text:
    Birmingham Trust & Savings Co., Executor, Estate of I. F. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7440.
    Decided October 29, 1926.
    The March 1, 1913, fair market value of shares of stock sold in 1921 determined.

      Lee G. Bradley, Jr., Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $3,571.33. The question in issue is the March 1, 1913, fair market price or value of 94 shares of the stock of an Alabama corporation which were sold in January, 1921, at $250 per share.

      FINDINGS OF FACT.
    The petitioner is the executor of the estate of I. F. Young, who died in November, 1923. The decedent and J. A. Yann were stockholders of the Young & Yann Supply Co., an Alabama corporation with its place of business in Birmingham.- The corporation was organized in November, 1906, with a.capital stock of $30,000. The decedent originally owned one-third of the- capital stock and Yann owned one-sixth. By successive stock dividends the capital stock was increased until it was $100,000 on March 1, 1913, and $210,000 on January 28, 1921, the date when the shares of stock in question were sold. This capital stock of $210,000 was divided into 2,100 shares having a par value of $100 per share. From the date of organization until the date of sale no new capital was put into the business, and the increase in capital stock was solely by way of stock dividends. The decedent was closely associated , with J. A. Vann in the conduct of this business from its organization until decedent’s death. The corporation was engaged in the business of selling steam fitters’ supplies, such as pipes, valves, packing, rubber hose, machine supplies, etc. Its principal customers were furnace companies and mining companies. Its principal business was in the mineral district of Birmingham, Gradsden, Sheffield, Annis-ton, and Montgomery. Since the organization of the business there have been no sales of the stock of the corporation, except to persons connected with the business. On January 31, 1912, a small number of shares in the aggregate were sold to several employees, the price being fixed by the book value at the end of the preceding year. There was a general understanding between Yann and the decedent that they would not sell the stock except to each other, the basis of the sale to be the book value of all of the assets, the value of which was to be fixed by an appraiser.
    The population of Birmingham and the number of consumers in the territory served by this corporation largely increased from the date of organization to March 1,1913. There was an increase in the size and number of mines in the Birmingham district, and also in coal and iron tonnage. Business conditions in the district were very much improved by the reported purchase of the stock of the Tennessee Coal Iron & Railroad Co. by the United States Steel Corporation during the year 1901. The population of Birmingham, as shown by the Federal censuses. for the years 1900, 1910, and 1920, was as follows:
    1900. 38, 415
    1910. 132, 685

      The population of Jefferson County, in -which Birmingham is situated and which composed a large part. of the mineral district in which the petitioner did business, as shown by the same Federal censuses, was as follows:
    1900_ 140,420
    1910_____ 226,476
    1920___;_:_310,454
    The Young & Vann Supply Co. negotiated a long-term lease beginning October 1, 1910, and ending September 30, 1930, on the property where it conducted its business. The lease was at a net rental of $5,000 per year and the property leased had valuable railroad connections.
    The net income of the corporation, after all expenses were deducted, was as follows:
    Dee. 1, 1906-Nov. 30, 1907_$14,679.95
    Dec. 1, 1907 — Nov. 30, 1908_ 5, 725.27
    Dee. 1, 1908-Nov. 30, 1909_ 16, 542.32
    Dee. 1, 1909-Nov. 30, 19101___ 26,451.35
    Dec. 1, 1910-Dec. 31, 1911_ 20,578.71
    Calendar year 1912-a._ 50,299.18
    Gross sales, less allowances and prepaid freight, were as follows:
    Dec. 1, 1908-Nov. 30, 1909_$283,073.10
    Dec. 1, 1909-Nov. 30, 1910_ 398,190.21
    Dec. 1, 1910-Dec. 31, 1911__ 436,307. 03
    Calendar year 1912_ 531, 647.75
    Month of January, 1913- 68,407.77
    Month of February, 1913_ 48, 055. 86
    The balance sheets at November 30, 1910, and at December 31, 1911, 1912, and 1920, show the . stockholders’ interest in the corporation as follows:

    The price of the products handled by the Young & Vann Supply Go. began to fall in November and December, 1920, and continued to fall throughout the year 1921. The corporation suffered a very severe inventory loss in 1921. ■
    In order to equalize the holdings between the decedent and Vann, the decedent in January, 1921, sold to Vann 94 shares of the capital stock of the corporation at.$250 per share. At that time there were outstanding 2,100 shares of capital stock. The sale price of $250 per share was substantially the book value of the stock at the date of sale. The book value of the capital stock at December 81, 1012, the nearest date to March 1, 1913, on which the book value of the capital stock can be determined, was $148,063.40, which, divided by 2,100 shares, gives a book value of $70.50 per share. The Commissioner determined a March 1, 1913, value of the 94 shares sold in January, 1921, of $73.12 per share, and the deficiency computed by the Commissioner is based upon a profit upon each share sold of the difference between $73.12 and $250.
    Yann and the decedent organized the corporation and were largely responsible for its success.. In order that the cash resources of the corporation might be conserved, they drew salaries which did not adequately compensate them for services rendered. During the early years of the corporation, Vann received a salary of $3,000 per year and the decedent a correspondingly low salary. The profits of the corporation from the date of organization to March 1, 1913, were approximately 33½ per cent on the average amount of capital invested.
    The fair market price or value of each of the 94 shares of stock sold by the decedent in January, 1921, was $100 on March 1, 1913.
   OPINION.

Smith:

The Commissioner determined the March 1, 1913, fair market price or value of the shares of stock sold by the decedent in January, 1921, at $73.12 per share. This value is slightly in excess of the book value at the basic date. The petitioner contends that the value ivas much greater than that, but has left the exact amount for the determination of the Board. At the hearing the petitioner put on the stand an accountant who testified that in his opinion a prospective purchaser of the corporation of the Young <& Yann Supply Co. in 1913 would have been justified in paying $275,000 or $300,000 for the assets of the business which, on December 31, 1912, had a book value, measured by capital stock, undivided profits, and reserve for contingencies, of $148,063.40. In his opinion a prospective purchaser could reasonably have expected profits of $30,000 a year from the business, and an industrial enterprise that was assured a return, year in and year out, of 10 per cent upon its capital investment was worth ten times the annual yield-

The evidence indicates that the success of the business was due in a very large part to the efforts of the decedent and Yann. They drew relatively small amounts as salaries during years prior to 1913. On cross-examination the witness Yann testified as follows:

Q. Do you think that had you and Mr. Young sold your stock in the corporation [in 1913] that the corporation could have carried on the business as successfully?
A. No, sir; we did not have the organization. We could not afford the organization to do that.
Q. What is that?
A. We could not afford — we did not have an organization that could do that. We were the executives. We did not have any men in our employ.
Q. Assuming you and Mr. Young had died on March 1, 1913, what would have happened to that business?
A. Well, that is problematical. I do not see hardly how it could have gone on. Of course it' would have been sold out probably.
Q. What was your salary in 1906 from the Young & Vann Supply Company?
A. I have forgotten. I believe it was $250 per month.
* * * * * * *
Q. Did you consider that you were taking out of the business sufficient compensation for the services rendered by you, or did you figure you were a stockholder and would share in the profits of the corporation, and only took out such funds as was necessary?
A. That is the way I considered it.
* * * * * * *
Q. Mr. Young only took out such drawing account as he needed, and left the other to be taken in the nature of dividends?
A. In the nature of capital; we needed capital.
Q. You need capital in the business?
A. Yes.
Q. In other words, he did not consider he was drawing an amount from the corporation'equal to the services which he rendered to the corporation?
A. We thought like we would get the benefit later.

We think that the sale of a few shares of stock at book value to certain employees of the corporation during the year 1912 is no indication of the “ fair market price or value ” of the shares on March 1, 1913. The circumstances under which the sales were made must be taken into consideration. Walter v. Duffy, 287 Fed. 41. In the absence of sales, we must look to other evidence of value. In a recent case, Boyd v. Reiner, 5 Am. Fed. Tax Rep. 6069, the District Court for the Western District of Pennsylvania stated:

Now, in determining the intrinsic value of this property, we must not confine ourselves to one factor in determining value, * * *. We must necessarily look to every factor that would have any bearing whatever on the determination of that fact.

Likewise, in the instant case, we must look at all the factors bearing'upon the value of the shares of stock. The corporation, Young & Yann Supply Co., was carrying on a profitable business in a mineral district where the demand for the products sold by the corporation was rapidly increasing. The sales of the corporation were mounting rapidly and the profits were correspondingly increasing. The name of the ’ petitioner corporation was becoming known. The profits for the three-year period prior to 1913 were in excess of 25 per cent on the capital actually invested. We think that this warrants a conclusion that the shares of stock had a value in excess of the book value. It is to be noted, however, that the corporation had no monopoly in its field. The principal officers were inadequately compensated for their services and the prosperity of the business depended to a large extent upon the activities of the decedent and Vann.

