author: MoRRis:

text:
    J. H. Cross Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5577.
    Promulgated November 22, 1927.

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

      J. Arthur Adams, Esq., for the respondent.
   OPINION.

MoRRis:

The question raised is whether the petitioner is entitled to personal service classification which is defined in section 200 of the Revenue Acts of 1918 and 1921 as follows:

* * * A corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include * * * any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or * * *.

The petitioner claims the benefit of an exception to the general method and extent of taxing corporations. The burden is upon it to show that it clearly comes within the terms of such exception. Hubbard-Ragsdale Co. v. Dean, 15 Fed. (2d) 410. As the principal stockholders were regularly engaged in the active conduct of the business the second element of the definition would seem to be fully met. It is necessary, however, not only that they shall be regularly engaged, but tile income from the corporation must be derived primarily from their activities. Examining the record in connection with this element of the definition we are unable to find that the petitioner has sustained the burden of showing that it clearly comes within it. With respect to the duties of those connected with the corporation, there is but little evidence in the record except as to the principal stockholders. We do not know how many employees made up the staff, or what kind of service such employees performed. J. H. Cross in the course of his testimony stated that all the employees outside of the principal stockholders were merely clerical employees, but on cross-examination he said that a sales plan or copy plan of any client was never decided by any individual but always in conference with the members of the organization, and that some of the employees who were competent members of the organization were taken into the conference. This would seem to indicate that there were some employees who were not merely engaged in routine clerical work. If the services and value thereof, which should be attached to the employees, are to be measured in dollars of salaries paid, it is very apparent that the income can not be primarily ascribed to the principal stockholders. In each of the taxable years the salaries paid employees exceeded the salaries paid the officers and stockholders.

In the Appeal of Patterson-Andress Co., 6 B. T. A. 392 where the question of to whom income should be primarily ascribed was raised, we said:

In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon non-stockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. Just as another clause excludes from personal service classification those corporations where capital contributes materially to the income, so does this clause exclude corporations where the services of employees so contribute.

A further ground, which standing by itself might not be fatal to the petitioner’s contention, but which is cumulative, is that capital was an income-producing factor. For the year 1919 the return shows interest, trade discounts and miscellaneous income of $9,420.43 whereas the gross income from operations was only $80,974.20. Although the petitioner was fairly successful in collecting from the advertisers prior to the time of its payments to the publishers, the evidence shows that in order to retain the good will of the publishers payments were made to them in sufficient time to secure the discount although the amounts had not been received from the advertisers. The balance sheet as of December 31,1920, shows accounts receivable of $118,354.21, which includes the 15 per cent commission, and accounts payable of $84,422.03, indicating an advance by the petitioner, exclusive of commission, of approximately $16,000. The accounts receivable on the balance sheet of December 31, 1921, are $179,872.86 and the accounts payable $141,686.56, indicating an advance at that time exclusive of commission of approximately $11,000.

Petitioner relied upon Massengale Advertising Agency, 2 B. T. A. 26, as a precedent for granting personal service classification. In that appeal it appeared that Massengale prepared the cuts and drawings and also drafts of advertising matter, made a print and offered suggestions as to the best medium or mediums of advertising and gave a statement of the costs thereof. Two or three artists were employed for the purpose of making drawings, some of which had been roughly sketched by Massengale. All the business was done through the personal services of the principal stockholders. The absence of any such showing in the instant proceeding clearly distinguishes the two cases. Evidence that the principal stockholders supervised and directed the services performed, without more detail as to their duties or the nature of the services rendered by an unknown number of employees, does not bring the case within the Massengale decision. Cf. Continental Accounting & Audit Co. v. Commissioner, 7 B. T. A. 330.

Judgment will be entered for the respondent.

Considered by Trammell, Murdock, and Siefkin.


source: Caselaw Access Project

author: Moeeis :

license: Public Domain

text:
    Wallace C. Johns, Petitioner, v. Commissioner of Internal Revenue, Respondent. Margaret K. Johns, Petitioner, v. Commissioner of Internal Revenue, Respondent. Virginia Kelso, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8352, 8353, and 8351.
    Promulgated November 22, 1927.

      Robert N. Anderson, Esq., for the petitioners.

      L. L. Eight, Esq., for the respondent.
   OPINION.

Moeeis :

The Commissioner in the determination of the deficiencies here in controversy not only increased the amounts of the liquidating dividends claimed by the petitioners, but included the full amount thereof in net income without the deduction therefrom of the March 1, 1913, value of the stock.

Section 201(c) of the lievenue Act of 1918 provides, inter alia:

Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.

It is clear from the above provision that only the gain realized by a stockholder upon liquidation of the corporation is to be included in net income. The gain in the instant cases is the excess of the amount received over the March 1, 1913, value of the stock. The Commissioner was therefore in error in including the full amount of the liquidating dividends in net income.

The fair market value on March 1, 1913, of the stock owned by Wallace C. Johns, Margaret K. Johns, and Virginia Kelso was $15,344.55, $8,369.76, and $4,184.88, respectively; the amount received in cash and notes on liquidation, as set out in the findings of fact was $32,665.77, $17,817.69, and $8,908.85, respectively. The gain realized by each therefore was Wallace C. Johns, $17,321.22, Margaret K. Johns, $9,447.93, and Virginia Kelso, $4,723.97.

Counsel in his brief contends that the gain of $17,321.22 realized by Wallace C. Johns upon the liquidation should be reduced by $7,802.20, the amount of corporate liabilities which he paid in excess of $43,326.06, the cash originally set aside for the payment of said liabilities. In our opinion said payment was made not by reason of his having been a stockholder in the corporation, who received part of its assets upon dissolution, but as a purchaser of the corporate assets, and merely increased the amount of his investment in them.

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

Considered by Trammell, MtjRdock, and Siefkin.


text:
    Webb Press Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7070.
    Promulgated November 22, 1927.

      E. W. R. Ewing, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
   OPINION.

MoRRis:

In view of our decision in Appeal of Webb Press Co., 3 B. T. A. 247, wherein the facts and circumstances were practically identical with those in this proceeding, we consider it unnecessary to resort to a lengthy discussion in reaching our conclusion. In that case, as in this, the title to the compresses contracted to be sold was in the petitioner until fully settled for as provided for in the contract. A test and acceptance was provided as a condition precedent to the passage of title in that case as in this. In that case we held that the transaction was not completed until the compress was tested and accepted by the purchaser.

In this proceeding the presses contracted for were not inspected and accepted by the purchaser until January 13, 1921, at which time the final settlement with cash payment and notes was agreed upon; therefore, the income derived from the sales of these presses is not taxable in 1920 as contended by respondent.

Judgment will be entered on IS dags’ notice, under Rule 50.

Considered by Trammell, Murdoch, and Siefkin.


author: GReen:

text:
    American Stone Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10898.
    Promulgated November 22, 1927.

      Robert P. Smith, Esq., for the petitioner.

      Maxwell E. McDowell, Esq., for the respondent.
   OPINION.

GReen:

The petitioner alleges that the respondent erred, first, in fixing for invested capital purposes a value of $40,000 on a certain pulp stone quarry. The pertinent section of the Revenue Act of 1918 reads as follows:

Sec. 326. (a) That as used in this title the term “invested capital” for any year means (except as provided in subdivisions (b) and (c) of this section): ****** *
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus : * * *

It appears that in June, 1915, C. E. Wemple, who for the prior 15 years had. been associated with the Smallwood Stone Co. of Empire, Ohio, which at that time was one of the largest producers of pulp stone in the United States, withdrew from this company and purchased a quarry at Littleton, W. Va., for $17,300, with the intention of engaging in the building-stone business. Soon after coming into possession of this quarry, he was convinced that the content was suitable for the manufacture of pulp stones. Samples of the stone were sent to Greely & Co., importers and fabricators of pulp stone at Portland, Me. This concern was one of the largest importers of pulp stones from England and was conversant with the requirements of the trade. Greely & Co. had several of the pulp stones fabricated and placed in use in paper mills where a thorough test was made. These tests proved that the stones satisfied the requirements for pulp stone. Greely and his associate, Hall, visited the quarry at Littleton, W. Va., in August, 1915, and in conjunction with Wemple determined that the quarry contained sufficient stone, after allowing for waste in quarrying, to produce 17,000 units of 2y2 tons each. It has been found as a fact that the life of the quarry was 20 years and that the net profit per unit was $50.

Two credible and thoroughly qualified witnesses testified unequivocally that the assets acquired by the petitioner in exchange for its stock were worth at least $250,000 on the date of their acquisition by the corporation. Their testimony as to value is entirely consistent with the remainder of the facts proven and we conclude, therefore, that inasmuch as the corporation issued in exchange for such assets, stock of the par value of $40,000, it is entitled to a paid-in surplus of $210,000.

The petitioner also alleged that the respondent erred in his computation of depletion for the year 1919. It has been stipulated that fifteen hundred and twenty 214-ton units were produced during this year. Depletion should be computed by using the same cost as has been allowed for purposes of invested capital.

