioner, a professor of chemistry and a member of tbe faculty of tbe University of Pittsburgh, in connection with the carrying- on of his profession, in attending- scientific meetings and conventions, constitute an ordinary and necessary business expense.

      8. Leo Buslander, Esq., and A. E. James, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income tax for the year 1921 of $55.88 by reason of disallowance of a deduction of $558.75 claimed by petitioner as ordinary and necessary business expense for the taxable year in carrying on his duties as a professor of chemistry and a member of the faculty of the University of Pittsburgh. The facts are found as stipulated.
    BINDINGS OB BAOT.
    The petitioner is a resident of Pittsburgh, Pa. He keeps his accounts on the basis of actual receipts and disbursements. Prior to and during the year 1921 he was at the head of the Department of Chemistry of the University of Pittsburgh, with the title of Professor of Chemistry, and has for the past twenty-one years been a member of the faculty of that university.
    As the head of the department of chemistry, it was expected of and incumbent on him as such to keep abreast in his particular field of work and in touch with other scientists in the same field, which was done among other ways by the preparation and publication of papers, by the reading of technical periodicals, and by the attendance at such conventions where consideration of subjects of a scientific nature were presented and discussed.
    The petitioner attended like conventions prior to 1921, did so attend in 1921 and has since so attended, such action on his part being expected and necessary, as it was of others similarly employed at the university, for the purpose of keeping thoroughly informed in his field of work and in touch with other scientists, and in order to advance the interests of the university, though his contract of employment does not specifically make mention of any such activities and there was no provision made for repayment to him of expenses so incurred.
    In the taxable year mentioned, petitioner, for the purposes and objects mentioned, attended the American Ceramic Society at Columbus, Ohio; the American Chemical Society at Bochester, N. Y., and a meeting of the same society in New York City, and, in so doing, incurred and paid reasonable and actual expenses for hotel rooms, meals, and railroad fare to and from said conventions, the sum of $558.75, no part of which sum has been repaid him by the university, nor by any person, society or organization, whatever. Each of the three trips mentioned occupied a week and petitioner was in attendance the full length of each convention, and for each convention prepared and delivered a paper or papers. By reason of the fact that petitioner was a member of the council of the American Chemical Society, he was in attendance prior to the general convention seasons.
   OPINION.

Littleton :

The Board has held that expenditures of the character and made under circumstances involved in this proceeding are deductible as ordinary and necessary business expense. Marion D. Shutter, 2 B. T. A. 23. We have also held that expenditures made by a professional cartoonist for periodicals and other current literature and in attending political conventions, when properly proved, were proper deductions as ordinary and necessary business expense. Jay N. Darling, 4 B. T. A. 499.

The Board is of the opinion from the facts in this proceeding that the petitioner is entitled to the deduction claimed.

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


author: Littueton :

text:
    H. B. Boyd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6751.
    Promulgated May 12, 1927.
    Deductions claimed for losses in business and for debts, represented by notes charged oft, will not be allowed unless by satisfactory evidence it is shown that an actual loss in the one case has occurred, or, in the other, that satisfactory evidence shows there has been failure after proper efforts to collect or that investigation shows notes charged off to be worthless; the mere fact of charging off notes not being sufficient evidence of their worthlessness.

      Milo A. Lang, Esq., for tbe petitioner.

      F. 0. Graves, Esq., for the respondent.
    The Commissioner determined deficiencies in income tax for the year 1919 of $960.16 and a penalty of $240.04; for 1920 a tax of $1,363.55 and a penalty of $340.89, and for 1921 a tax of $101.14 and a penalty of $25.89. An overassessment of $37,920.66 was determined for the year 1917.
    Petitioner claims that the Commissioner failed to allow proper deductions for salaries paid office assistants, losses, and for worthless accounts and notes.
    FINDINGS OP PACT.
    The petitioner is a resident of Sarcoxie, Mo., and was during the years 1919, 1920, and 1921 engaged in banking, real estate, and farm loan business.
    During the three years 1919 to 1921, inclusive, petitioner had at different times different office and clerical assistants and paid them as salaries in 1919 the sum of $8f0; in 1920, $975; and in 1921, $975. The Commissioner allowed a deduction on this account of $663.50 for 1919, $375 for 1920, and $725 for 1921.
    Petitioner owned a one-fourth interest in the E. W. Wilson Motor Co., a Missouri corporation, which began to liquidate in 1921, in which year petitioner took over its entire assets.
    In 1917 petitioner owned $2,000 par value of the stock of the Main Street Theatre, in Picher, Okla., and thereafter he paid an assessment thereon of $250. In 1919 the theatre was destroyed by fire.
    Petitioner invested $2,506 in an oil lease in Starr County, Texas, in 1920. ■ -
    Petitioner owned in 1920, $2,000 par value of the capital stock of the Forsythe Electric Light & Mill Co. In that year the entire assets of the company were sold under foreclosure proceedings to satisfy a $5,000 indebtedness thereon, E. B. Jacobs, trustee, becoming the purchaser thereof. Shortly thereafter one Loren Seneker reorganized the company and offered stock in the new company for 50 cents on the dollar to those who had stock in the old company, and petitioner received $2,000 of the stock in the new company.
    In 1903 petitioner became the owner of certain lands in Newton County, Mo., which cost him $4,500. He later sold a two-thirds undivided interest therein for $3,000. In January, 1920, the entire tract of land was sold for $1,400.
    In the three years, 1919, 1920, and 1921, the petitioner charged off as worthless notes totaling $22,469.92.-
   OPINION.

