text:
    A. H. Fell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2089.
    Promulgated June 9, 1927.
    1. Tbe petitioner acquired a one-fourtb interest in an oil lease. Oil was not found in paying quantities, and tbe petitioner and bis associates, witliin tbe taxable year, withdrew from tbe • premises, removed all of tbeir tools and equipment therefrom, and did not again enter upon tbe land or assert any rights therein. Held, tbe oil lease rights were abandoned in the taxable year.
    2. The tools and equipment were sold and delivery made within tbe year, although tbe price to be paid was not arrived at and payment not made until subsequently. Held,, the enterprise was wound up within the taxable year, and petitioner is entitled to a deductible loss of the amount contributed by him less his share of the salvage.

      John B. King, Esq., and Don T. Haynes, G. P. A., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding to redetermine deficiencies in income tax for the years 1919 to 1921, inclusive, in the amount of $2,396.88. The amount in controversy is $2,216.43, for the year 1919. The question is whether the petitioner sustained a deductible loss in that year.
    FINDINGS OP FACT.
    The petitioner resides in Wichita Falls, Tex.
    In April, 1919, one Harry Katz acquired by assignment an interest in an oil and gas lease, covering 10 acres of land in Wichita County, located in Block 89 of the Red River Valley Lands Subdivision, paying therefor $18,000. The lease was for a term of three years from September 12, 1917, and thereafter so long as oil and gas was found in paying quantities. It provided among other things for a royalty of one-eighth of all oil produced; that the lessee should begin operations within one year, or thereafter pay an annual rental in quarterly installments until operations were commenced; that the lessee had the right to surrender the grant at any time upon payment of $1 and any amounts then due thereunder and to be released from all further obligations, and that a written surrender from the lessee accompanied by $1 would be accepted by the lessor. About a month after Katz acquired the lease the petitioner and two other persons became associated with Katz for the purpose of operating under the lease. They agreed to and each did contribute one-fourth of the amount paid for the lease and also one-fourth of the cost of sinking a well on the 10-acre tract. They further agreed to form a joint stock association with capital stock of $100,000 and to transfer the lease and the completed well to the association for its entire authorized capital stock, which was to be issued to the four of them in equal amounts.
    They drilled to the 2,000-foot level and struck no oil, except that at the level of'1,730 feet they passed through a stratum of oil sand. The organization of the joint stock association had not been completed and the plan to do so was thereupon given up. No property was ever conveyed to it and it had no assets. The four associates then purchased the necessary tools and equipment, plugged the hole back to the 1,730-foot level and attempted to develop oil in paying quantities at that level. This effort was a failure. Thereupon in August, 1919, the petitioner and his associates decided to abandon the project, withdrew from the leased premises, removed therefrom all of their tools, equipment and other property, never again entered upon it, and never paid any further rentals or claimed any rights therein.
    The salvaged property consisting of casing, cables, tools, tubing, pumps, etc., was sold in 1919 to Golconda No. 2 Oil Co. This company was unable to make present payment therefor. The value of the salvage material was subsequently determined to be $3,354.43 and this sum was paid in installments in 1920 and 1921, and petitioner’s share thereof was $838.61.
    The petitioner contributed during 1919 toward the entire enterprise including his share of the cost of the lease, $19,145. While drilling operations were proceeding, he sold a part of his undivided interest of $4,000, leaving his net contribution $15,145.
   OPINION.

Love : The primary question is whether or not there was an abandonment in 1919 by the petitioner and his associates of their interest in the oil lease. If there was an abandonment, was the loss which they sustained in their enterprise realized in 1919, in view of the fact that the amount of salvage was not determined until 1920 and payment therefor not received until 1920 and 1921 ?

. The estate that a lessee acquires under the laws of Texas to secure the production of oil is determinable by abandonment. Abandonment is defined as the surrender or relinquishment of rights of property by a person, and includes both intention to abandon and the act of abandonment. There must be a concurrence of the intention to abandon and an actual relinquishment of the property. The intention to abandon may be shown by circumstantial evidence.

In the case of Wisconsin-Texas Oil Co. v. Clutter, decided by the Court of Civil Appeals, Fifth District of Texas (258 S. W. 265), the question in the case was whether or not the Wisconsin-Texas Oil Co. had abandoned an oil lease, and if so, did such abandonment effect a forfeiture of the lease contract to the extent that the owner of the fee might make a valid subsequent lease contract with another. The trial court instructed the jury “ that abandonment is a question of intention, and the duty rests with you in answering this question to ascertain what the intention of the defendants was in this case * * *. The intention to abandon may be shown by all the facts and circumstances in the case. The intention not to abandon may likewise be determined by all the facts and circumstances in the case.”

The Court of Civil Appeals approved the charge given by the trial court under which the jury found as a fact that the company had abandoned the lease. In discussing the law, the Court of Civil Appeals states the following propositions:

Abandonment is dependent upon the acts of the party; it is a question of intention to be ascertained and determined by the jury as to what that intention was * * *.
That intention to abandon the lease, or what is equivalent thereto, may be established just as any other fact may be, by positive testimony or by circumstantial evidence, such as removal of the machinery, quitting the premises, ceasing to work, and any other circumstance of value tending to show an intention to ultimately relinquish all rights and interest in the leased premises. * * *
*******
The estate that a lessee acquires to secure production of minerals is not in fee nor absolute, because it may be lost, and is determinable by abandonment on the part of the lessee, of mineral development.

While this case was reversed by the Supreme Court of Texas (268 S. W. 921), it was on grounds which do not affect the principle of law stated above.