From a consideration of all of the factors, we are of the opinion that the fair value of the shares of stock on March 1, 1913, was in excess of the amount found by the Commissioner, and that the fair market price or value of each of the 94 shares of stock sold by the decedent in January, 1921, was, on the basic date, $100, which value was in excess of the cost to the decedent.

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


source: Caselaw Access Project

author: TRAmmell:

license: Public Domain

text:
    Appeal of John J. Radel Co.
    Docket No. 5576.
    Decided October 29, 1926.
    Tbe basis for determining gain or loss on the sale of stock determined from the evidence.

      Cecil L. Hall, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $1,146.19 in income and profits taxes for 1921. The deficiency arises on account of the action of the Commissioner in disallowing a deduction of $20,000, claimed by the taxpayer as a loss on the sale of 400 shares of stock of the Queen City Livery Co.
    findings of fact.
    The taxpayer is a corporation, organized under the laws of Ohio, with its principal place of business in Cincinnati. It is engaged in the undertaking business. Prior to 1910 it had a livery business in connection with its undertaking business. In 1910 a group of undertakers organized the Queen City Livery Co., which was to do a general livery business principally for the undertakers who were its stockholders. The stockholders of the company consisted of certain undertakers- in Cincinnati. Their purpose was to turn over all of their livery equipment to the new company and hire the equipment from that company as they needed it.
    The taxpayer acquired a block of 460 shares of stock of the Queen City Livery Co., upon the organization of that company in 1910, in exchange for its horses, carriages, harness and other stock and equipment, which was appraised, for the purpose of the exchange, at $46,000. The following table sets forth the equipment turned over by the taxpayer for stock, together with the allowance made by the Queen City Livery Co. and the average allowance for each article:

    In addition to the amount of equipment above set forth, the taxpayer turned over furniture which was valued at $300, and the difference between the appraised value of the furniture and the articles set forth above, that is, $18, was paid to the taxpayer by the livery company in cash.
    The carriages turned in by the taxpayer were of the same kind used by hackers generally. The trade allowances for used carriages and equipment in the purchase of new carriages and equipment were $250 to $300 for carriages and $500 to $750 for hearses.
    In 1915. the Queen City Livery Co. reduced its authorized capital stock from $400,000 to $200,000, and reduced the par value of its stock from $100 per share to $50 per share.
    The taxpayer, at that time being the owner of 460 shares of stock, which it carried On its books at par, that is, at $46,000, on February 28, 1915, when the capitalization was reduced, made an entry oh its books of account writing down this investment in stock from $46,000 to $23,000.
    In December, 1921, the taxpayer sold 400 shares of the stock of the Queen City Livery Co. for $9,200. In its income-tax return for that year, under Schedule A-23, it reported the sale price of the 400 shares at $9,200, the cost of the 400 shares in' 1910 at $40,000, and the fair market value as of March 1, 1913, at $20,000, which figure was taken from the investment account as it then stood on the books of the taxpayer company after the write-down had been made on said books in 1915. The Commissioner allowed a loss on the sale of $10,000, being the difference between thé selling price and $20,000, which he determined to be the March 1, 1913 value.

      The cost of the 400 shares of stock sold by the taxpayer in 1921 was $21,985.21. The March 1, 1913, value was not less than that amount.
   OPINION.

TRAmmell:

The question to be determined is the amount of the gain or loss, if any, arising from the sale of the 400 shares of stock of the Queen City Livery Co. in 1921.

The loss which is deductible is the difference between the cost or the March 1, 1913, value, whichever is lower, and the selling price.

The cost of the stock which the taxpayer sold is the fair market value of the property which the taxpayer turned over to the Queen City Livery Co. for the stock. The taxpayer claims that the value at which the assets were appraised at the time they were turned over to the livery company was their fair value. The evidence relating to the value of the equipment was given by Paul Huth and John F. Ruehlmann. Huth testified that in 1910 he was connected with the undertaking business of his father in Cincinnati. His father was one of the organizers of the taxpayer corporation. Huth was the secretary and treasurer of the taxpayer corporation. He expressed his opinion that the property was worth the amount at which it was appraised and turned over to the Queen City Livery Co. Pie testified that, in his opinion, if the property had been placed on the market for sale, it would have brought more than the amount that was subsequently realized in cash from the stock, which was $9,200. The only actual sale of used funeral livery equipment that Huth had knowledge of was a sale made by himself in 1910 of two hearses and six or seven carriages. - All these were sold together for $1,900. He and another person together acquired these hearses and carriages for $1,000 and, after repainting and repairing them and advertising them for sale, they received $1,900, making a profit of $900. The trade allowance for used, second-hand funeral equipment was from $250 to $300 for carriages, and from $500 to $750, and in some instances, $1,000, for hearses. The carriages turned over by the taxpayer to the Queen City Livery Co. were the same kind as those used by hackers in 1910.

The witness Ruehlmann testified that he thought that the values placed upon the assets for 1910 were fair valuations, but he does not testify that the valuations placed were in accordance with the fair market value of those assets as determined by the selling price of similar assets. There is no testimony as to how long these particular assets had been in use by the taxpayer when they were turned over to the Queen City Livery Co-

If we accept the valuation of $300 for carriages and $1,000 each for hearses, the total value of the assets turned over to the taxpayer for stock was $25,168. From all the evidence we find that these figures represented the fair 'market value of the carriages and hearses of the taxpayer exchanged for stock. This represented the cost of the stock.

There were no sales of the stock on the open market in 1913, and in order to determine the value on March 1, 1913, resort must be had to the facts surrounding the condition of the business and the valuation of its assets. From 1910 to 1915 the Queen City Livery Co. had not been as successful as was contemplated at the time of its organization. In 1910, 1912 and 1913, it showed profits, but for 1911 there was a loss, and, talcing the four years together, there was a profit of only $150.02. In 1913 the auto equipment was being experimented with by undertakers, although it had not become in general use. This fact had not, on March 1, 1913, materially interfered with the livery business in connection with the undertaking establishments. From all the evidence, we do not believe that the value of the stock on March 1, 1913, was greater than the cost of the stock in 1910, which cost was represented by the value of the assets turned over therefor. The loss to which the taxpayer is entitled is the difference between the cost of the stock and the selling price, the cost being determined in accordance with this opinion.

Judgment will be entered on 15 days’ notice, u/nd'er Bule 50.


author: Trammell:

text:
    Earl O. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8259.
    Decided October 29, 1926.

      David A. Gates, Esq., for the petitioner.

      Ward Loveless, Esq., for the respondent.
   Trammell:

This is a proceeding for the redetermination of a deficiency in income taxes for 1920 and 1921 in the amount of $24,141.04. The deficiency is based upon the action of the Commissioner in treating the proceeds of the sale of certain stock as belonging to the taxpayer instead of to his wife. The 50 per cent penalty was also imposed by the Commissioner upon the taxpayer, upon the ground that he had made a false and fraudulent return in that he had failed to include the proceeds of the sale of stock in his income-tax return. The taxpayer at the hearing amended his petition to claim as an error the action of the Commissioner in disallowing a loss in a business transaction during the year, but no competent evidence was introduced with respect to such loss.

FINDINGS OP FACT.

Earl O. Johnson, the taxpayer, acquired 50 shares of stock of the par value of $5,000 in the Thane Lumber Co. in 1914. This stock cost him $5,000. On January S, 1920, the taxpayer transferred to his wife, Eoberta D. Johnson, 40 shares of the stock. He delivered the stock certificate representing 50 shares to the corporation, and a new certificate representing 40 shares was issued in the name of .Mrs. Johnson on January 8, 1920, in lieu thereof. Mrs. Johnson signed a receipt for the certificate. A certificate for the other 10 shares was issued in the name of the taxpayer.

When the stock was transferred to Mrs. Johnson'on January 8, 1920, she turned it over to Thane, president of the Desha Bank, for safekeeping. Thane had been closely associated with the taxpayer for many years and Mrs. Johnson had absolute confidence in him.

The taxpayer had the 50 shares of stock, together with other securities, deposited with Thane as security for an indebtedness in the amount of approximately $5,000 which the taxpayer owed Thane.

On March 8, 1920, the 50 shares of stock, which included the 40 shares transferred by the taxpayer to his wife, were sold to the Thane Lumber Co. for $65,000, of which $10,000 was paid in cash and the balance was represented by 22 promissory notes of $2,500 each, bearing 6 per cent interest. These notes became due at intervals of thirty days after March 8, 1920. Mrs. Johnson endorsed the certificate representing the 40 shares and the taxpayer endorsed the certificate representing the 10 shares.

All dealings with respect to the sale of the stock were carried on by the taxpayer. He received the cash and the notes were payable to him. Four of these notes for $2,500 each were endorsed to Johnson Brothers Hardware Co. The remainder of the notes were endorsed by E. O. Johnson and he received the cash or credit 'for them.