Littueton :

The Board is satisfied from the evidence that the petitioner paid for clerical and stenographic assistance in the year 1919, $870; in 1920, $975; and in 1921, $975. The amounts so paid were proper deductions from gross income as ordinary and necessary expenses.

Petitioner claimed an interest in and loss on certain “ Gilstrap ” notes, but there is no sufficient evidence in the record to enable the Board to make any findings of fact in reference to the particular notes referred to as “ Gilstrap ” notes, their dates, amounts, character, or what loss, if any, was in fact suffered by petitioner on account thereof.

Petitioner owned a one-fourth interest in the R. W. Wilson Motor Co., a corporation, but just what that interest cost him or what loss, if any, he finally sustained by reason of such ownership, the evidence does not disclose. The Board must therefore approve the action of the Commissioner in not allowing the deduction claimed.

Petitioner owned $2,000 par value of the capital stock of the Main Street Theater, Picher, Okla., for which he paid par and paid an assessment of $250 thereon. He claimed a loss of $1,910.60, but the Board can not determine from the evidence what loss, if any, the petitioner sustained by reason of his stock ownership and the subsequent destruction of the theater by fire. The evidence discloses that after the fire the corporation owned some assets and had a considerable amount of cash and that the matter of acquiring other property and continuing the business was considered by the directors and stockholders. What finally happened is not disclosed and we are therefore unable to determine what loss, if any, this petitioner sustained in that regard.

Petitioner purchased from E. A. Boyce an interest in an oil lease on land in Starr County, Tex., for which he paid $2,506. He claims this investment was a complete loss in the year 1920. The only evidence in support of this claim is the statement of petitioner in his deposition that there developed some defect in the title to the leased premises and for that reason no efforts were made by the lessees to operate under leases or to pay royalties provided for therein. The Board is unable from the evidence to hold that petitioner sustained a loss of $2,506.

The petitioner owned $2,000 par value of the capital stock of the Forsythe Electric Light & Mill Co., which he claims was a total loss in 1920 by reason of the sale of the entire assets of the company in that year to satisfy an incumbrance thereon. The evidence does not show the cost or March 1, 1913, value of the stock and without this information the Board can not determine what loss, if any, was sustained.

Petitioner claimed a loss of $1,033.33 on account of his investment in Newton County, Mo., lands which he acquired in 1903 and sold in January, 1920, but there is no evidence as to the value of such lands on March 1, 1913, and the Commissioner can not be held in error for disallowing the loss claimed.

Petitioner was asked if he sustained a loss of an investment in the Eealty Assurance Corporation and replied that he did and filed as exhibits to his deposition photostatic copies of two checks drawn by him; one for $57.50 payable to Jones and another for $15 payable to Bealty Assurance Corporation, without further statement or explanation touching said corporation or his alleged investment and loss therein. Upon this evidence the action of the Commissioner in not allowing a deduction of $72.50 as a loss is approved.

The petitioner claims to have ascertained, determined, and charged off in each of the three years, 1919,1920, and 1921, as worthless, notes given him for money loaned, but there is not sufficient evidence to enable the Board to make findings of fact that such debts were in fact worthless. No evidence was adduced to show that the makers of the notes were insolvent or that any proper and reasonable efforts were made to collect. In these circumstances the Board must affirm the action of the Commissioner in disallowing the deductions claimed. Appeal of Valdosta Grocery Co., 2 B. T. A. 727. Appeal of Alemite Die Casting & Mfg. Co., 1 B. T. A. 548.

Judgment will be entered on W days’ notice, under Rule 50.


author: Littleton:

text:
    Coca-Cola Bottling Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9387.
    Promulgated May 13, 1927.
    No allowance can be made lor the exhaustion of the cost of a contract granting a perpetual privilege to bottle Coca-Cola.