The petitioner further alleges that the respondent erred in refusing to allow as invested capital notes in the amount of $50,000 paid in for capital stock. The notes in question were given in good faith by solvent makers for capital stock which was actually issued. The makers were at all times solvent and able to pay on demand. The record shows that the notes were treated by the petitioner as capital assets, and on two occasions were used by it as collateral for loans. The notes are properly includable in invested capital. See Hewitt Rubber Co., 1 B. T. A. 424, and American Steel Co., 1 B. T. A. 839.

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

Considered by Sterni-iagen and Akttndell.


author: Love:

text:
    H. Humphreys, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9335.
    Promulgated November 22, 1927.

      James Oraig Peacock, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Love:

The first question presented for consideration is whether in computing the profit derived from the sale of the depreciable properties 'in question, there may be taken into consideration an amount of depreciation in excess of the amount previously claimed by or allowed to the petitioner.

In Even Realty Co., 1 B. T. A. 355, we held that under section 202(a) of the Revenue Act of 1918, due allowance must be made, in ascertaining gain or loss upon the sale of capital assets, for exhaustion, wear and tear and obsolescence occurring during the period of ownership, whether or not deductions have been taken therefor in prior tax returns. The decision of the Board in this respect applies with equal force to the Revenue Act of 1921 in determining gain or loss resulting from the sale of capital assets.

However, the petitioner takes the position that under no circumstances, in determining the profit from the sale of the properties in 1920 and 1921, can any adjustment on account of depreciation exceed in the aggregate $585.85, which, it is urged, must be deemed to be the true depreciation sustained between March 1, 1913, and the dates of the sales of the properties.

In support of this position, our attention is called to article 1561 of Regulations 45 and of Regulations 62, which it is argued have the force of law and bind the Commissioner, in determining the profit from the sales herein, to consider only the depreciation claimed by and allowed to the petitioner.

Without discussing the regulations cited or passing upon their, validity as interpretative of the pertinent sections of the Revenue Acts to which they are applicable, it will be sufficient to point out that the Commissioner by his regulations can neither add to nor detract from the provisions of the taxing statutes. See William Reibert, 7 B. T. A. 1198. As above stated, the Revenue Acts of 1918 and 1921, require that in determining gain or loss from the sale of property due allowance must be made for depreciation sustained, whether or not deductions therefor have been previously taken. Consequently, a regulation contrary thereto would be of no force or effect. The action taken in regard thereto, is, therefore, sustained.

The Commissioner having determined the amount of depreciation sustained on the property in question, and his determination not having been challenged, it must also be approved.

With respect to the petitioner’s third assignment of error, the Commissioner concedes that he erred in that respect. The deduction for depreciation allowed for 1920 was $11.85. It should have been $168.75. Proper adjustment should be made in respect of this amount.

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

Considered by Trussell, Smith, and Littleton.


text:
    Pan American Wall Paper & Paint Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7116, 9106.
    Promulgated November 22, 1927.

      Arnold R. Baar, Esq., for the petitioner.

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

This proceeding is for the redetermination of deficiencies in income and profits tax, Docket No. 7116 for the year 1919 in the amount, as shown by the deficiency notice, of $7,336.98; Docket No. 9106 for the year 1920 in the amount, as shown by the deficiency notice, of $15,870.72, of which only the amount of $3,072.47 is in controversy.

FINDINGS OF FACT.

The Assets Producing Co., the Omaha Wall Paper Co., and the Star-Peerless Wall Paper Mills were, admittedly, an affiliated group. In its return for each of the years 1919 and 1920, the petitioner included in the affiliated group, as affiliated corporations, the Central Wall Paper Manufacturing Co., the Staples Wall Paper Co., and the H. P. Rawlings Wall Paper Co. The Commissioner denied the last three named companies were affiliated and determined the deficiencies accordingly.

The name of the Assets Producing Co. corporation was changed to Pan American Wall Paper & Paint Co.

At the hearing, petitioner abandoned and withdrew its assignments of error and contention in respect of the alleged affiliated status of the Central Wall Paper Manufacturing Co., and the Staples Wall Paper Co., but left in issue the alleged affiliated status of the H. P. Rawlings Wall Paper Co., and that is the only remaining issue in this case.

Evidence, both oral and documentary, was adduced, and after the said evidence was received and made of record, counsel for the respondent conceded that the uncontroverted evidence in the case established the fact that in the years 1919 and 1920, the H. P. Raw-lings Wall Paper Co. was affiliated with the Assets Producing Co. (Pan American Wall Paper & Paint Co.) and justified a decision to that effect, and that conclusion being in accord with the judgment of the Board, we deem it unnecessary to set out in a formal manner all the facts so proven. For the years 1919 and 1920 the H. P. Rawlings Wall Paper Co. was affiliated with the Assets Producing Co. (Pan American Wall Paper & Paint Co.).

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

Considered by Teussell, Smith, and Littleton.


text:
    Frank L. Orth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5588.
    Promulgated November 22, 1927.

      Frank L. Orth pro se.

      James V. O’Oallahan, Esq., for the respondent.
   Love:

This proceeding is for the redetermination of a deficiency in income tax for the year 1924 in the amount of $158.24.

The only error assigned is that the Commissioner refused to allow as a deduction from gross income of the year 1924, $5,000 which petitioner paid in a compromise settlement of a suit against him by George L. Danforth.

BINDINGS OP PACT.

The petitioner is an individual who resides in East Chicago, Ind.

In 1912, the petitioner and George L. Danforth entered into a contract agreement by which petitioner authorized the said Danforth to act for him and in his behalf in the sale of a certain patent or rights under such patent. Sometime subsequent to 1912, the controversy arose between the petitioner and Danforth, in regard to a claim, or claims by Danforth for commissions due him for services rendered.

In 1920, Danforth filed suit against the petitioner on said claims. In 1924, a compromise agreement was made between them to the effect that petitioner should pay to Danforth $10,000 in full settlement of all claims against the petitioner.- In pursuance of that agreement, petitioner paid to Danforth, on December 15,1924, $5,000 in cash.

Petitioner keeps his books and makes his returns on a cash receipts and disbursement basis and on his return for 1924, deducted that $5,000 payment from his gross income. The Commissioner disallowed the deduction and determined a deficiency.

Payment of the $5,000 was an ordinary and necessary expense, deductible in the year paid— 192J¡.. Judgment of no deficiency will be entered.

Considered by Teussell, Smith, and Littleton.


author: Love :

text:
    Harold Bauer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8579.
    Promulgated November 22, 1927.

      Martin A. Schench, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   Love :

This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1920 and 1921 in the aggregate amount of $1,924.82. It is alleged in the petition herein that in determining the deficiencies the respondent erred in disallowing as deductions amounts expended for maintenance and repair of an automobile used in business; for salary of chauffeur for services rendered in the course of business; and for traveling expenses incurred in business. Certain facts relative to the petitioner and his business are alleged.

The answer of the respondent, after admitting certain formal allegations of the petition, denies that the respondent committed error in disallowing the deductions with respect to the denial of which error is alleged, and also denies specifically all allegations of fact with respect to the petitioner and his business.

The petitioner produced no evidence with respect to his business or of the amounts expended in connection therewith. In fact, there is nothing in the record to show that amounts, the denial of which as deductions is complained of, were ever expended. Upon the record, we can only affirm the action of the respondent.

The notice of deficiency, or a copy thereof, is not before us and we are, therefore, unable to determine the deficiency as to each year in question.

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

Considered by Teussell, Smith, and Littleton.


author: Green :

text:
    Appeal of Uniform Printing & Supply Co.
    Docket No. 5016.
    Promulgated November 23, 1927.

      Walter H. Echert, Esq., for the petitioner.

      M. N. Fisher, Esq.-, for the Commissioner.
   OPINION.

Green :

The petitioner contends that it is a “ business league ” and as such entitled to exemption under section 231(7) of the Revenue Act of 1918, which reads as follows:

That the following organizations shall he exempt from taxation under this title—
(7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual.

This provision has been reenacted without material change in the Revenue Acts of 1921, 1924, and 1926. The regulations prescribed by the Commissioner are the same under the various acts and read as follows:

Art. 518. Business leagues. — A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. An association engaged in furnishing information to irrespective investors, to enable them to make sound investments, is not such a league, since its members have no common business interest, and it is not exempt, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income of which inures to any private stockholder or individual, is exempt provided its activities are limited to the exchange of checks and similar work for the common benefit of its members. An association of persons who are engaged in the business of carrying freight and passengers by boats propelled by steam, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for ofiice expenses and the salary of a secretary-treasurer, is exempt from tax. An incorporated cotton exchange, whose shares carry the right to dividends, is organized for profit and is not exempt.

Under such conditions each reenactment adds weight to the administrative interpretation as set forth in the regulation, and unless such interpretation is clearly contrary to the intention of Congress it should not be disturbed.

This taxpayer does, in part at least, “ engage in a regular business of a kind ordinarily carried on for profit,” and therefore unless the regulation is wrong it must be enforced and the exemption denied.