On January 12, 1920, there was a meeting of the stockholders of the Thane Lumber Co. and the pertinent portion of the minutes of that meeting is as follows:

Pursuant to notice in writing of the meeting of stockholders issued hy secretary Dec. 1st 1919, the stockholders of the Thane Lumber Company met in session with H. Thane acting as chairman. The following shares were represented :
50 shares H. Thane by self
50 “ E. O. Johnson by self
1 « A. Kimball by self
49 “ Mrs. A. Kimball by self
50 “ G. W. Reese' by self
The advisability of increasing the amount of capital stock .was discussed and the following resolution read and unanimously adopted.

On March 6,1920, a meeting was held of the directors of the Thane Lumber Co., at the Desha Bank & Trust Co. building in Arkansas City, Ark. At that meeting a resolution was passed the pertinent parts of which are as follows:

12. O. Johnson, president, having signified his desire to resign as president and to dispose of his interest in the Thane Lumber Company, it was decided for the Thane Lumber Company to buy his interest on the following basis: Upon delivery of his 50 shares the Thane Lumber Company to pay him sixty-five thousand dollars ($65,000), ten thousand dollars ($10,000) in cash and twenty-two (22) notes of twenty-five hundred dollars ($2,500) each bearing six per cent interest.

No negotiations were had with respect to the sale of the stock until a few days before the salean March, 1920.

The taxpayer and his wife had had domestic difficulties for' about a year prior to the transfer of the stock to her, and the stock was transferred to' her in an effort to adjust their differences or for her benefit in case of separation. After the transfer and about the time of the sale of the stock, their marital troubles had been settled and Mrs. Johnson authorized the taxpayer to handle the matter as he saw fit and to use the purchase price.

The transaction was an actual conveyance of the stock to Mrs. Johnson in January, 1920. The income-tax return in which the taxpayer reported no profit with respect to the 40 shares of stock was not false or fraudulent.

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


author: Trammell :

text:
    Mrs. Browning Coleman Moore, Executrix, Estate of Betty W. Coleman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5221.
    Decided October 29, 1926.
    1. Evidence held insufficient to show that the value of real estate as determined by the Commissioner was not correct.
    2. Petitioner was residuary legatee and also executor. The will did not make specific provision that the executor-should have the legacy over and above the commissions. Held, under the law of Louisiana, that the executor was not entitled to commissions, and no deduction is allowable in determining the net estate subject to the estate tax.

      Stirling Parker son, Esq., for the petitioner.

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

      This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $161.40. The deficiency arises on account of the action of the Commissioner in increasing the valuation of certain real estate owned by the decedent at the time of her death, and on account of the disallowance by the Commissioner of the executrix’s commission of $4,069.86.
    FINDINGS OF FACT.
    The petitioner is the -duly qualified executrix of the estate of Betty W. Coleman, who died February 16, 1924. The decedent owned at the time of her death certain real estate in New Orleans. This real estate was valued by the petitioner at the time of filing the estate-tax return at $8,000. This is the figure at which the property was carried on the assessment rolls in 1923 and 1924' by the City of New Orleans. The Commissioner determined that the value of the property was $12,000.
    The executrix of the estate was the residuary legatee and received the entire estate, with the exception of certain specific legacies. The will of the decedent did not make specific provision for the payment of executrix’s commission in addition to the legacy, and made no reference whatever to such commission.
   OPINION.

Trammell :

There are two questions involved in this proceeding. The first relates to the value of the estate at the time of decedent’s death, and the second to the deductibility of the executrix’s commission, when no provision was made in the will for such commission and the executrix was the beneficiary under the will.

As to the first question, the Commissioner determined that the property in question had a value of $12,000 at the time of the decedent’s death. The only testimony which is in conflict with this is the fact that the property was assessed for taxation purposes by the City of New Orleans at $8,000. There is no testimony as to the basis upon which the property was assessed, whether at its full value or otherwise, nor is there any testimony that the value placed upon the property for local taxation purposes was correct. The burden of proof is upon the taxpayer to establish by a preponderance of evidence that the determination of the Commissioner is incorrect.. In our opinion, the taxpayer has not sustained that burden with respect to the valuation of the real estate here involved.

With respect to the deductibility of the executrix’s commission, resort must be had to the law of Louisiana, as interpreted by the courts of that State. If, under the law of Louisiana, a sole beneficiary, who is also executrix, under the will of the decedent, is entitled to executrix’s commission out of the estate, such amount should be deducted in determining the net estate subject to the Federal estate tax.

Article 1686 of the Civil Code of Louisiana provides in part as follows:

Testamentary executors, to whom the testator has bequeathed any legacies of other gifts by his will, shall not be entitled to any commission unless the testator has formally expressed the intention that they should have the legacies over and above their commission.

The statute has been interpreted in several decisions by the Supreme Court of Louisiana. In the case of Succession of Abrams, 145 La. 627; 82 So. 727, decided by the Supreme Court of Louisiana June 30, 1919, the court reviewed many of its previous decisions interpreting the above section of the Code, and quoted from Succession of Fisk, 3 La. Ann. 706, as follows:

The language of the article is general, including within its terms all executors, whether they be legatees under one and the same will, or under different wills. Any legacy, in the words of the law, given by the testator to his executor, will exclude the latter from commissions unless a contrary intention is expressed. * * * The French Code makes no provision for the compensation of executors. Subsequently, under that system, the duties of the trust are gratuitously, performed, unless the testator otherwise directs. Our law differing from the French in this respect, has fixed the compensation of executors only in the event of the testator’s silence. The testator must be presumed to know the law, and to be aware of this rule. If he make a bequest to his executor, this must be considered in law equivalent to a declaration of his intention that the legacy shall stand in lieu of commissions. It is the compensation which he fixes for the services to be rendered by his executor, which can neither be increased nor diminished. The executor is not compelled to accept the trust. But, if he act, no option is left to him; he can rebeive no other compensation than that fixed by the testator himself.

The taxpayer, however, contends that this rule laid down by the Supreme Court of Louisiana does not apply to a case where the executor is also universal legatee, but this question was decided by the Supreme Court of Louisiana in the case of Succession of McNeely, 50 La. Ann. 823; 24 So. 338. The universal legatee in that case claimed the statutory commission. The court, however, disallowed it and applied the rule set out above.

In view of the law of Louisiana, as interpreted by its Supreme Court, we must hold that the executrix’s commission is not properly allowable as a deduction in determining the estate subject to the Federal estate tax.

Judgment will be entered for the Commissioner.


text:
    Appeals of Montgomery Bros. & Co.
    Docket Nos. 5571, 8320.
    Decided October 29, 1926.
    Evidence held insufficient to establish value of property at the time it was turned in for stock.

      E. G. Gruen, O. P. A., for the petitioner.

      Josef h K. Moyer, Esq., for the Commissioner.
    These are appeals from determinations of deficiencies in income and profits taxes for the calendar years 1919 and 1920, in the respective amounts of $6,167.40 and $9,418.56. At the hearing taxpayer withdrew two of the allegations of error for the year 1920, leaving in issue for both years the single question whether it may include the sum of $67,364.90 in invested capital as paid-in surplus.
    FINDINGS OF FACT
    The taxpayer is a New York corporation with its principal office at Buffalo. It was incorporated October 31, 1899, under the name of the Montgomery Door & Box Co., which was subsequently changed to Montgomery Bros. & Co.
    At or about the time of its organization the taxpayer acquired for stock the fixed assets of the partnership known as Lee, Holland & Co., which had been operated for several years by brothers,' George B. and H. Ernest Montgomery, who, in turn, had acquired the assets of a partnership which had theretofore been operated by their mother and her two brothers.
    The issuance of stock and the acquisition of the partnership assets were recorded on the taxpayer’s books by the following entries:
    Stock subscription account_$350, 000
    Treasury account_ 50, 000
    To capital account_i_$400, 000
    Real Estate account (Plant)- 175, 000
    (Grounds and yards)
    Buildings accent (Main building), sbed, dry kiln, sprinkling equipment, carrier system, beating apparatus, etc_ 100,000
    Machinery account (machinery, belting, shafting, etc.)_ 50,000
    Engines and boilers_ 25, 000
    Geo. B. Montgomery-- 175,000
    H. E. Montgomery_ 175, 000
    No inventory or valuation of the assets of the partnership was made at the time they were taken over by the taxpayer. In 1907 an appraisal of the taxpayer’s property, exclusive of real estate, was made by an appraisal company. The report of the appraisal company, submitted to the taxpayer with a letter of transmittal dated August 17, 1907, gave the reproduction cost of the plant and equipment, less depreciation to the time of the appraisal, as $866,373.79.
    The taxpayer’s property, including real estate, was carried on its books on January 1, 1907, at $457,802.19.
    During the period January 30, 1907, to January 1, 1908, inclusive, the taxpayer added to its equipment a number of items at a. net price, that is, price less credits entered in the detailed annual property account, amounting to $10,893.86. During the period January 30, 1908, to January 1, 1909, inclusive, similar additions to equipment were made at a net price- of $5,312.84. These amounts, $10,893.86 and $5,312.84, were transferred under date of January 1, 1908, and January 1, 1909, respectively, to a ledger account designated “Property Accounts”.
    Under date of February 1, 1909, two years after the date of the appraisal, the taxpayer entered the amount of $67,364.90 as a debit to the “ Property Accounts ” in its ledger with the explanation “ to equal figures of App.”, and under date of February 28, 1909, entered the same amount as a credit to “ Surplus Accounts ” with the explanation “ Property Inc. to equal App.”
   OPINION.