      Leon CPQuin, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    The Commissioner determined deficiencies of $4,280.36 for 1920 and $811.40 for 1921. This proceeding arises because of the refusal of the Commissioner to allow a deduction of $8,387.70 for each of the years as alleged exhaustion of.a contract giving petitioner the exclusive privilege to bottle and sell Coca-Cola in three counties in the State of Texas, and the disallowance by the Commissioner of a portion of the depreciation claimed upon machinery and. equipment for 1920 and 1921.
    FINDINGS OF FACT.
    Petitioner is a corporation organized in 1919 under the laws of the State of Texas, with its domicile in Wichita Falls.
    On December 13, 1919, the Coca-Cola Bottling Co., of Wichita Falls, purchased the Coca-Cola bottling business and plant of Mc-Daniels, Jay & Co., a copartnership doing business in Wichita Falls under the name of Coca-Cola Bottling Works, for the sum of $100,000 paid in cash and notes, the business purchased including the exclusive right or contract of McDaniels, Jay & Co. to bottle and sell Coca-Cola in the counties of Wichita, Clay, and Archer in the State of Texas in accordance with provisions of a contract entered into between the Coca-Cola Bottling Co., a Tennessee corporation with its principal office in Atlanta, Ga., and McDaniels, Jay & Co., and approved by the Coca-Cola Co., a corporation of Atlanta, Ga.
    The consideration paid by the petitioner for the business and contract was $100,000. The amount of $16,122.98 was paid for the physical assets and $83,877.02 for the exclusive right to bottle and sell Coca-Cola in certain counties in Texas in which such exclusive right or privilege had theretofore been held by McDaniels, Jay & Co. The exclusive right to bottle and sell Coca-Cola was embodied in the usual form of contract executed by the parent Coca-Cola Bottling Co. cancelable by the parent company upon the failure of the grantee to properly and vigorously push the sale of the bottled product, and was not transferable except with the consent of the parent'company.

      The contract so purchased had no stated or fixed term but was subject to termination by the Coca-Cola Company, grantor of the right, upon failure of petitioner to vigorously and properly push the sale of bottled Coca-Cola, and was subject to cancellation by either party if the other failed for thirty days after due notice to perform its obligations according to stipulations and conditions imposed by the contract. The terms of the contract, other than are herein stated, are not material to the decision of the questions involved.
    At the time of the purchase referred to Wichita Falls was a prosperous town due to activities in oil. Petitioner began business the latter part of December, 1919, and is still engaged in bottling and selling Coca-Cola in the counties named.
    The greater portion of petitioner’s business is done during the months of June, July, August, and September.
   OPINION.

Littleton:

Section 234 (a) (7) of the Revenue Acts of 1918 and 1921 allows as a deduction a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

It is insisted by petitioner that Coca-Cola contracts of the character as the one owned by it are estimated by persons when purchasing them to produce a return sufficient to restore the capital invested therein within six or seven years, and that the investment of $83,877.02 in the • contract here involved was made with the expectation that such return would be had, at least within ten years; petitioner claims, therefore, that the contract should be treated as if it were in fact a ten-year contract, and one-tenth of the cost thereof in 1919 allowed as a deduction for each of the years 1920 and 1921 for exhaustion. Petitioner contends that if a deduction from gross income for exhaustion of this contract is not allowed it will be taxed upon its capital.

The annual deduction for exhaustion, wear and tear of property used in the trade or business is for the purpose of returning to the taxpayer the March 1, 1913, value or the cost of the projoerty if acquired subsequent to that date at the end of its useful life in the trade or business. Appeal of W. J. Ostheimer, 1 B. T. A. 18.

The allowance for exhaustion, wear and tear is not based upon the amount of profit derived in any year or over any particular period of time from the business in connection with which such property may be used, but is computed upon the basis of the March 1, 1913, value or cost applying ratably over the useful life of the property in the business, and the fact that the purchaser of a contract may earn profits in an amount equal to the cost of such contract in a specified period of time forms no basis for the determination of the useful life thereof for the purpose of the exhaustion deduction.

The exclusive franchise or privilege of bottling and selling Coca-Cola in certain counties granted to petitioner by the Coca-Cola Co., as manufacturers of Coca-Cola syrup, was unlimited in duration. The instrument stipulated that upon the happening of certain contingencies the contract could be canceled by either party and under certain circumstances the privilege granted therein could be revoked by the Coca-Cola Co. and given to another, but the happening of these events was so indefinite and uncertain as to form no basis for the determination of the useful life of the contract. We have held that no allowance can be made for the exhaustion of the March 1, 1913, value of an application for a patent until such application ripens into a patent having a definite aiid determinable life. Individual Towel & Cabinet Service Co., 5 B. T. A. 158.