Three types of organizations are mentioned in paragraph (7)— business leagues, chambers of commerce, and boards of trade. Ordinarily chambers of commerce and boards of trade are organized to promote the common welfare of a substantial group of individuals, partnerships, and/or corporations all engaged in business in the same community. The profit advantage derived by the member does not come by way of dividends or other distribution of earnings of the corporation but comes rather from the increased earnings of the business of which the member is the owner. Not uncommonly do the activities of the board of trade or chamber of commerce result in a general good participated in by members and nonmembers alike. It seems to us that a business league, to be entitled to the exemption, should be engaged in and limited to activities similar to those of the ordinary chamber of commerce or board of trade, and that those activities should be of a kind not ordinarily engaged in for profit.

The various types of organizations entitled to exemption have been carefully classified in the statute and grouped according to their similarity. An examination of the various provisions indicates that the entire absence of possibility of profit to the member is the predominant characteristic.

That portion of the regulation which limits the exemption to organizations which do “ not engage in a regular business of a kind ordinarily carried on for profit” is a logical and reasonable construction of paragraph (7) of section 231, and this being true there is no legal justification for its rejection.

The petitioner herein, while organized and at present operated to give service to its stockholders at cost, is by no means required so to do. If, for reasons which seem sufficient to its stockholders or directors, it is decided to increase the charge made for the printing and distribution of forms, such action could properly and lawfully be taken. Such action has already been taken to provide a fund to care for anticipated improvements and replacements. Should this or other accumulations exceed the requirements of the business, there is nothing to prevent their distribution to stockholders as dividends. Thus they may function, in most respects at least, as does an ordinary corporation and have so functioned except in the matter of the distribution of dividends, and these they may distribute if they so desire.

The Appeal of Waynesboro Manufacturers Association, 1 B. T. A. 911, is not in point. There the parties agreed that the taxpayers were a business league and the appeal turned on other issues. Here the only issue is whether the taxpayer is a business league. Reviewed by the Board.

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

Sterni-iagen and Siefkin concur in the result.

Smith, Trtjssell, Milliken, and Murdock dissent.


author: Maequette:

text:
    Appeal of Estate of W. S. Tyler, Proctor Patterson and Marion C. Tyler, Executors.
    Docket No. 3875.
    Promulgated November 23, 1927.

      Sterling Newell, Esq., for the petitioners.

      P. S. Grewe, Esq., for. the Commissioner.
   OPINION".

Maequette:

The petitioner contends that the assessment of tax involved herein is invalid for the reason that the early expiration of the statute of limitations does not constitute jeopardy to collection of the tax, within the meaning of section 250(d) of the Revenue Act of 1921, under which the assessment was made, and that the petitioner was entitled to the 30-day notice and opportunity to protest provided by said section. We think the petitioner’s contention is not well founded. Section 250(d) of the Revenue Act of 1921 provides that, if upon examination of a return made under the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or the Revenue Act of 1921, a tax or a deficiency in tax is discovered, the taxpayer shall be notified thereof and given a period of not less than 80 days in which to file an appeal and show cause or reason why the tax or the deficiency should not be paid, that opportunity for a hearing on the appeal should be given, but “that in cases where the Commissioner believes that the collection of the amount due will be jeopardized by such delay, he may make the assessment without giving notice or awaiting the outcome of such hearing.” It will be observed that the Commissioner is expressly authorized to dispense with the 30-day notice and the hearing provided by section 250(d) when he believes that collection of the tax will be jeopardized by the delay incident to the giving of such notice and hearing. The Commissioner, in this case, determined that the collection of the tax would be jeopardized if the usual 30-day notice and opportunity for appeal were given, and this Board will not inquire into the correctness of his determination. Appeal of California Associated Baisin Co., 1 B. T. A. 1251. The assessment involved in that appeal was made under the authority of section 274(d) of the Revenue Act of 1924, which contains a prolusion in regard to jeopardy assessments substantially the same as the above quoted provision of section 250(d) of the Revenue Act of 1921. The Board, in holding that it would not inquire into the basis of the Commissioner’s belief that jeopardy exists as provided in section 274(d) of the Revenue Act of 1924, said:

But the taxpayer urges that the assessment was erroneous because no jeopardy in fact existed, and that any belief of the Commissioner of the necessity of a jeopardy assessment is not well founded and can not form the basis for a valid assessment under subdivision (d). The ground of the Commissioner’s belief and assessment is that the taxpayer is bankrupt and its property is in possession of a trustee in bankruptcy under the Bankruptcy Act. This, says the taxpayer, so far from denoting jeopardy, assures to the United States the protection of the assets for the purpose of paying taxes as a preferred obligation. Furthermore, it is said that the trustee, having already filed his official bond for faithful performance, is not in position to file any bond which may be required by the Revenue Act, section 279, to accompany a claim for abatement; and hence it will have no opportunity to appeal under section 279.
We are, however, constrained to the view that these are matters which, if they be true, are not within our authority to adjudicate. Congress has expressly based the power of jeopardy assessment upon the Commissioner’s official belief, consistently with his responsibility for the protection and collection of the revenue. If he so exercise this power as to be arbitrary and oppressive the remedy lies with the courts, as it does with any official abuse of power or discretion.

We think that the decision in the Appeal of California Associated Raisin Co., supra, applies with equal force as to the situation presented hero and on the authority of that decision we determine this issue in favor of the Commissioner.

The next question relates to the power of the respondent to reconsider and reverse the decision of his predecessor in office. We are of the opinion in the instant case he has that power. There is no dispute as to the facts. They were the same before the former Commissioner as before the present one and the decision of each involves only an interpretation of the statute authorizing deductions in computing net income. They involve no conclusion of fact. As we have heretofore stated in the Appeal of Yokohama Ki-Ito Kwaisha, Ltd., 5 B. T. A. 1248, “ An erroneous interpretation of a statute by the Commissioner does not conclude the United States on a subsequent modification of the ruling, or create equities in favor of the petitioner requiring the judicial adoption of the first interpretation.” See also Goldfield Consolidated Mines Co. v. Scott, 247 U. S. 126.

Under the statute it was clearly the duty of the present Commissioner to determine the petitioner’s true tax liability at any time within five years from the date the return was filed, and we are of the opinion that since his action in reversing the decision of his predecessor involved only a question of law and was not barred by any statute of limitations, it is valid.

The final question is, whether or not the petitioner is entitled, in computing its net income for the year 1918, to deduct the amount of $218,000 paid in that year to the Western Reserve University and the Lakeside Hospital, under the circumstances set forth in the findings of fact. The petitioner contends that it is entitled to the deduction under the provisions of section 219 (b) of the Revenue Act of 1918. Section 219 of the Revenue Act of 1918, provides in part:

ESTATES AND TRUSTS.
Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that there shall also be allowed as a deduction {in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part o£ the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; and in eases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary’s distributive share of sucii net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In sucii cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.

It is admitted by tlie Commissioner that the Western Reserve University and the Lakeside Hospital are corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes. It is therefore only necessary to determine whether the $218,000 in question ivas “ part of the gross income which, pursuant to .the terms of the will or deed creating the trust,” was paid to those institutions in the year 1918. The construction placed by the petitioner on the language just quoted assumes the existence of a comma after the word “ will,” and that the language should be construed as meaning that if a will gives an executor discretion to pay a legacy as he sees fit, out of principal, income, or both, and the executor in fact pays the same out of income, then the payment is made out of income “ pursuant to the terms of the will.” But we should not stop there. The language which Congress enacted in the law, was “ terms of the will or deed creating the trust.” The clause “ creating a trust ” modifies or limits both “ will ” and “ deed.” That the omission of the comma was not a mere accident, is apparent from the conference report submitted on behalf of the managers of the Senate and House on the legislation which became the Revenue Act of 1918. In two places in that report there appears the identical language used in the Act, that is, “ pursuant to the terms of the will or deed creating the trust.” It seems clear to us that Congress intended to cover the situation where a trust was created either by a will or by a deed, and where the terms thereof provided for the payment to a charitable, religious, scientific, or educational corporation of all or part of the income of that trust, and not to the situation where executors, acting within discretionary powers, pay a legacy out of income. We are, therefore, of the opinion that the situation presented in the instant appeal does not come within the provisions of section 219(b) of the Revenue Act of 1918, and that the petitioner is not entitled to any deduction from gross income under that section.

While the petitioner, in computing its net income for the year 1918, is not entitled to deduct the legacies in question, under the provision of section 219(b) of the Revenue Act of 1918, it might be contended that it is entitled to the deduction under section 219 (c) of that Act, which provides that—

in determining tho net income of tlie estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary.