Trammell:

The facts may be briefly summarized. In 1899 the taxpayer acquired for stock the assets of a business conducted by a partnership. In 1907, for the first time, a detailed appraisal of the taxpayer’s plant and equipment was made by an appraisal company. This appraisal placed a value on the assets which was $84,-062.85 more than the value at which they were carried on the books of the taxpayer. Early in 1909 the taxpayer added to its property and surplus accounts the excess of the appraised value of its assets over the book value, less the amount spent for equipment in 1907 and 1908. This amount, $67,364.90, the taxpayer claims the right to include in invested capital as paid-in surplus.

The only evidence introduced by the taxpayer with respect to the values of assets acquired for stock, or with respect to the books showing assets at less than cost or value, was an appraisal report made by an appraisal company. The appraisal was made by an appraisal company in 1907. The taxpayer offered the report in evidence for the purpose of establishing as a fact that the assets acquired in 1899 were worth more than the values at which they were placed on the books. The appraisal purported to show the replacement cost new in 1907 of all assets then owned, less depreciation actually sustained as shown by the appearance and condition thereof. It was made by two persons, one of whom made an inspection of the property, determined the amount and quality of materials, the estimated hours of labor used in the erection or construction of the assets, and other data, upon the basis of which another person in the office of the appraisal company could make calculations based on the current price of materials and labor and arrive at an estimated cost of the property if it had been constructed at that time. The person who prepared the estimates of the quantity and quality of materials required and the condition of the buildings when examined did not appear as a witness, nor was any tvitness able to testify as to the identity of such person. The testimony of the witness who made the estimates of the replacement costs was based entirely upon the assumption of the correctness and accuracy of the data furnished him by the person who made the inspection of the assets.

While the above report was offered in evidence at the time of the hearing, the question of its admissibility was taken into consideration.

We are of the opinion that the appraisal report, made as above stated, in the absence of the testimony of the person who prepared an essential part thereof, is not admissible in evidence. In so far as certain material facts are concerned, the report is merely an ex parte statement by a person who was unidentified and who was not subject to cross examination by opposing counsel. Even if the appraisal were admitted in evidence, we are of the opinion that it would be of little value for the purpose for which it was offered. There was no other material evidence offered by the taxpayer and we must, therefore, approve the determination of the Commissioner.

Judgment will be entered for the Commissioner.


text:
    J. A. Majors Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6403.
    Decided October 29, 1926.
    A contribution to Tulane University held not a business expense.

      M. E. Sanders, C. P. A., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiency in income and profits taxes for 1921 in the amount of $20. The deficiency arises from the action of the Commissioner in disallowing as a deduction a contribution of $200 made by the taxpayer to Tulane University.

      FINDINGS OF FACT.
    The taxpayer is a Louisiana corporation with its principal office at New Orleans. It is engaged in the business of operating a book store in New Orleans. For several years prior to 1915 it operated a branch store at Tulane University. The students of the University bought books from the taxpayer. In 1915 the branch store operated at the University, having been operated at a loss, was abandoned. The taxpayer paid the University $30 a month rental for space occupied at the University.
    During 1921 contributions were solicited for the University and the taxpayer contributed during that year $200. One of the reasons for this contribution was the fact that the students of the University constituted a substantial portion of taxpayer’s customers and the further fact that the taxpayer felt under some obligation to the University on account of relieving it of its rental contract for space occupied by the branch store at a loss.
   'opinion.

Trammell :

The question here involved is whether a contribution of $200 to Tulane University by the taxpayer was an ordinary and necessary expense of carrying on its trade or business, or whether it was, as it purported to be, a contribution or gift. If it was in fact a gift or contribution, it is not deductible, because gifts or contributions made by corporations are not allowed as deductions.

The benefits sought to be derived by the so-called contribution are indirect and remote. There was no obligation on the part of - the taxpayer to make the payment; it was not made in connection with the operation of the taxpayer’s trade or business, and, in our opinion, the amount is not deductible as an ordinary and necessary expense paid or incurred during the year.

Judgment will be entered, for the Commissioner.


author: Marquette:

text:
    Appeal of Sophia G. Coxe.
    Docket No. 2121.
    Decided October 29, 1926.
    1. Income received by the owner of a life estate acquired by will is taxable and can not be regarded as a non-taxable legacy or bequest.
    2. Losses sustained by an estate upon the sale of securities are not deductible from the gross income of a person holding a life interest in such estate.
    3. The Mining and Mechanical Institute of the Anthracite Coal Region, Inc., of Freeland, Pa., %el& to be a corporation contributions to which are deductible under the Revenue Act of 1918, section 214 (a) (11).

      4. The Board will not judicially notice tlie nature of an organization merely from the names of the individuals who sponsored it; and the fact that a corporation was organized to promote world peace is not sufficient per se to bring it within the classification of “ corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes.”

      John Oadwalader, Jr., Esq., for the petitioner.

      E. 0. Lake, Esq., for the Commissioner.
    This appeal involves a deficiency in income tax for the year 1919, in the amount of $43,075.95. From the evidence by oral testimony and exhibits introduced at the hearing, the Board makes the following
    FINDINGS OF FACT.
    The taxpayer in 1919 was a life tenant under the will of Eckley B. Coxe and had no interest in the principal or remainder of the estate.
    A loss of $89,320.21 on the sale of securities by the estate was deducted by the taxpayer in her tax return for the year 1919.
    The taxpayer made contributions in 1919 of $2,000 to the Mining and Mechanical Institute of the Anthracite Coal Region, Inc., of Freeland, and of $5,000 to the League to Enforce Peace. Other contributions in addition to those reported upon her return were made by the taxpayer in 1919, totaling $37,331.33.
    The Mining and Mechanical Institute of the Anthracite Coal Region, Inc., of Freeland, was a corporation organized and operated exclusively for charitable or educational purposes, no part of the net earnings of which inured to the benefit of any private stockholder or individual.
    The evidence is not conclusive as to the nature of the League to Enforce Peace.
    The Commissioner determined a deficiency in the amount of $43,075.95, from which determination the taxpayer duly filed her appeal with this Board.
   OPINION.

Marquette:

The first question before us for decision is whether income received by a life tenant is a non-taxable legacy or bequest. That question was recently decided by the Supreme Court in Irwin v. Gavit, 268 U. S. 161, contrary to the taxpayer’s contention. In the present appeal no evidence was introduced as to the terms of the will or the nature of the taxpayer’s interest in the income. We have the mere statement that the interest ivas a life estate. Such evidence is insufficient as a basis for distinction from the decision in Irwin v. Gavit, supra.

The next question presented, broadly stated, is whether a life tenant may deduct from gross income losses sustained by the estate on the sale of securities. That question was passed upon by us in the Appeal of Mary P. Eno Steffanson, 1 B. T. A. 979, contrary to the taxpayer’s contention. See also Appeal of Louise P. V. Whitcomb, 4 B. T. A. 80. Accordingly, we hold that the taxpayer was properly taxable as to income received in 1919, without deduction for any loss sustained by the estate on the sale of securities.

The remaining issues are with respect to the deductibility of certain contributions made in the year 1919.

The Mining and Mechanical Institute of the Anthracite Coal Region, Inc., of Freeland, was incorporated under the laws of Pennsylvania July 31, 1894, for the purpose of affording educational and scientific advancement for the men and boys engaged, or desirous of engaging, in the business of mining; mechanical-or other pursuits to better fit themselves for the work which they propose to undertake, and to furnish those who desire the same proper facilities for preparing themselves for the examinations given by the Mining Commission of the State of Pennsylvania. It had no other purpose than to give education to the boys and men in that coal region. It was operated without profit — was run by means of an endowment fund and actually had a deficit each year. Each member of the board of trustees paid a minimum fee of $10. Nominal tuition charges were made but did not in the aggregate amount to one-half of the annual expenses of the institution.

In our opinion the taxpayer has proved that the $2,000 contribution to the Mining and Mechanical Institute of the Anthracite Coal Region, Inc., of Freeland, was a proper deduction and it should be allowed.

With reference to the $5,000 contribution to the League to Enforce Peace, the evidence does not satisfy us that such corporation meets the statutory requirements as “ a corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes.” We can not take judicial notice of the nature of the organization merely from the names of prominent individuals who sponsored it.

In the tax return as filed, the taxpayer enumerated contributions made only to the extent of 15 per cent of her net income reported. The disallowance of the $39,320.21 loss increases the taxpayer’s net income and permits a greater deduction for contributions within the 15 per cent limitation. In addition to the $2,000 and $5,000 contributions above referred to, the taxpayer made other contributions in the year 1919, totaling $37,331.33. It was stipulated by the parties that these contributions will be subject to examination by the Commissioner.