Under the terms of the contract here involved there was no exhaustion of the capital investment by the lapse of time. The fact that the earnings of the business may have increased or decreased from year to year has no bearing upon the question of exhaustion. Upon the facts the Board is of the opinion that the Commissioner correctly denied the deduction for each of the years involved of one-tenth of the cost of the contract.

The evidence is insufficient to show that petitioner is entitled to a greater allowance for exhaustion, wear and tear of machinery and equipment than that allowed by the Commissioner.

Judgment will be entered for the respondent.


text:
    Blue Ridge Overalls Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10210.
    Promulgated May 13, 1927.
    Value of property on March 1, 1913, determined.

      Peter Peeh, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1919 of $9,381.4?. Only such portion of the deficiency is contested as results from the determination by the Commissioner that petitioner realized a profit of $8,165.80 from the sale of certain real estate in Roanoke, Va. Petitioner denies that it realized this profit and claims that the fair market value of the property on March 1, 1913, was greater than the price for which it was sold in 1919, and that, in the manner and to the extent indicated, the Commissioner committed error.

      FINDINGS OF FACT.
    The petitioner is a Virginia corporation engaged in manufacturing overalls at Eoanoke. In 1905 it purchased a lot on the southwest corner of Eoanoke Street and Salem Avenue, Eoanoke, Va., paying therefor $2,800, and in 1907 it erected a building thereon at a cost of $15,000. Thereafter, and prior to March 1, 1913, petitioner found it desirable and necessary to install an electric elevator, change the first floor, and to erect fire escapes, etc., for the proper carrying on of its business, and for such additions expended $7,500.
    At the time of the purchase of the real estate in question property values in Eoanoke were not high, but real estate values increased considerably from 1905 to 1914 due to the construction of the Virginia Eailway Co., which afforded considerable railway terminal facilities, and to the establishment there of other manufacturing enterprises. From 1914 to 1919 real estate values declined. There was little activity in the sales or dealings in real estate in Eoanoke from about 1914 to 1919, both rental and sales conditions being better in 1913 than in 1919. The drop in real estate values in Eoanoke from about 1914 to 1919 and 1920 was due in large measure to the fact of the existence of the World War; practically no war supplies were being manufactured or furnished by Eoanoke enterprises, and due to the ability of skilled and unskilled labor to obtain better pay elsewhere a great number of mechanics and persons engaged in other trades left Eoanoke and many of the young men entered the military service. Salem Avenue was at one time the main business thoroughfare of Eoanoke but subsequent to 1913 ceased to be such, due to the fact that Campbell Avenue and Jefferson Street were opened up and traffic and business, after 1913, largely diverted to Campbell Avenue. In 1916 liquor was voted out of Eoanoke and this fact tended to cause the value of real estate on Salem Avenue to decline, for the reason that a number of business houses were thrown on the market for rent and for sale. At the end of 1919 and early in 1920 when the men were discharged from military service and began to return to Eoanoke, business and property values began to increase and business conditions there in manufacturing and other lines continued to improve. The fair market value on March 1,1913, of the lot with the improvements thereon, situated on Eoanoke Street and Salem Avenue, Eoanoke, Va., was $35,000.
    The petitioner sold the property in 1919 for $31,000. The Commissioner determined that the fair market valué thereof on March 1, 1913, was $25,000; the petitioner claims the value of $35,000 on that date.
   OPINION.

Littleton:

Petitioner introduced the testimony of two witnesses in support of its claim that the property in question had a fair market value on March 1, 1913, of $35,000. The first witness had been actively engaged in the real estate business in Roanoke for forty years. He was thoroughly familiar with real estate market conditions during the period of his experience. He was, also, thoroughly familiar with the property owned by the petitioner, the value of which is here in controversy, as well as other business properties located in Roanoke. He gave it as his opinion that the fair market value of the property in question on March 1, 1913, was between $37,000 and $38,000. The other witness had been actively engaged in the business of buying and selling real estate and in building construction since 1897. He was thoroughly familiar with petitioner’s property and the market value of real estate in Roanoke on March 1, 1913. He gave it as his opinion that the fair market value of the property in question on March 1, 1913, was between $36,000 and $37,500.

Upon the consideration of the testimony of these witnesses and the reasons given by them in support of their opinions of the values, the Board is of the opinion that the fair market value of petitioner’s property on March 1, 1913, was $35,000 as claimed by the petitioner.

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