In order properly to determine whether or not the petitioner is entitled to a deduction under section 219(c) of the Revenue Act of 1918, we must inquire as to whether the legacy was, by the terms of the will, made payable out of the income of the testator’s estate. The will contains no provisions expressly directing the executors to pay the legacies to the Western Reserve University and the Lakeside Hospital out of income rather than principal. It may be observed that when the testator had in mind the use of the income of his estate for the payment of a legacy, he made a definite provision to that effect, for instance, the codicil of March 15, 1916. In our opinion the language of the will giving the executors discretion as to the time when the legacies should be paid was inserted for the purpose of preventing the legatees from making any legal demand for payment at a time which might force the sale of the principal of the estate to the disadvantage of the estate, thereby adversely affecting the interest of the testator’s wife as the residuary legatee, or his daughter, as the recipient of an annuity or the income from the trust. The petitioner attaches great weight to the codicil of October 8, 1910, as an expression of the testator’s intent that the stock in the W. S. Tyler Co. should not be used for the payment of legacies provided by his will. We do not think, however, that the codicil of October 8, 1910, is susceptible of that construction. It was clearly intended to operate as a restriction upon the powers of the Citizens Savings & Trust Co., as trustees for the testator’s daughter, in the event the trust for her benefit should come into existence, and was not intended as a limitation or restriction upon the powers of the executors. The trust for the benefit of the daughter was to be created only .in the event that the testator’s wife did not survive him. However, she did survive him, so that the trust was never created and the codicil of October 8, 1910, did not become operative.

We are unable to 'find any authority in the decedent’s will for holding that the legacies in question were intended by him to be paid out of the income rather than the corpus of his estate. The construction most favorable to the petitioner, of which the provisions of the will are susceptible, is that they do not expressly prohibit the legacies from being paid out of income. However, they would have been payable, even if the estate had no income, and they were required to be paid before any part of the estate could be turned over to the residuary legatee. The Western Reserve University and the Lakeside Hospital had no right, under the testator’s will, to demand any part of the income of his estate but they did have a right to $250,000 of the corpus of his estate. We therefore think that it can not be properly held that the legacies in question represent “ income properly paid or credited to any legatee, heir or beneficiary ” during the period of the administration or settlement of an estate, and that the petitioner is not entitled, in computing its net income for the year 1918, to deduct the amount of the legacies paid in that year, under the provisions of section 219 (c) of the Revenue Act of 1918.

The testator died in May, 1917, and his estate bore an estate tax under the Revenue Act of 1916 which did not permit the deduction from the gross estate of legacies payable to charitable, religious, scientific or educational corporations. By the Revenue Act of 1918 such deductions were granted to the estates of all persons dying after December 81, 1917. If the testator had died subsequent to December 31, 1917, we are satisfied that the legacies involved herein would have been deductible in computing his net estate subject to the Federal estate tax, under the Revenue Act of 1918, but we do not think they are proper deductions in computing the net income of the estate under the Revenue Act of 1918.

Reviewed by the Board.

Judgment will be entered for the Commissioner.

Milliken did not participate.


author: MaRquette :

text:
    Appeal of Pennsylvania Central Brewing Co.
    Docket No. 1537.
    Promulgated November 23, 1927.

      J. Marvin Ilaynes, Esq., R. H. Montgomery, Esq., Charles P. O'Malley, Esq., O. J. McGuire, Esq., Matthew' E. O'Brien, Esq.,

      Matthew II. O'Brien, Esq., L. E. Renard, Esq., and J. P. W. Ilein-boehel, O. P. A., for the petitioner.

      John D. Foley, Esq., and B. G. Svm/pich, Esq.,- for the Commissioner.
   OPINION.

MaRquette :

The first question presented for decision here is what amount, if any, the petitioner is entitled to include in its invested capital for the years 1919 and 1920, on account of good will acquired from the 12 brewing companies under the circumstances set forth in the findings of fact. The Commissioner has refused to permit the petitioner to include any amount in invested capital on account of the good will so acquired, on the ground that it had no value.

The evidence discloses that the petitioner acquired all the assets, including good will, of 12 breweries, paying therefor bonds, preferred stock and common stock, each of the par value of $2,800,000. That it acquired for these stocks and bonds, assets of substantial value, is evidenced by the fact that the bonds immediately after they were issued sold for par, and that the preferred stock and common stock sold for $50 and $20 per share, respectively. However, no amount of stock or bonds was issued specifically for tangibles or intangibles, and it is therefore necessary, if we are to arrive at a solution of the question before us, to determine the value of the two classes of assets from the evidence that has been presented. While the issue here is as to the value of the intangibles, we must, in view of the fact that the petitioner and the Commissioner can not agree as to the value of either the tangibles or intangibles, first ascertain the value of the tangibles. We are satisfied from the evidence presented that when the petitioner acquired the assets of the 12 breweries, the tangibles included therein had a fair market value of at least $1,505,684.83. While the evidence as to that value consists principally of an appraisal made in (he year 1925, the appraisal was a detailed and minute one made by competent men and based upon the original inventory of the assets under consideration. Retrospective appraisals should be carefully scrutinized, and are often not of great probative value, but we are of the opinion that the appraisals involved herein, considered with the other evidence tending to establish the value of the assets, shows with reasonable certainty that the tangible assets which the petitioner acquired in exchange for its stocks and bonds, had a value of at least the amount set forth, and we so hold.

Having determined the value of the tangible assets we can, by taking the earnings of the 12 breweries prior to the time they were acquired by the petitioner, and allocating them to tangibles and intangibles in accordance with the rules laid down in prior decisions of this Board, determine a value for the intangible assets. In the Appeal of Dwight & Lloyd Sintering Co., 1 B. T. A. 179, and Appeal of St. Louis Screw Co., 2 B. T. A. 649, the Board had before it the question of determining the value of a mixed aggregate of tangible and intangible property acquired by the taxpayer in exchange for stock and the assumption of certain liabilities. In determining the value of the intangibles so acquired, it was necessary to capitalize the earnings of several years immediately prior to the date the taxpayers acquired the assets. It was held that an allowance should be made for a proper return on tangibles and that the average net earnings in excess of such return should be capitalized to determine the value of the intangibles. We think that the method so adopted is proper in the instant appeal. We do not, however, agree with the contention of the petitioner that, as in the Appeal of Dwight & Lloyd Sintering Co., supra, the rates to be used should be 8 per cent on tangibles and 15 per cent on intangibles. In view of the nature of the petitioner’s business, which was subject to the hazards common to all manufacturing enterprises, as well as those peculiar to itself, it appears that the rates of 10 per cent on tangibles and 20 per cent on intangibles, are proper here, and applying those rates we find that the good will acquired by the petitioner, under the circumstances set forth in the findings of fact,, had a value of $2,202,-415.20 on October 1, 1897.

The net earnings which we have considered in reaching this conclusion are for the 3-year period ending June 30, 1897. While it would be desirable to have before us the earnings for a longer period, we are satisfied that the values we have found for both the tangible and intangible property acquired by the petitioner, are amply supported by the evidence.

Having found the values of the tangible and intangible assets acquired by the petitioner in exchange for its bonds and stock, we must next determine to what extent the value of the intangibles may be reflected in the petitioner’s invested capital for the years 1919 and 1920. In the Appeal of St. Louis Screw Co., supra, the facts were that the taxpayer acquired tangible and intangible property in exchange for stock and the assumption of certain liabilities. We there held that the value of the tangibles should be reduced by the amount of the liabilities; that the capital stock should be applied against the remaining tangibles and intangibles, according to the cash value of each class of assets at the date of acquisition, and that the intangibles so paid in for stock should be included in invested capital subject to the limitations contained in section 326(4) of the Revenue Act of 1918. Applying that rule here we must consider that the bonds were issued first for tangibles; that the bonds in excess of the value of the tangibles were issued for intangibles, and that the remainder of the intangibles were acquired for stock. We therefore find that in consideration of its bonds the petitioner acquired tangible property of the value of $1,505,684.83, and intangibles of the value of $1,294,315.17, and that for its captital stock it acquired intangibles of the value of $908,100.03. Under section 326(a) (4) of the Revenue Act of 1918, intangible property paid in for stock prior to March 3, 1917, may be included in invested capital in an amount not exceeding:

(a) Tlie actual cash value of such property at the time paid in,
(b) The par value of the stock or shares issued therefor, or
(c) In the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.

Of the.three limitations prescribed, the value of the intangibles is the lowest here and it therefore follows that the petitioner is entitled to include in invested capital for the years 1919 and 1920, on account of the intangibles in question, the amount of $908,100.03.

The next question is whether the petitioner is entitled to any deduction from gross income for the years 1919 and 1920 as an allowance for the obsolescence of its good will. We have heretofore held in Appeal of Manhattan Brewing Co., 6 B. T. A. 952, and Appeal of Standard Brewing Co., 6 B. T. A. 980, that under the Revenue Act of 1918 a taxpayer is not entitled to any deduction from gross income on account of obsolescence of good will. Upon the authority of the decisions in those appeals the petitioner’s claim for deductions from gross income on account of obsolescence of its good will is denied. See also Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626.

It appears from the evidence presented herein that, as set forth in the findings of fact the petitioner’s earned surplus is understated on its books by the amount of $500,000. Earned surplus should, therefore, be adjusted accordingly.