Judgment toül be entered on 15 days’ notice, under Buie 50. '


author: Tuttsseel :

text:
    Appeal of A. R. Swartz & Co., Inc.
    Docket No. 3688.
    Decided October 29, 1926.
    Compensation of officers. — Compensation, at the rate of $175 and $115 per week, respectively, for the two principal officers who are also the sole stockholders of a mercantile corporation during a year when the gross business exceeded $190,000, helé to be reasonable compensation for such officers and a proper deduction from gross income.
    False and fraudulent returns. — Corporation income and profits-tax returns and the circumstances under which the same were prepared and filed examined, and such returns, although found to be erroneous, are not false and fraudulent under the provisions of the Revenue Act of 1918. The record discloses no evidence of intent to evade taxes sufficient to warrant the assertion of a 50 per cent penalty.

      F. B. Gibbs, Esq., and E. Barrett Prettyrrum, Esq., for the petitioner.

      G. B. Oonybeare, Esq., and J. E. Marshall, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1919 and 1920 of $1,512.40 and $1,956.05, respectively, and penalties for the same years of $186.20 and $3,985.62. The deficiency for the year 1919 results from an increase of sales by $9,604.10 and from an alleged decrease of purchases in the amount of $4,201.12. For the year 1920 closing inventory has been increased from $21,196.30 to $31,194.25 and the deduction made on account of salaries paid has been disallowed in the amount of $6,080. The penalties are imposed under section 250(b) of the Revenue Act of 1918, on the ground that the taxpayer filed false and fraudulent returns for the years 1919 and 1920 with the intent to evade tax.
    FUNDINGS OF FACT.
    The taxpayer was organized in 1915 under the laws of New York, and for a number of years, 1919 and 1920 included, was engaged in business at 41 Court Street, Binghamton, N. Y., as a retail dealer in ladies’, misses’, and children’s ready-to-wear garments. The corporation is not now in existence, having since been dissolved.
    Capital stock of $10,000 par value was authorized and, with the exception of a small amount, was held • by A. R. Swartz and his wife, Lottie Swartz. A. R. Swartz was president and general manager of the taxpayer corporation and his wife was vice president and assistant buyer. During the taxable years both of these individuals devoted all of their time to the business. Prior to the incorporation of the taxpayer, A. R. Swartz had been employed in similar work by a number of dry-goods firms. For several years he was buyer and manager of the ladies’ department of Herman Straus and Sons Co., of Louisville, Ky., one of the largest firms in that city. Subsequently, he was general manager of the Star Dry Goods Co., located in the same city.
    The taxpayer rented space to outside parties for the operation of shoe and millinery departments, charging as a rental 10 per cent of the gross sales. For the purpose of operation these departments were treated as parts of the taxpayer’s business. The taxpayer had nothing whatever to do with the purchase of the stock-in-trade of these departments and assumed no responsibility for the payment for such goods. The total sales from the shoe and millinery departments during the year 1919 amounted to $43,180.78. The rental, being 10 per cent of the gross sales, was $4,318.07. Rentals were reported on the taxpayer’s return for that year in the amo'unt of $4,286.83. Gross sales from the taxpayer’s business for the year 1919 were reported on the return as $147,629.33. The taxpayer’s books show gross sales for the year in the same amount. Purchases during the year are shown on the return in the amount of $114,165.62, whereas the books show that purchases during the year were $114,163.62.
    The taxpayer’s return for 1920 shows a closing inventory of $21,196.30. The Commissioner has increased this amount to $31,794.25, which is admitted by the taxpayer as being correct.
    During the year 1919 salaries paid to Mr. and Mrs. Swartz were $5,200 and $1,800, respectively. At'a meeting of the directors held in 1919, a resolution was passed increasing the salary of Mr. Swartz to $175 per week and that of Mrs. Swartz to $115 per week. These salaries were effective from January 1, 1920, and were deducted in full by the taxpayer on its return for that year. This deduction was disallowed by the Commissioner in the amount of $6,080, of which $2,600 was deducted as a part of the salary of Mr. Swartz, and $3,480 as salary of Mrs. Swartz.
   OPINION.

Tuttsseel :

With reference to the computation of the deficiencies the difficulties presented by this appeal are negligible. The questions involved are questions of fact, which are very definitely disposed of by the evidence presented at the hearing.

For the year 1919, the only items in issue are sales and purchases, and the books of the taxpayer disclose that sales were correctly reported by the taxpayer on its return. Purchases were reported on the taxpayer’s return in the amount of $114,165.62, whereas the taxpayer’s books show that total purchases amounted to $114,163.62, resulting in a net understatement of $2.

For the year 1920, the only items involved, so far as the computation of the tax is concerned, are closing inventory and salaries paid to Mr. and Mrs. Swartz. With reference to closing inventory, the taxpayer has admitted that the correct amount is $31,794.25 and that it was erroneously stated on the return as $21,196.30. In the matter of salaries paid to Mr. and Mrs. Swartz, the only point for determination is the i-easonableness thereof, since the record shows that the increases were regularly authorized by the board of directors at a meeting held some time during the year 1919. The exact date of the meeting is not disclosed, due to the fact that the taxpayer could not locate its minute book. Internal Revenue Agent Dewey, a witness for the Commissioner who had previously examined the books- of the taxpayer, stated that he had seen, in the course of his examination, the minute book of the corporation, which disclosed the fact that the increase in the salaries of Mr. and Mrs. Swartz had been duly authorized at a meeting of the board of directors held prior to January 1, 1920. From the evidence, it appears that Mr. Swartz had previously had a great deal of experience in the management of business such as that in which the taxpayer was engaged, and to a very large extent the responsibility for the successful operation of the business rested upon him. From the nature of the business, its size, the previous experience of Mr. Swartz, and the responsibility which rested on him, we see no reason for concluding that the salary of $175 per week paid to him for his services during the year 1920 was unreasonable. With reference to Mrs. Swartz, it appears that during the years in question she devoted her full time to the business of the corporation. She was vice president and assistant buyer, and there is nothing to show that the salary paid to her during the year 1920 was excessive, when considered in connection with the duties and responsibilities of positions such as those held by her; and, in view of the fact that the board of directors saw fit in a regularly conducted meeting to fix her compensation at $115 per week, we must conclude, in the absence of any facts to the contrary, that they properly judged the worth of her services to the taxpayer corporation.

Only one question remains for disposition, that is, whether or not the Commissioner was justified in imposing penalties amounting to 50 per cent of the deficiencies proposed, on the ground that the returns of the taxpayer for the years 1919 and 1920 were false and fraudulent and filed with the intent to evade tax. Sales and purchases reported by the taxpayer on its return for that year were substantially correct, sales being correctly reported and purchases understated in the amount of only $2, and, since these were .he only items affecting 1919 income that are in controversy, there is no basis for the assertion of the penalty for that year.

In the case of the 1920 return, the taxpayer has admitted an understatement of closing inventory in the amount of $10,598.15. There is nothing in the record, however, which shows that the understatement was fraudulently made with the intent to evade tax. Furthermore, A. W. Goodman, assistant business manager of the taxpayer corporation during the years 1919 and 1920, testified that a separate statement was attached to the return for the year 1920, showing the correct amount of closing inventory, and when it appeared that such a statement was not attached to the return when introduced in evidence the taxpayer submitted in evidence a statement purporting to be a copy of the statement attached to the return at the time it was filed. This copy disclosed closing inventory for the year 1920 in the correct amount.

During the course of the testimony many references were made by Internal Revenue Agent Dewey, a witness for the Commissioner, to an audit of the taxpayer’s books by an accounting firm, which audit, it was contended, disclosed facts proving that the taxpayer’s returns were false and fraudulent. There is reason to believe from the trend of his testimony that the report of Revenue Agent Dewey, which formed the basis for the assertion of the fraud penalty by the Commissioner, was, to a great extent, based upon such audit by the firm of accountants rather than upon the books of the taxpayer corporation. This belief is strengthened by the fact that the alleged overstatement of purchases for 1919, as disclosed by Revenue Agent Dewey’s report, is based upon purchases as stated by the audit and not upon purchases as stated by the taxpayer’s books.

The alleged understatement of sales for the year 1919 was attributed by Dewey to the omission of sales made during January of that year from total sales for the year, but when confronted with the books of the taxpayer he admitted that total sales reported on the taxpayer’s returns did include January sales and that the understatement was in fact due to the intermingling of sales made by the taxpayer in its business and the sales of the millinery and shoe departments. The books disclosed, however, that sales from the shoe and millinery departments were recorded separately from the sales of the business of the taxpayer and that the taxpayer reported income from the departments mentioned in the form of rentals.

On these facts there is no justification for a conclusion that the taxpayer’s returns for the years 1919 and 1920 were fraudulent and filed with the intent to evade tax.