Reviewed by the Board.

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

SteRNi-iagen and Murdock dissent.


author: Murdock:

text:
    Alfred M. Bedell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7612.
    Promulgated November 23, 1927.

      Lyle T. AVoerson, Esq., for the petitioner.

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

Murdock:

In order to decide the net loss issue in the petitioner’s favor it would be necessary for us to hold that the petitioner was regularly engaged in carrying on the business of buying, selling, exchanging and otherwise dealing in bonds, stocks, mortgages, real estate, notes, choses in action and other like property. This we can not do.

The petitioner starts with a presumption against him. To prove that he was regularly engaged in 1919 in carrying on the business of buying and selling, exchanging and otherwise dealing in bonds and stocks, he testified in a general way as to what he had done in 1919 and the several preceding years.” But he never limited his testimony so that it would apply specifically to the year 1919. He said that during these years he spent about four hours on each of three or four days of each week in some broker’s office; that he had large margin accounts with his brokers; that he bought and sold large blocks of various stocks, which he named; that sometimes he would buy in the morning and sell at night; that frequently he pooled his interest with others; that his purpose in buying was to sell at a profit; and that he did an active business with his brokers, whom he named. These general statements could be truthfully made even though some of them did not apply specifically to the year 1919.

It must be borne in mind that we are concerned primarily with the year 1919. It was to prove that in 1919 he was regularly engaged in this business that the testimony was offered. If it was relevant and material we must assume that all of it applied specifically to the year 1919 and not only to some part of the period “ 1919 and the several preceding years,” and that it was offered to prove that in 1919 the petitioner did an active business with his brokers and bought and sold a considerable number of stocks and bonds.

On cross-examination he was asked to identify his income-tax return for the calendar year 1919. The return was then offered in evidence by the respondent without any objection by the petitioner. This return shows but one profitable sale of a stock or a bond during the year. The bond sold was purchased in 191G. The profit was $97.50. No claim was made on the return that the petitioner was engaged in any business as an individual. Some interest from Liberty bonds was reported, but the petitioner never claimed that the purchase or sale of Liberty bonds had any bearing on the question before us. Eight thousand four hundred and seventy-five dollars was reported as interest on corporation bonds containing a tax-free covenant, on which a tax of 2 per cent was paid by the debtor corporation. Dividends of $300 from “ Can So Ry ” were reported. A loss of $254,357.95 was claimed as shown by an attached schedule a copy of which appears in our findings of fact. Twenty-eight thousand one hundred and sixty-five dollars and fifty cents was reported as cash or stock dividends from corporations taxable by the United States upon a portion of their net incomes. The petitioner also testified on cross-examination that the stocks and bonds shown on the schedule attached to the return were owned by him on March 1, 1913, and were turned over by him to the Bank of Manhattan, which sold them for his account.

It seems to us that the facts thus developed on cross-examination seriously challenge the direct testimony of the petitioner in regard to his 1919 stock and bond purchases and sales. If in 1919 he was doing an active business with brokers, if he was buying and selling stocks and bonds, where is this reflected in his return? The sales at a loss were all made through a bank. These securities had all been held for six years at least. The one profitable sale was of a bond purchased in 1916. The purchase of stocks and bonds in 1919 might be reflected in the amount of interest and dividends reported, it is true. But no attempt was made to explain the apparent inconsistency between his testimony and his return. He did not mention one specific purchase or sale of stocks or bonds made by him during the year. The only other witness did not give any more satisfactory testimony on this point. The petitioner has not sustained his burden, his proof on this point is not convincing and fails to give us sufficient justification for changing the Commissioner’s determination.

We are only concerned with the year 1919 in so far as it may affect the petitioner’s tax liability for the year 1920, which alone is before us. Having decided that the petitioner has failed to prove facts entitling him to a favorable decision on the question of whether or not he was in 1919 regularly engaged in carrying on the business of buying, selling, exchanging and otherwise dealing in bonds and stocks, we need not discuss or decide the same question in regard to mortgages, real estate, notes, and choses in action, inasmuch as such discussion and decision would not produce any change in the petitioner’s tax liability for the year 1920, in view of the facts stipulated and otherwise in evidence.

The petitioner contends that the Commissioner committed error by including a profit of $84,765.94 in the petitioner’s 1920 income on account of the sale of the Morris Building; that, so far as he was concerned, the signing of the two contracts resulted in an exchange of personal property for other personal property, to wit, the legal right to compel the Valentine Building Co. to convey title to the building to the Broadway-John Street Corporation in accordance with the terms of the first contract was exchanged for the legal right to compel the White Oil Corporation to take title to the building and to pay therefor the sum of $1,075,000 in accordance with the terms of the second contract; that by reason of this exchange he received $80,000 income in the year 1919, that amount being the excess of the fair market value of the right he received over the cost of the right he gave up. In support of this contention he claims that he was a joint adventurer in these transactions with the Broadway-John Street Corporation.

There are several reasons why we can neither adopt this reasoning nor reach the conclusion that the Commissioner was in error. In the first place the evidence does not support the claim that the petitioner was a joint adventurer with the Broadway-John Street Corporation. A joint adventure can only exist where the parties to it have voluntarily agreed and intended that it should be created. Maas v. Lostroff, 194 Fed. 577; Interstate Chemical Corporation v. Duke, 163 N. Y. S. 1035. An agreement to share profits is not of itself sufficient to create the relationship. National Surety Co. v. Winslow, 143 Minn. 66; 173 N. W. 181; Hill v. Curtis, 139 N. Y. S. 428; Haskett v. Stanley, 115 N. Y. 625; 22 N. E. 745. There must be some additional fact such as control over or proprietary interest in the subject matter involved or a share in the risks and burdens incident to the transaction or transactions to be carried forward, showing that the parties intended the relationship. Griffiths v. Von Horberg, 99 Wash. 235; 169 Pac. 597. The sharing of profits may be only a measure of compensation for monies loaned to the sole adventurer. If the money is to be returned in any event or is secured against loss should not profit result, the one who advanced the money is ordinarily not a joint adventurer. McLean v. City State Bank, 210 Fed. 21. It is only when the agreement extends beyond this and makes the person a principal in the prosecution of the enterprise that he becomes a joint adventurer. Hill v. Curtis, supra; Haskett v. Stanley, supra; Boise v. Jones, 94 N. Y. S. 896; Marston v. Gould, 69 N. Y. 220; Moscowitz v. Sassulsky, 126 N. Y. S. 513.

Applying these principles to the facts proven in this case and comparing these facts with the facts in the above cases, we reach the conclusion stated at the beginning of this discussion, that the petitioner has failed to prove that he was a joint adventurer with the Broadway-John Street Corporation. This being so, it does not follow that both had the same rights and owned the same property throughout these transactions. We do not express any opinion as to what the tax liability of the Broadway-John Street Corporation would be. As far as the tax liability of this petitioner is concerned the facts do not present a question of an exchange of property in 1919 and consequently no question of the 1919 fair market value of property received in exchange arises.

Regardless of what the petitioner’s rights were under the contract between the Valentine Building Co. and the Broadway-John Street Corporation, we do not think that the signing of the agreement between the Broadway-John Street Corporation and the White Oil Corporation changed his existing rights so that under the Revenue Act he had income in 1919 as a result of these transactions. He advanced his money in consideration of an agreement which secured him against loss of that money and promised him a share of some expected profits when, as, and if there were any. He assumed no liability or responsibility and thereafter did not move in the matter. At no time in 1919 were profits assured and certainly he had no right in 1919 to move so that a share in the specific funds from the contract between the Broadway-John Street Corporation and the White Oil Corporation might be assured for himself. Immediately after this contract was signed he had the same rights and owned the same thing as previously. His rights may have ■ increased in value as a result of the signing of this second contract because thereafter profits were more reasonably to be expected, but neither a mere increase in value nor a fictitious or paper profit is income which was intended to be taxed. Eisner v. Macomber, 252 U. S. 189; Appeal of James P. McKenna, 1 B. T. A. 826.

The facts leave us in considerable doubt as to another step in the petitioner’s reasoning, which we think is important although we have decided the case as if the step had been satisfactorily proven. The petitioner had his agreement with Elias R. Cohen, an individual, whereas a corporation made the contract for the purchase and sale of the building. We do not know that this corporation ever authorized Cohen to contract in regard to its expected profits and if it never authorized him to contract, we do not understand how the agreement between Cohen and the petitioner in any way affected the profits which the corporation actually received in 1920. This agreement mentions 50 per cent of the profits as the petitioner’s share. The petitioner has mentioned 40 per cent, 45 per cent, and 50 per cent of the profits as being his share. The result is that we are not sure that we know what contract controlled the division of these profits,

The determination of the Commissioner, holding that the sum of $84,763.94 received by the petitioner in 1920 as his share of the profits resulting from the transactions involving this building was income to him in 1920, is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

Littleton did not participate.


author: Arundell:

text:
    Simon Benson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4721.
    Promulgated November 23, 1927.

      Arthur F. Jones, O. P. A., for the petitioner.

      Shelby S. Fmilkner, Esq., for the respondent.
   OPINION.

Arundell:

The petitioner is willing to have us decide the issue upon his admission that no legal consideration was paid for the note and that it was intended as a gift.

The courts have held that a promissory note given ’ without a valuable consideration is a mere promise to make a gift in the future. Williams v. Forbes, 114 Ill. 167; 28 N. E. 463; Wisler v. Tomb, 169 Cal. 382; 146 Pac. 876. The promise to pay interest was made concurrently with the promise to pay the principal sum and is nothing more than a promise to make a future gift.

The taxpayer fulfilled his promises, in part, during 1921 by making an interest payment of $600 which the payee accepted. This payment, and the acceptance thereof, was the real gift.

We are unable to agree with the contention of the taxpayer that the item is deductible as interest on an indebtedness.

Bouvier defines indebtedness as “ The state of being in debt, without regard to the ability or inability of the party to pay the same. But to create an indebtedness there must be an actual liability to pay at the time, either to pay then or at a future time.” The term is defined by Anderson in his law dictionary as “ the condition of owing money; also the amount owed.” In its general sense it is defined to be that which is due from one person to another, whether money, goods or services; that which a person is bound to pay or perform to another. 5 Am. and Eng. Enc. of Law, 143. Being indebted. is synonymous with owing. Van Winkle v. Ketcham (N. Y.), 3 Caines 323. An indebtedness is the owing of a sum of money on a contract. Roelofsen v. Hatch, 3 Mich. 277.

None of these or other definitions, or the judicial decisions examined by us support the theory that an executory gift, which is not a contract and which the donee can not enforce, either in law or in equity, against the donor, and the donor may revoke at any time before it is perfected, creates the relationship of debtor and creditor.

Reviewed by the Board.

Judgment will be entered for the resfondent.,

GREEN dissents.


author: Trussell:

text:
    Beacon Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11894.
    Promulgated November 23, 1927.

      Garl H. Smith, Esq., for tbe petitioner.

      Henry Ba/venel, Esq., for tbe respondent.
   OPINION.

Trussell:

The record of this action shows that during the year 1922 the petitioner in accord with its usual custom accrued upon its books an amount equivalent to 10 cents per ton of coal mined as a reserve to take care of expenses which could not be anticipated in advance. During that same year it charged against this fund $5,531.45 actually expended for labor and material used in making repairs and purchasing repair parts for its mining equipment. This amount of $5,531.45 is an allowable deduction for the year 1922.

The sum of $4,158.39 was accrued upon the petitioner’s books in the year 1921 as the probable amount of expense and damage resulting from the wrecking of several railroad cars and was a proper accruable expense of operations during that year. Of this amount $358.59 was paid during the year for the use of a wrecking crew furnished by the railroad company. On February 6, 1922, a further payment on account of damages to the railroad cars in the amount of $1,924.40 was made and on April 9 the whole matter was adjusted and settled with the additional payment of $1,212.30, thus all the cost and expenses borne by the petitioner on account of the first mentioned accrual was settled for $3,495.09. The difference between this amount and the original accrual, $663.30, should be restored to income for the year 1921 and no amount growing out of this situation should be reflected in the petitioner’s accounts for the year 1922.

Up to the close of the year 1920, petitioner had acquired mining properties and equipment at a cost of $336,904.31. It had estimated that the original coal content of its lands was 350,000 tons and that when mining operations would cease the salvage of its properties would be $60,000. Mining operations began in the year 1919 and for that year and the year 1920 its income and profits-tax returns have been settled and are not here in question. During those years it mined 148,720 tons of coal, and was allowed combined depletion and depreciation deductions for the two years in the amount of $104,104. In arriving at its adjustment for depletion and depreciation for the years 1919 and 1920, it had reduced the cost of its mining properties and equipment by the amount of the estimated salvage, $60,000. Later it developed that this estimated salvage was excessive, and that the true salvage was $40,950.63. On January 1, 1921, after having made adjustments for corrected estimate of salvage the unex-hausted cost of mining properties and equipment was $192,581.43. The estimated recoverable coal remaining in the ground on that date was 201,280 tons. The unit for a composite depletion and depreciation deduction for the year 1921 was therefore found to be 95.672 cents, and the allowable deduction found by applying that unit to the 83,196 tons of coal mined is $79,601.27.

During the year 1922, the petitioner acquired additional coal lands costing $14,050, and additional machinery equipment costing $14,708.87. The new lands acquired were estimated to have a coal content of 53,000 tons. The unexhausted cost of property and equipment for the year 1922 is $141,739.03; the amount of recoverable coal on January 1,1922, found by adding the 53,000 tons contained in the new land acquired and adjusted to correct the estimate in accordance with the actual tons mined resulted in a then coal content of 162,796 tons. The combined unit for depletion and depreciation for the year 1922 is thus found to be 87.066 cents and this unit applied to 97,634 tons of coal mined in that year produces an allowable deduction of $85,005.91.

Carrying this computation through to the close of the petitioner’s business when its mine was exhausted, we find that the allowance for exhaustion for the year 1923, when 64,920 tons of coal were mined, would be $57,778.15, and for the year 1924 when 242 tons of coal were mined and mining operations ceased the deduction for depletion and depreciation would be $215.87, and summarizing the entire operations of this petitioner, it appears that the total cost of its properties and equipment throughout the period of its operations was $367,655.83; that the petitioner recovered through salvage $40,950.63; that the amount recoverable through depletion and depreciation exhaustion is $326,705.20; that the amount recovered by depletion and depreciation deductions will appear as follows:

For the two years of 1919 and 1920_$104,104. 00
For the year 1921_ 79, 501.27
For the year 1922_ 85,005.91
For the year 192S_ 57, 778.15
For the year 1924__ 215. 87
Total_ 326, 705.20

The petitioner’s liability to income and profits taxes for the years 1921 and 1922 should be recomputed in accordance with the foregoing findings of fact and opinion.

Reviewed by the Board.

Judgment will he entered upon 15 days’ notice, pursuant to Rule 50.


author: Smith:

text:
    Smith Insurance Service, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10901.
    Promulgated November 23, 1927.

      W. Chester Gray, C. P. A., H. E. Dermison, Esq., and R. D. Campbell, C. P. A., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
   OPINION.

Smith:

The only allegation of error so far as the year 1920 is concerned is that the resjiondent improperly disallowed $5,000 of the amount paid as salary to the president of ‘the company. At the hearing of this appeal the respondent admitted error with respect to this disallowance.

Although the petitioner reported in its gross income for 1921, $21,391.58 of indebtedness canceled by the St. Croix Paper Co., the petitioner now contends that it was in error in doing so; also that if this amount is to be included in gross income the respondent was in error in disallowing $5,000 of the amount claimed as salary deduction for 1921.

The net result of the transaction by which the St. Croix Paper Co. released the petitioner from indebtedness of $21,391.58 and by which the petitioner canceled a debt owing to it by Fred S. Smith of $6,063.25 increased the petitioner’s assets to the extent of $15,328.33. This enrichment of the petitioner was at the expense of two principal stockholders. It, in effect, was a contribution to the corporation by those stockholders and constituted a gift to it. Section 213(b) of the Revenue Act of 1921 specifically provides that the term “ income ” shall not include the following items, which shall be exempt from taxation under this title:

(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income).

Section 233 (a) of the Revenue Act of 1921 provides:

That in the case of a corporation subject to the tax imposed by section 230 the term “ gross income ” means the gross income as defined in sections 213 and 217 * * *.

In the light of these provisions of the Revenue Act of 1921 we are of the opinion that the petitioner was in error in including in the gross income reported in its tax return $21,391.58 of indebtedness canceled by the St. Croix Paper Co. and that it likewise was in error in claiming as a deduction from gross income $6,063.25 indebtedness owed by it to Fred S. Smith, which was canceled in the circumstances herein stated.

Reviewed by the Board.

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


author: Littleton:

text:
    J. K. Rishel Furniture Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11113.
    Promulgated November 25, 1927.

      Paul E. Shorb, Esq., M. P. Wormhoudt, Esq., and E. G. Anderson, G. P. A., for the petitioner.

      P. J. Rose, Esq., for the respondent.
   OPINION.

Littleton:

The question whether the petitioner and the Pi shell

Phonograph Co. were affiliated for the years 1919 and 1920 was before the Board and the action of the Commissioner in denying an affiliated status was sustained. Rishell Phonograph Co., 2 B. T. A. 229. It does not necessarily follow however that an affiliated status fixed for one or more years will continue for the succeeding year or years for the reason that “ affiliation is a statutory status, which is determinable separately for each year, and the failure of a taxpayer to establish for one year the facts prescribed by the statute can not operate to prevent a full presentation of the facts for a subsequent year.” Canyon Lumber Co., 4 B. T. A. 940.