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


author: Moeris:

text:
    Appeals of Kiddy Shoe Service, Inc., Harry Eby Shoe Co., Inc., and Eby Shoe Co., Inc.
    Docket Nos. 1560, 4906.
    Decided October 29, 1926.
    The petitioners were not affiliated during the years 1919, 1920 and 1921.

      Theodore B. Benson, Esq., for the petitioners.

      Percy 3. Crewe, Esq., for the Commissioner.
    These appeals are from the determination of a deficiency of $17,-967.82 in income and profits taxes for the calendar years 1919, 1920 and 1921. The only question raised is whether the three petitioner .companies were affiliated for the taxable years in question.
    FINDINGS OF FACT.
    The petitioners are Pennsylvania corporations, the Kiddy Shoe Service, Inc., and the Eby Shoe Co., Inc., being located at Lititz, and the Harry Eby Co., Inc., at Ephrata. The Eby Shoe Co., Inc., and the Harry Eby Shoe Co., Inc., were engaged in the manufacture of children’s shoes, and the Kiddy Shoe Service, Inc., in the distribution of shoes. The holdings of voting stock were as follows:

    The officers and directors of the three corporations for the taxable years were as follows:

    Harry E. Eby, Frank E. Eby, Elia Eby and Elmer Eby are brothers, and E. N. Eby is their father, and M. S. Eby is their first cousin. Elizabeth Miller Eby is the wife of Harry E. Eby and a sister of John Miller. John Miller married a sister of the Eby brothers. Norman Badorf, Paul M. Badorf and Elmer Badorf are brothers, and John S. Badorf is their father. The Badorf brothers are first cousins to John M. Miller and Mrs. Harry E. Eby. Elam H. Risser is a brother-in-law of the Eby brothers. N. B. Beaman is the son of B. B. Leaman and married Elam H. Kisser’s sister. Elizabeth Holtzhouse was secretary to Harry E. Eby, and H. E. Holtz-house is her father.
    Harry E. Eby was actively engaged as president of all three companies. M. S. Eby was employed as a salesman by the Eby Co. and the Harry Eby Co. jointly. Frank E. Eby was employed by the Eby Co. and had charge of one of the manufacturing departments. Elia Eby was in the employ of the Eby Co. as foreman of one of the departments. Elmer Eby was employed by the Eby Co. as an accountant. Norman Badorf was manager of the Kiddy Shoe Service, Inc. Elmer Badorf was superintendent of the Harry Eby factory. Paul Badorf was employed by all three of the companies as a salesman. Elam H. Risser was manager and superintendent of the Eby Co. S. Milo Herr was employed by the Harry Eby Co. as manager.
    Under date of March 6, 1917, the stockholders of the Eby Co. passed a resolution wherein they agreed individually to charge their estates to sell their common stock to the company at book value. This resolution was in effect during the years in question. Under date of January 8,1917, Harry E. Eby and S. Milo Herr each entered into agreements with the Harry Eby Co. that, in the event of their death, their stockholdings would be sold to the company at the book value thereof. These agreements were also in effect during the years in question.
    There has never been a minority stockholder who did not acquiesce in the management of the companies. At times stockholders have given proxies to the secretaries of the respective companies to vote their stock.
    Approximately 50 per cent of the output of the Eby Shoe Co. and the Harry Eby Shoe Co. was disposed of through the Kiddy Shoe Service, Inc. The shoes were sold to the Service Company at the same price and on the same terms as to other jobbers.
   OPINION.

Moeris:

Section 240 of the Revenue Acts of 1918 and 1921 provides that two or more domestic corporations shall be deemed to be affiliated if substantially all their stock is owned or controlled by the same interests. Applying the ownership test to the facts in these appeals, it appears that stockholders of the Eby Shoe Co. owned 880 shares of the voting stock of the Kiddy Shoe Service, Inc., of a total of 1,000 outstanding during the years 1919 and 1920, or 38 per cent, and 495 shares during the year 1921 of a total outstanding of 1,435, or approximately 84 per cent; that stockholders of that company owned 310 shares of the Harry Eby Shoe Co. during the years 1919 and 1920 of a total outstanding of 484 shares, or approximately 64 per cent, and 617 shares during the year 1921 of a total outstanding of 968 shares, or approximately 63 per cent. It further appears that, although stockholders of the Kiddy Shoe Service, Inc., owned, during the years 1919 and 1920, 474 shares of the voting stock of the Harry Eby Shoe Co. of a total of 484 shares outstanding, and 954 shares during the year 1921 of a total outstanding of 968 shares, stockholders of the Kiddy Shoe Service, Inc., owning 230 shares during the years 1919 and 1920 of a total of 1,000 outstanding, or 23 per cent, and 295 shares during 1921 of a total of 1,435 shares outstanding, or approximately 21 per cent, owned no stock at all in the Harry Eby Shoe Co. It is therefore apparent that substantially all the stock of these three corporations was not owned by the same stockholders.

The petitioners contend that persons closely related by blood or marriage, or closely associated by employment or in business, constitute the same interests. The mere fact of family and business relationship standing alone is insufficient to constitute control or to warrant a holding that persons standing in such relationship constitute the same interest with the majority. Appeal of Goldstein Bros. Amusement Co., 3 B. T. A. 408. Beyond this relationship the evidence affords us very little upon which to base an ownership or control of substantially all the stock by the same interests. Under date of March 6, 1917, the stockholders of the Eby Shoe Co. passed a resolution wherein they agreed individually to charge their estates to sell their holdings of common stock to the company at book value, and under date of J anuary 8, 1917, Harry E. Eby and Herr agreed with the Harry Eby Shoe Co. that, in the event of their death, their stockholdings would be sold to the company at the book value thereof, but these facts do not establish any control of the stock of the companies by the same interests. There was no evidence of an arbitrary shifting of profits or the operation of the companies as one business. Approximately 50 per cent of the output of the Eby Shoe Co. and the Harry Eby Shoe Co. was disposed of through the Kiddy Shoe Service, Inc. The shoes were sold to the Service Company, however, at the same price and on the same terms as to other jobbers. We are of the opinion that, on the evidence presented, substantially all the stock of the three companies was not owned or controlled by the same interests.

Judgment will be entered for the Commissioner.


author: Mobbis:

text:
    Appeal of Helvetia Milk Condensing Co.
    Docket No. 5306.
    Decided October 29, 1926.
    The selling of goods with a protection clause against market declines does not result in an actual liability until there is a decline in the market; and, where payments or credits are made in adjustment of prices due to a decline in a subsequent taxable year, gross sales for the preceding year may not be reduced by the amount thereof.