In deciding against an affiliated status for the prior years, the Board said:

In tlie case at bar three men holding directly 61.57 per cent of the stock of the furniture company held directly 75 per cent of the stock of the phonograph company. Indirectly through the holdings of the former company in the latter, they owned an additional 15.39 per cent of the stock of the phonograph company and through their majority control of the furniture company they were in a position to vote all of the stock of the phonograph company. Their respective proportionate holdings in the two companies varied somewhat. Whether or not this variation is sufficient to justify the conclusion that their stock in the two corporations was controlled by the same Interests is a question into which it is not necessary for us to go, for the reason that we are not convinced that they can be said to control substantially all the stock of both companies. That they controlled substantially all the stock of the phonograph company may be conceded for the purpose of argument, but we are not satisfied that in controlling 61.57 per cent of the stock of the furniture company they controlled substantially all of such stock. Much was stated in argument to the effect that the minority stockholders of the furniture company were friends and relatives of the majority stockholders, and that their stock was therefore controlled by the majority stockholders. But there is no real evidence m the record demonstrating any such control. The mere fact of relationship by blood or affinity does not of itself constitute proof of control, and the same may be said of friendship. To our minds 61.57 per cent of the stock of the phonograph company can not, in the light of all the circumstances of this case, be held to constitute substantially all of the stock, whether or not such a percentage in other circumstancos might be held to be substantially all. The claim of the taxpayer for affiliation with the J. K. Rishel Furniture Company must be rejected and the determination of the Commissioner approved. (Italics supplied.)

Substantially the same conditions as to stock ownership exist in this proceeding as existed in the proceeding for the prior years; in fact, minority stockholders are slightly greater for 1921 than they were for 1919 and 1920. Additional evidence, however, has been presented in the instant proceeding with respect to the conditions surrounding the early history of the petitioner, and the general relationship existing between the majority and minority stockholders.

In the decision on the appeal for the prior year, reference was made to the argument advanced “that the minority stockholders of the furniture company were friends and relatives of the majority stockholders, and that their stock was, therefore, controlled by the majority stockholders.” We said, however, that there was “ no real evidence in the record demonstrating any such control.” Much of the evidence in the instant proceeding was introduced for the purpose of demonstrating the control referred to in the prior proceeding. While this evidence shows lack of interference on the part of the minority in the management of the petitioner and full confidence and satisfaction on the part of the minority in the acts of the majority, there was nothing shown which demonstrated real control, whether legal or actual. The most that can be said is that there was a quiescent minority which was satisfied with, and did not interfere in, the management of the petitioner, but this is far from saying that there was actual control by the majority of the minority stockholders. See Isse Koch & Co., 1 B. T. A. 624. In Canyon Lumber Co., 1 B. T. A. 473, the Board said that the control “referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.” We are not convinced that there was control in the foregoing sense in this instance. The facts that stockholders would have given proxies to the majority to vote their stock, had such request been made; that the minority stockholders were friendly to the majority; that at the time the minority purchased their stock, there was some sort of oral understanding that the majority would be given an opportunity to buy stock which the minority might desire to sell, and other similar circumstances are not sufficient to convince us that the control of the voting rights of stock contemplated by the statute existed in this case.

Petitioner argues that by virtue of its holdings of 25 per cent of the stock of the Phonograph Company, there was, therefore, ownership by all of its stockholders of stock in the Phonograph Company and that when this stock ownership is considered there will be found to exist a complete ownership of the stock of the two companies by the same individuals. The answer to this contention is that ownership by a corporation is not ownership by the stockholders of the corporation. The corporation exists separate and apart from the stockholders, the assets of the corporation, among which in this instance was certain stock of the Phonograph Company, being owned by the corporation and the stockholders merely possessing and exercising certain rights through the corporation.

In view of th.e foregoing and from a consideration of the entire record the action of the Commissioner in declining to compute the income and invested capital of the petitioner and the Phonograph Company upon the basis of a consolidated return is sustained. Reviewed by the Board.

Judgment will be entered for the respondent.


author: Siefkin :

text:
    Keeler Brass Co., and Keeler Realty Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6218.
    Promulgated November 25, 1927.

      Frank E. Seidman, G. P. A., Julius H. Amberg, Esq., and Jacob S. Seidman, Esq., for the petitioners.

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

Siefkin :

The evidence shows that the two companies were operated as a business unit with numerous intercompany dealings and a real ownership and control of all the stock of both companies by one individual. The companies were affiliated in 1919.

We can not now pass on the contention of petitioner that, should we find that the grounds for affiliation exist, the tax should be allocated to the three companies making up the affiliated group in the proportion that the net income of each bears to the consolidated net income. That question is not now before us. One member of the affiliated group, as determined by respondent, is not a party to this proceeding. Further, we can not anticipate that the respondent, in computing the tax as the result of this decision, will not follow the requirements of the statute. Again, it may be that there has been a consent to a different allocation. There is no allegation of fact or proof of faot to the contrary.

In view of our decision upon the merits, we deem it unnecessary to determine the question as to whether the assessment or collection is barred.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, wnder Bule 50.


author: Marquette :

text:
    McIntosh Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9832.
    Promulgated November 25, 1927.

      Robert II. Smith, Jr., Esq., and H. E. Ewnt, O. P. A., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   OPINION.

Marquette :

We shall first discuss the two issues resulting from the respondent’s adjustments of cotton inventories. It appears that the petitioner while asserting its right to price its December 31, 1918, TRW cotton inventory at market? contending market to be lower than cost, is at the same time inventorying the cotton in stock in process at an average designed to represent the “ known price ” without regard to market at the inventory date. There has been no evidence to differentiate by lot, grade, price, or otherwise, between the raw cotton in stock and the cotton in stock in process.

We know of no authority lending countenance to an .inventory method under which two lots of the same merchandise which are similar and undistinguished, may be priced on different bases, and we find no merit in the petitioner’s plea of convenience. The evidence shows that it was the petitioner’s custom to take its closing inventories at cost or market, whichever was lower, and that it followed that custom in regard to its raw cotton in its closing inventory for 1918. The market price of cotton is admitted to have been lower than cost on that date, and the petitioner was, therefore, clearly within its rights in taking its inventory at market. For the reasons above stated, the December 31, 1918, inventory of stock in process should be taken on the same basis. We have before us no evidence as to the cost or market price of cotton as of December 31 of other years involved, and in the absence of that evidence we can only approve the respondent’s determination as to the inventories of cotton in stock in process for those years.

The respondent has increased the petitioner’s closing inventories of raw cotton by the addition of sums paid as warehousing and dray-age charges on such of the cotton as the petitioner stored in a public warehouse because of its own limited storage facilities. The respondent’s action is premised on the theory that these storage and dray-age charges constituted an additional cost of the cotton. The petitioner contends that the payments are expense.

When the cotton was warehoused it had been acquired by the petitioner and was in its possession. The warehouse and drayage charges on a supply such as petitioner had on hand are business expenses and are properly deductible from income as such. They do not increase the cost of the cotton for inventory purposes. See Appeal of George C. Peterson Co., 1 B. T. A. 690.

On the issues involving special assessment, allocations of manufacturing expense, etc., in computing the stock in process inventories and depreciation, the evidence is wholly inadequate to warrant us in disturbing the respondent’s determination. The respondent’s determinations in respect thereof are, therefore, approved.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, umd&r Bule 50.


author: MaRquette:

text:
    Belt Railway Company of Chicago, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4289.
    Promulgated November 25, 1927.

      R. Kemp Slaughter, Esq., and Hugh G. Bickford, Esq., for the petitioner.

      A. R. Marrs, Esq., for the respondent.
   OPINION.

MaRquette:

The deficiency letter herein asserts additional taxes for the years 1913 to 1919, inclusive, and the petitioner appealed as to all of those years. However, at the hearing counsel for the petitioner conceded that the Board had no jurisdiction as to the years 1913, 1914, and 1915, and abandoned the appeal in so far as it relates thereto.

The first question presented by the record is whether or not the petitioner, in computing its net income for the years 1916 to 1919, inclusive, is entitled to any deduction for depreciation of the rolling-stock and equipment which was held under the lease set forth in the findings of fact. The Revenue Acts of 1916 and 1918 each provide that in computing its net income a corporation is entitled to deduct a reasonable amount for the exhaustion, wear and tear of its property, and the petitioner rests its contention as to this issue on these provisions of the statutes.

The record discloses that the petitioner had no invested capital in the property for which the depreciation was .taken and the depreciation reserve established. This reserve then, can not be a fund set aside for keeping intact invested capital; it can only be regarded as a fund accumulated from year to year to meet a contingent liability. This contingency — the wearing out and consequent need of replacement of locomotives and cars leased to and used by petitioner — probably would become an actuality before the termination of the lease. If and when such replacements became necessary, petitioner was obligated by its contract to supply them at its own expense. But until such expenditures become necessary and are actually made by the petitioner, it can not deduct the amounts thereof from its gross income. It can not anticipate a probable expense as to leased property, and in which it has no capital investment, in computing its income tax.