      Hugh Satterlee, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    The petitioner appeals from the determination of a deficiency in income and profits taxes for 1919 of $14,598.29. Allegations of error as to obsolescence and amortization were abandoned at the hearing, leaving as the sole question the proper treatment of payments and credits to jobbers in 1919 and 1920 in adjustment of sales made during the next preceding year.
    FINDINGS OF FACT.
    The petitioner, an Illinois corporation, was organized in 1885, to engage in the business of producing evaporated milk, and has ever since engaged in such business.
    The petitioner originated the process of preserving milk by evaporation and for many years was the only producer of this product. It lost this monopoly prior to 1900 and did not thereafter control the market price of its product. The market for the petitioner’s product was highly competitive for many years prior to 1918, as well as during 1918, 1919, and subsequent years.
    For many years prior to 1918, as well as during and after 1918 and 1919, it was the universal practice of producers of evaporated milk, including the petitioner, to sell their product to jobbers at a price equal to the lowest producers’ market price prevailing at any time after the sale to the jobbers and prior to the resale of such product by such jobbers. In pursuance of this practice such producers, including the petitioner, agreed to protect jobbers against declines in the producers’ market price from the price at which they had been billed for goods in their hands; that is to say, when a decline in the producers’ market price of say 50 cents per case occurred, each producer, including- the petitioner, immediately requested' each of his jobbers to submit an inventory of goods purchased from him still on hand and at once either paid or credited to the jobber 50 cents per case on all such goods which the jobber had on hand at the time the decline occurred.
    During 1918 and 1919, as well as before and after those years, the petitioner sent circulars and general and special letters to the jobbers, soliciting purchases of evaporated milk and offering its goods for sale to them on the terms and conditions described in the preceding paragraph.
    In all transactions for the sale of evaporated milk made during 1918 and 1919 by the petitioner with jobbers, as above stated, it was agreed by the petitioner and the jobbers (a) that the latter should pay to the petitioner, at the time of the sale to them, an amount equal to the producers’ market price of the goods prevailing at the time of the sale, and (b) that the petitioner should protect the jobbers from a decline in the producers’ market price of evaporated milk so sold and purchased during said year, upon such of said purchases as remained in the jobbers’ hands at the time of the decline, by paying in cash or crediting to the jobbers, whenever the producers’ market price was reduced, an . amount equal to the difference between the amount invoiced by the petitioner to the jobbers at the time the goods were sold to them and the amount of the reduced producers’ market price upon all said goods remaining unsold by and in the hands of the jobbers at the time of said reduction.
    In accordance with such contracts of sale, each jobber to whom goods were sold by the petitioner during 1918 and 1919 was invoiced by the petitioner at the time of sale with an amount equal to the producers’ market price of the goods pervading at that time, subject to the petitioner’s agreement to protect the jobber from a decline in the producers’ market price of evaporated milk so sold and pur-(‘liaised in 1918 and 1919, upon such of said purchases as remained in the jobbers’ hands at the time of the decline, by paying in cash or crediting to the jobbers, whenever the producers’ market price was reduced, an amount equal to the difference between the amount so invoiced by the petitioner to the jobbers at the time the goods were sold to them and the amount of the reduced producers’ market price upon all said goods remaining unsold by and in the hands of the jobbers at the time of said reduction.
    In 1919 and 1920 there occurred declines in the producers’ market price of evaporated milk, and by reason thereof the petitioner, pursuant to its practice and agreement hereinabove described, repaid or credited to jobbers in 1919 the total sum of $42,023.40 in respect of 1918 sales, and in 1920 the total sum of $114,692.68 in respect of 1919 sales, these sums representing the difference between the amount invoiced by the petitioner to the jobbers at the time such goods were sold to them under such agreements in 1918 and 1919, respectively, and the lowest producers’ market price prevailing during the period in each case commencing with the date of said sale to them and ending with the date of the resale of said goods by the jobbers. The petitioner unconditionally transferred the property in said goods to the jobbers in 1918 in pursuance of the contracts of sale entered into in that year, and in 1919 in pursuance of the contracts entered into in that year.
    On or about March 14,1919, the petitioner sent the following notice to its trade relative to protection against declines in the market price in the future.
    All orders placed with this company after March 15, will be accepted with a limited protection against decline on stocks in jobbers hands as follows: In the event of our own declino we will rebate the jobbers only on stocks on hand which have been delivered to the jobber within fifty (50) days prior to the date of the decline, and in no event will the protection be given on more than one carload of a maximum of one thousand (1,000) cases.
    We direct your attention to the enclosed letter of explanation on this subject. The rule above announced will be in effect until you are notified of change or modification.
    The notice was accompanied by a letter relative to the petitioner’s position before the Federal Trade Commission in the latter’s investigation of the above-mentioned practice of guaranteeing prices against declines.
    The price adjustments in 1920 of 1919 sales were accordingly limited to deliveries within fifty days prior to the date of the decline and to a maximum of 1,000 cases on the shelves of each jobber.
    On February 7, 1920, the petitioner announced a price reduction of $1 per case. This decline was due to a reduction announced by a competitor on February 6th. The notice of the price reduction was as follows:

      PRICE REDUCTION HELVETIA MILK CONDENSING CO.
    Highland, III., Fed. 7-1320.
    TO THE JOBBING TRADE :
    We beg to announce that the following prices will go into effect at once:
    Our Pet Brand Evaporated Milk
    BABY SIZE TALL SIZE
    Per case of_6 doz. cans 4 doz. cans
    In carload lots- $3.90 $5. 75
    In less than carlots- 3.95 5. 80
    E. O. B. your station.
    Teems : 30 days net or less 2 per cent in 10 days.
    Quantities may be made up both sizes in order to obtain lowest price.
    Please report all stock of Pet Milk on hand up to 1,000 cases from last car received within fifty days prior to date of this notice. (See Circular letter of March 14, 1919.)
    Any Pet Milk received by you after Dec. 19, 1919, but billed prior to Dec. 19, 1919, invoice must be accompanied by expense bill showing date of arrival to entitle you to decline.
    Thanking you for past favors we are
    Respectfully yours,
    Helvetia Milk Condensing Co.
    BABY SIZE TALL SIZE
    72 cans per case 40 cans per case
    N. B. — Please render invoice covering decline in price on stock on hand. We will remit for same. Please make no deductions for remittances.
    The petitioner had no control over the producers’ market price of evaporated milk at any time during 1919 and 1920. It produced during 1918 and 1919 from 12 to 15 per cent of the evaporated milk manufactured in the United States during those years. At the close of both 1918 and 1919 the market was highly competitive, both producers and jobbers then having large stocks on hand, and the season for greatest production being almost at hand. The petitioner knew at the close, of both 1918 and 1919 that a drop in the market price of the goods was practically certain to come early in 1919 and in 1920, respectively.
    The petitioner kept its books and accounts and made its returns for 1918 and 1919, as well as prior thereto and thereafter, upon the accrual basis.
    The petitioner filed an amended income and profits-tax return for the calendar year 1919, wherein, for the purpose of determining taxable net income, the gross sales, less returns and allowances for 1919, were shown as $16,636,804.64, which amount excluded said sum of $114,692.68 paid to jobbers in 1920 in adjustment of 1919 sales, and from which there was not deducted said sum of $42,023.40 paid to jobbers in 1919 in adjustment of 1918 sales.

      The Commissioner computed the petitioner’s taxable net income for 1919, realized by it from sales of its product in 1919, without subtracting from the amount invoiced by the petitioner to' the jobbers at the time of sale the sum which the petitioner paid in cash or credited to the jobbers in 1920 in respect of 1919 sales as aforesaid, to wit, $114,692.68, but deducting from the amount invoiced by the petitioner to the jobbers at the time of sale the sum which the petitioner paid in cash or credited to the jobbers in 1919 in respect of 1918 sales, to wit, $42,028.40.
   OPINION.

Mobbis:

The petitioner is seeking to reduce its gross sales for 1919 by the amount of certain credits or payments made to jobbers in 1920 in adjustment of 1919 sales. Goods were sold with a guarantee that price declines within fifty days on not more than 1,000 cases, as to stock still on hand, would be paid back or credited to purchasers in the amount of the decline. The question is as to the legal effect of the clause which protects the buyer from declines in the market price.

The petitioner contends that the basis for ascertaining profit from sales for 1919 is the contract price to which it was entitled and which it received, and such contract price was the lowest producers’ market price prevailing prior to resale by the jobbers, and therefore the gross sales for 1919 should include only the difference between the original price and the amount of the credits and payments made thereon in 1920 due to the decline. The Commissioner contends that the amounts credited or refunded in 1920 on sales made in 1919 did not accrue as liabilities until 1920 and are therefore not deductible from the gross income of the earlier year.

The status of the petitioner on December 31, 1919, was that it had executed sales upon which refunds and credits would have to be made should there be a decline in the producers’ market price within fifty days from date of delivery. Market prices were high, and, as subsequently developed, at their peak price. Petitioner was satisfied that declines would occur, but just when it was impossible to state. It did not control the market nor could it foresee what price reductions, if any, would be made by its competitors, which would necessitate a like reduction on its part. Nothing could be more uncertain than the fact that, within a limited period of time, an unknown amount might become due because of the happening of a contingency. If the price went up or remained constant the sale price stood; but if the producers’ market price went down within the fifty days there was a corresponding reduction to the jobbers.

There is no doubt in our minds that, as of December 81,1919, there was no actual liability on the part of petitioner to pay any determined or determinable amount. The liability was contingent. The contingency did not develop until February 7, 1920. As income is reported on an annual basis, there was no incurred liability on December 31, 1919, which could have been accrued.

Counsel for the petitioner has argued at length that the contingency here in question is as to profits and not as to losses. But with this contention we can not agree. At the time of the sale every act necessary to consummate the sale was done. The price was fixed subject to change only in one possible event. Counsel admits that a contingency exists but claims that the contingency exists only as to profits. The logic of the proposition seems to us to point entirely the other way. The sale was made at the market price, with a guarantee that the seller would stand for market declines within a limited period. Any liability of the petitioner in such cases is contingent upon the decline.

Suppose the petitioner had set up a reserve for such contingent liability: the decisions of the Board are uniformly to the effect that such reserves are not deductible, but that the deduction must be taken when the liability is satisfied. This question was dealt with in the Appeal of William J. Ostheimer, 1 B. T. A. 18, where the Board said (p. 21):

The question remains as to whether the taxpayer in this case was entitled to accrue and take as a deduction in the respective periods included in this appeal a liability which it was known would arise when the leased property would be required to be returned to the lessor as good as when received. Since the taxpayer kept his books on the accrual basis, all deductions allowable in determining his net income should be on that basis, including his contractual obligation under the terms of the lease. 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 the future is not a present actual liability, and is not the actual incurring of an expense or liability.

See also Appeal of Richmond Light & Railroad Co., 4 B. T. A. 91; Appeal of Brighton Mills, 1 B. T. A. 392; Appeal of Pan-American Hide Co., 1 B. T. A. 1249; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Appeal of Thatcher Medicine Co., 3 B. T. A. 154; and Appeal of Greenville Coal Co., 3 B. T. A. 1323.

In view of the foregoing, we are of the opinion that the gross sales for 1919 may not be reduced by the amount of credits and payments made to jobbers in 1920 on 1919 sales, and that the credits and payments made in 1919 on 1918 sales are a deduction from the 1919 gross income.