The Board early decided that a taxpayer operating under a lease, who had no capital investment in the chattels under lease, had no basis for an allowance for wear, tear and exhaustion. Appeal of William J. Ostheimer, 1 B. T. A. 18. In that case, just as in the case before us, the lease expressly bound the lessee taxpayer to maintain the chattels, supplies and equipment under the lease “ in as good condition as they now are and in such condition to * * * ” redeliver them to the lessor at the end of the term. It was apparent in that case, as in this, that the chattels under lease could not be maintained and returned to the lessor in like good condition, except by renewals and replacements. In that case, as in this, the taxpayer’s books were kept on the accrual basis. The Board said:

In order that an item may be accrued, however, a liability must actually be incurred in the taxable year. Schuster & Co. v. Williams, 283 Fed. 115. The statute recognized the accrual basis of making returns by providing for the deduction of expenses incurred but not paid. It is apparent that no liability in praesenti was incurred under the terms of the lease in question in the years 1918 and 1919 however well known it might have been that a liability in some amount would be incurred at some time in the future. The liability to restore chattels as good as new or as good as when received when a lease is ultimately canceled or surrendered at some indefinite or indeterminate time in tlie future is not a present actual liability, and is not the actual incurring of an expense or liability.
Jit * si! * jji * *
In the case of a lessee of chattels who is required by the terms of the lease to make such renewals or replacements as are necessary to keep the property in as good condition as when received as additional rental or as a condition to the continued use of the property to which he has no title and is acquiring none, they are deductible, if at all, as expenses paid or incurred in carrying on a trade or business. Reserves for future unincurred expenses are not allowable as deductions under the Revenue Act of 1918.

The same conclusion applies under the Revenue Act of 1916. See also Weiner v. Weiss, 17 Fed. (2d) 650; 6 Am. Fed. Tax Rep. 6527, to the same effect.

These decisions are directly in point with the case we are now considering. The petitioner had no cost or capital investment in connection with the leased rolling stock. Whatever liability it may have had with respect to such chattels, it was a future, not a present liability. The petitioner’s original capital would have remained unimpaired even though this depreciation reserve had not been established. We therefore sustain the Commissioner in his disallowance of the depreciation reserve as a deduction from gross income in the years 1916 and 1917. The record shows, however, that the petitioner did not take any deductions for depreciation of the leased equipment in computing its net income for 1918 and 1919 and the respondent, therefore, erred in adding to its income as reported, any amount as disallowed depreciation of that equipment for those years.

The only other assignment of error is that the respondent added to the petitioner’s income for 1917,1918, and 1919, inclusive, erroneous amounts as “ income tax accrued ” in those years. The record as to what actually occurred in this respect is not as clear as might be desired; in fact, it is difficult to tell what the true situation is. However, it appears that the petitioner in the year 1917 estimated the tax that would be due and payable in that year on its return for 1916, accrued such estimated amount on its books and collected it from the tenant companies. In reporting its income for 1917 the petitioner included therein either the amount estimated and accrued for 1916 taxes, or the amount thereof actually paid in 1917. The 1917 and 1918 taxes were handled in a similar manner; that is, they were estimated, accrued and collected, and either the estimated amount, or the actual amount paid, included in income for 1918 and 1919. The respondent has added to income for 1917,1918, and 1919, the amounts set forth in the findings of fact which, it is conceded, resulted, to some extent at least, in a duplication of income. We have heretofore held in Providence & Worcester Railroad Co., 5 B. T. A. 1186, that income and profits taxes of the lessor, paid by the lessee, constituted income in the year in which paid, in the nature of additional rental. Therefore, the petitioner’s income tax for each of the years 1916, 1917, and 1918 was a proper accrual in the subsequent year, and since it passed its taxes on to the tenant companies — that is, they reimbursed the petitioner in each' year for the taxes on the preceding year’s income, there should be included in income for 1917, 1918, and 1919, respectively, the exact amount of taxes due in each of those years on the income for the preceding year.

Eeviewed by the Board.

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

MoRRis and Green did not participate.

SterNiiageN concurs in the result.

Trussell dissents.


text:
    Appeal of D. C. Jackling.
    Docket No. 4272.
    Promulgated November 25, 1927.

      Lyle T. Alv&rson, Esq., for the petitioner.

      George G. Witter, Esq., and E. 0. Lahe, Esq., for the Commissioner.
   ORINION.

MaRquette:

The petitioner contends that in computing his net income for the year 1917 he is entitled to deduct the amount of the loss sustained by him in that year on the sale of the boat Cyprus; that regardless of whether said loss is deductible, collection of the additional tax assessed for 1917 is barred by the statute of limitations and that, therefore, under the provision of section 1106(a) of the Revenue Act of 1926, the liability is extinguished and there is no deficiency. We are of the opinion that the latter contention is well taken.

The petitioner’s income and profits-tax return for the year 1917 was filed April 1, 1918, and the additional tax for that year was assessed on the March, 1923, assessment list. Under the provisions of section 250(d) of the Revenue Act of 1921, which provides that—

(d) The amount of income, excess-profits, or war-profits taxes due under any return made under this Act for the taxable year 1921 or succeeding taxable years shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts, or under section 38 of the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, or of any taxes due under section 38 of such Act of August 5, 1909, shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or proceedings begun at the time of the passage of this Act. * * *

the Supreme Court of the United States in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346, held that the word “ proceeding” as used in section 250(d) of the Revenue Act of 1921, includes distraint as well as suit, and that it was the intention of Congress by the clause “no suit or proceeding for the collection of any such tax * * * shall be begun after the expiration of five years after the date when such return was filed,” to protect taxpayers against any proceeding whatsoever for collection of tax claims not made and pressed within five years.

The petitioner’s return for the year 1917 was, as above stated, filed on April 1, 1918, and the petitioner not having signed and filed a waiver, the five-year period within which collection of the tax due on such return could be made, either by suit or by distraint, expired April 1, 1923, and collection of the tax became barred at that time. The bar to the collection of this tax was not removed by either the Revenue Act of 1924, or the Revenue Act of 1926. On the contrary the Revenue Act of 1926, by section 1106(a) thereof, provides that “the bar of the statute of limitations against the United States in respect to any internal revenue tax shall not only operate to bar the remedy but shall extinguish the liability * * It is therefore clear that although the taxes in question were assessed within five years from the date the return was filed, the collection thereof, that is the remedy, was barred on and after April 1, 1923, and that the remedy being barred at the date of the enactment of the Revenue Act of 1926, the liability was extinguished by section 1106(a) of that Act. It follows that there is no deficiency for the year 1917. In view of what we have said it is unnecessary for us to decide whether the loss sustained by the petitioner on the sale of the Cyprus is a proper deduction from gross income for the year 1917.

The next question is whether the petitioner in computing his net income for 1918 is entitied to deduct the amount of $29,151.37, representing expenditures made by him in that year for the purposes and under the circumstances set forth in the findings of fact. The evidence clearly shows that these expenditures were made by the petitioner in furtherance and because of the work he was doing for the Government, and that they would not have been made except for the fact that he was in the service of the Government. They were not made for the benefit of his private business, but were entirely for the benefit of the Government and in furtherance of the work which it had requested the petitioner to supervise. While the amount may .seem large when considered as an expense in connection with an ordinary peace-time business, it must be borne in mind that the work which the petitioner was doing and in connection with which the expenses were incurred, was a great war-time enterprise, costing millions of dollars and carried on under the stress and pressure of war-time conditions, and in which early completion of the work was of more importance than low construction costs. We think that under the circumstances the amounts so expended by the petitioner constituted ordinary and necessary business expenses and that the deduction claimed should be allowed.

The last question is whether the Pacific Rice Mills sustained a loss in the fiscal year ended October 31, 1918, of the amount invested in and advanced by it to the American Lumber Co. If a loss was sustained by the partnership, the amount thereof is a proper deduction in computing the partnership’s net income for that fiscal year and will affect the petitioner’s income for the calendar year 1918. We are of opinion that the partnership, the Pacific Rice Mills, sustained a loss in the fiscal year ended October 31, 1918, in the amount claimed. The evidence shows that it invested in the stock of the corporation the amount of $25,000, and that it advanced the corporation money to continue its business until February, 1918, when having determined that the operation of the corporation would always be unprofitable, it caused the corporation to cease its activities and advanced further funds to liquidate the corporation’s indebtedness. The advances after February, 1918, were made because under the laws of California the partnership, as sole stockholder of the corporation, was liable for its debts. The corporation had no assets other than the timber -lease, which under the circumstances was in reality only a continuing liability. The fact that the corporation was not dissolved does not, in our opinion, affect the question presented here. Its operations were permanently abandoned; it had no assets of any value, and the partnership lost its entire investment as well as the amounts it had advanced to operate and liquidate the corporation’s obligations. Appeal of Milton H. Bickley, 1 B. T. A. 544; Appeal of John Anthony Barry, 2 B. T. A. 1095. The partnership should be allowed the deductions claimed and the petitioner’s income for the year 1918 adjusted accordingly.

Reviewed by the Board.

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

Aeundell did not participate.

GeeeN and Love dissent.