Judgment toill be entered for the Commissioner.


author: MoRRis:

text:
    Appeal of Wheeler Lumber Bridge & Supply Co.
    Docket No. 4824.
    Decided October 29, 1926.
    The Commissioner’s action in reducing the petitioner’s invested capital by $321,300, approved.

      K. N. Parlcmson, Esq., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency of $4,427.55 in income and profits taxes for the fiscal years ended November 30, 1919, and November 30,1920. The error alleged is that the Commissioner reduced invested capital for the years in question by the amount of $321,300, on the ground that there was a reorganization in 1915 such as would affect the invested capital of the company.
    FINDINGS OF FACT.
    The Wheeler Lumber Bridge & Supply Co. was organized under the laws of the State of West Virginia in the year 1908, $471,300 of its capital stock being outstanding on August 31, 1915. It was engaged in buying and selling timber and timber products, lumber, building materials, and fuel. It was also engaged in buying timber, logs, etc., and it owned and operated mills for the purpose of manufacturing lumber.
    In 1912 a fire occurred which practically destroyed the entire mill and yards. The company did not carry sufficient insurance to cover the loss sustained as a result of the fire. Consequently, it was so badly crippled, as a result of the enormous loss, that it was unable to rebuild its plant, nor could it operate on a profitable basis for several years after the fire. Operations, however, were continued until 1915, when the stockholders decided the business could never be operated on a profitable basis unless a change was made. Accordingly, it was decided to reduce the par value of the capital stock of the company by an amount sufficient to wipe out the then existing deficit. It was also decided, at the time of making this change in the capital stock of the company, to obtain a new charter under the laws of the State of Iowa. In 1915 the deficit of the company, according to the books of account, amounted to $321,300. Capital stock was therefore reduced by this amount. Besides reducing its capital stock by an amount equal to the then existing deficit, the company surrendered its West Virginia charter and took out a charter under the laws of the State of Iowa.
    No change was made in the books of account of the company at the time of the reduction of the capital stock and the obtaining of a new charter under the laws of the State of Iowa, nor was there any change in the method of keeping the books. The officers of the company were the same as before. The company continued to do business in the same way as previously, maintaining the same officers and employees. The percentages of stockholdings remained approximately the same.
   OPINION.

MoRRis:

On the facts, as hereinabove set forth, the question is raised whether the Commissioner’s action in reducing the petitioner’s invested capital by $321,300 for the taxable years in question was correct. There is no doubt but that there was a reduction of $321,300 in the actual value of the property turned in to the new corporation. Under section 326 of the Revenue Act of 1918, invested capital includes the actual cash value of tangible property paid in for stock at the time of such payment.

Counsel for the petitioner contends, however, that the invested capital of the new corporation should be the same as that of the old, in that the reorganization was merely one in form, and that the substance of the transaction, rather than the form, should be determinative of the issue. He argues that after the reorganization the net value of the stockholders’ interest was neither more nor less than before, nor, in fact, were the assets of the corporation itself greater or less; that there was no segregation of a loss to the stockholders, and, there being no loss to the stockholders, and the loss not being of such a nature as to reduce invested capital, invested capital stands as before. This argument reduces itself to the proposition that, for the purposes of invested capital, the petitioner should not be considered a new corporation but a continuation of the old. With that conclusion we can not agree. The Supreme Court, in Marr v. United States, 268 U. S. 536, 541, after commenting on the case of Weiss v. Stearn, 265 U. S. 242, said:

In the case at bar, the new corporation is essentially different from the old. A corporation organized under the laws of Delaware does not have the same rights and powers as one organized under the laws of New Jersey. Because, of these inherent differences in rights and powers, both the preferred and the common stock of the old corporation is an essentially different thing from stock of the same general kind in the new.

The petitioner was not only incorporated under the laws of a different State, but there was a change in the amount of its authorized capital stock. In view of the above opinion and section 326 of the Revenue Act of 1918, we are satisfied that the action of the Commissioner in reducing the petitioner’s invested capital by $321,300 was correct.

Judgment will he entered for the Commissioner.


author: Gkeen:

text:
    C. D. Lennox and Sallie B. Lennox, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1737.
    Decided October 30, 1926.

      G. D. Lennox, for the petitioners.

      Robert A. Littleton, Esq., for the respondent.
   Gkeen:

The taxpayers appeal from a deficiency in income tax for the year 1919 in the sum of $341.50. The deficiency arises from the disallowance of certain depreciation on farm improvements claimed by the taxpayers.

FINDINGS OF FACT.

The taxpayers own several large farms in the State of Texas. These farms are divided into smaller tracts and rented to white and colored tenants. Each tenant is provided with a small house, barns, .sheds, and fencing. There are in all some 400 sets of tenant improvements. The houses are cheaply constructed and have a varying life, depending upon the care they receive, the repairs made upon them, the materials used, and the nature of their construction. We are unable to determine from the evidence what the life of any particular building, or the average life of a group of buildings, would be. In addition to the frame buildings and other improvements mentioned, the taxpayers owned and claimed depreciation on one brick-building.

The taxpayers and the Commissioner agree that the total value of the improvements in the year 1919 was $57,910. The Commissioner allowed depreciation upon the brick building at the rate of 3 per cent and upon the frame building and other improvements at the rate of 6 per cent. The taxpayers deducted depreciation at the rate of 10 per cent.

Judgment will be entered for the Commissioner.


author: Gbeen:

text:
    Stillwater Milling Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5687.
    Decided October 30, 1926.
    1. Additional allowance for amortization of war facilities denied for want of proof.
    2. Amount expended by petitioner for repairs in 1920 determined.

      Charles H. Garnett, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 iri the sums of $106.04 and $305.44, respectively.
    The errors alleged are, first, the denial of an allowance for amortization of war facilities as a deduction from income in the year 1919; second, the prorating of the erroneous sum of $2,204.04 as 1918 taxes, instead of the correct sum of $290.40, in determining invested capital for 1919; and third, the disallowance of the deduction, of the sum of $4,575.81 as expense in the year 1920.
    FINDINGS OF FACT.
    In the year 1918 the United States Food Administration required the petitioner to remodel its mill so that it would be suitable for the manufacture or production of whole wheat flour. The change necessitated the installation of certain new machinery and the rearrangement of practically all the old machinery, which was continued in use. The total expenditure for the remodeling of the mill was $6,339.33. The greater part of this expenditure was for labor. In 1919, after the Food Administration had relaxed its requirements, the mill was restored to its prewar condition. This restoration necessitated a rearrangement of practically all of the machinery. The machinery which had been installed in 1918 was retained by -the petitioner and continued in use. There was left over a small amount of lumber and other surplus materials which the petitioner sold for $118.67. Of the amount expended in 1918 in remodeling the mill, the Commissioner allowed as a deduction against the taxpayer’s income for 1918 the sum of $4,058.65.
    The petitioner included in one account all of its expenditures for improvements, replacements and repairs. At the close of the year the various items were examined by the bookkeeper and the president of the corporation and carefully segregated into the various classifications. In 1920 the petitioner expended, in making repairs, the sum of $4,515.81. This amount was claimed by the petitioner as a deduction and denied by the Commissioner upon the ground that it represented a capital expenditure.
    In arriving at the petitioner’s invested capital the Commissioner prorated $2,204.04 as the amount of taxes paid for the year 1918. The amount of tax actually paid was the sum of $290.40.
   OPINION.

Gbeen:

Of the total amount expended by the petitioner in remodeling its plant for the purpose of manufacturing war-time flour, the Commissioner has allowed, as a deduction in 1918, $4,058.65. The petitioner contends that the remainder, less $118.61 received from the sale of lumber and other small items, should be allowed as a deduction in 1919. It appears, however, that when the mill was remodeled in 1918, certain machinery was purchased, some new and some second-hand, and that this machinery was continued in use by the taxpayer after the mill was restored in 1919 to its prewar condition. The cost of this machinery does not appear in the record, and, except for the fact that the major portion of the amount expended in 1918 was due to labor, we have no information as to the proportionate amount representing the cost of the machinery, and we are not in position to say that the petitioner has not been allowed as a deduction the full amount to which it is entitled under the law.

From the record it appears that the petitioner kept its accounts covering expenditures in a rather irregular manner by posting improvements, replacements and repairs in one account until the end of the year, at which time the amounts expended for repairs were segregated from the capital expenditures. At that time the petitioner’s bookkeeper and president checked each item and listed as repairs only such amounts as were expended for the purpose of keeping the plant in running condition. The evidence convinces us that the petitioner expended the sum of $4,515.81 in making repairs in the year 1920, and is entitled to a deduction of that amount.

With reference to the taxes for 1918 prorated in determining the petitioner’s invested capital for 1919, the Commissioner has admitted that the proper amount is $290.40, instead of $2,204.04, as used in his computation.

Judgment will be entered on 15 days' notice, u/nder Rule 50.