On general principles and to the same effect are the following Texas cases: Grubb v. McAfee, 109 Tex. 527; 212 S. W. 464; Robinson v. Jacobs, 113 Tex. 231; 254 S. W. 309; Guffey Petroleum Co. v. Jeff Chaison Townsite Co., 48 Tex. Civ. App. 555; 107 S. W. 609. To the same effect are the following cases: In New York, Conkling v. Krandusky, 112 N. Y. S. 13; in West Virginia, Sult v. Hochstetter Oil Co., 63 W. Va. 317; 61 S. E. 307. In the last cited case the court said that whether or not a lease has been terminated by abandonment on the part of the lessee is a question of intention. That the abandonment of a lease, and its termination by such abandonment closes the transaction is so nearly axiomatic, that argument in support of such a proposition would be superfluous.

In the Appeal of A. L. Huey, 4 B. T. A. 370, while the word abandonment was not used, the petitioner was allowed a loss deduction because of the fact that he had abandoned his lease, such abandonment being evidenced by the fact that he delivered the lease contract to another person without compensation.

To our minds the evidence shows beyond doubt an intention on the part of the petitioner and his associates to abandon their rights under the lease. This is the only reasonable interpretation of their conduct in withdrawing from the premises, removing all of their property therefrom and not again entering upon or making any claim thereto. We think these acts also amount to an actual relinquishment of the lease rights.

It is suggested, however, that in view of the fact that the Supreme Court of Texas has held that oil in place, is realty, that an oil lease is a lease of realty, and that mere abandonment may not be treated as a termination, or closing of the deal, in the absence of a sale or other formal disposition of the leasehold. However, the Supreme Court of Texas has held that an oil lease may be abandoned and that such abandonment may effect a forfeiture even as against a subsequent assertion of rights on the part of the lessee. Wisconsin Texas Oil Co. v. Clutter, Grubb v. McAfee, supra. The idea, or doctrine seems to be that notwithstanding the holding that oil in place is realty, that an oil lease is but a permit or license to remove that oil by the payment to the fee owner of certain royalties, no nonforfeitable interest in the fee is granted by such a lease.

The petitioner claims that when the enterprise was abandoned he sustained in 1919 a loss, which is deductible in that year, of $15,145, or of this amount less the salvage subsequently collected. The Revenue Act of 1918, section 214 (a) (4), (5), allows the deduction of “ losses sustained during the taxable year.” The Board has held that a loss is not sustained or realized until the transaction out of which it arises is completed or closed. Appeal of A. J. Schwarzler Co., 3 B. T. A. 535; Appeal of Old ’76 Distilling Co., 3 B. T. A. 1346. The question therefore is whether or not the loss was sustained in 1919. The amount to be paid by the purchaser of the salvaged equipment was not determined in dollars and cents until the following year and payment was not received until subsequently. However, the equipment was delivered in 1919 and the property therein was then transferred to the purchaser. It then became an executed sale and the obligation of the purchaser to pay arose. If no price is agreed upon, the buyer must pay a reasonable price. Williston on Sales, 2d ed., sec. 171. The amount was not subject to fluctuations in market price; the time as of which it was to be determined was fixed by the delivery of the goods. These considerations lead to the conclusion that the enterprise was wound up and closed within the taxable year, as all of the factors were then in existence which would enable the amount of loss to be ascertained. The loss sustained by petitioner was $15,145, less his share of the salvage, or $14,306.39.

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

SteRNHageN dissents as to the loss claimed upon the sale of the equipment.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Louis Sakowitz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10807.
    Promulgated June 10, 1927.

      Lawrence A. Baker, Esq., John V. Goffield, Esq., and Leroy Sanders, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
   Smith :

This proceeding is for the redetermination of a deficiency in income tax for the year 1920 in the amount of $580.67. It is alleged that the Commissioner committed error in including in the petitioner’s income for 1920 the amount of $6,000 representing a bonus credited to him in 1920 upon the books of a corporation of which he was an officer and stockholder but not actually received by him during the taxable year.

FINDINGS OF FACT.

The petitioner is an individual residing at Indianapolis, Ind. During the year 1920 he was secretary and treasurer of the General Engineering Co., a corporation formed during the year 1919 and engaged during the year 1920 in dismantling an Army camp near Fort Worth, Tex. He was employed by the company upon the basis of a yearly salary of $6,000 and there was a further agreement that he would receive a yearly bonus in proportion to the extent to which his services contributed to the success of the business. The corporation kept its books upon the basis of a fiscal year ending June 30. At the close of the fiscal year ended June 30, 1920, it credited upon its books to the personal account of the petitioner a bonus in the amount of $6,000. No part of the bonus was paid to the petitioner during the calendar year 1920, nor was the petitioner privileged to draw upon the company for any part thereof. The petitioner held 2 shares of the 1,000 shares of stock of the company and his two brothers-in-law, Isaac Marks and H. Benjamin Marks, each held 498 shares. The remaining 2 shares were not issued.

The petitioner kept no personal books of account. He made up his income-tax return for the year 1920 upon the cash receipts and disbursements basis and did not report any income in respect of the bonus of $6,000 standing to his credit upon the books of the General Engineering Go. The Commissioner in computing the petitioner’s tax liability for the year 1920 has included the $6,000 in taxable income. This action was in error.

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


author: Smith:

text:
    Wagner-Taylor-Edson Co. Inc. (now Wagner-Taylor Co.), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7079.
    Promulgated June 10, 1927.
    The petitioner held to be not entitled to personal service classification for the year 1918.

      J. Robert Sherrod, Esq., and Ward Loveless, 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 1918 in the amount of $14,493.70. The error alleged on the part of the Commissioner is that he failed to classify the petitioner as a personal service corporation for the year 1918.
    FINDINGS OF FACT.
    1. The Wagner-Taylor-Edson Co. was incorporated January 7, 1918, and took over the business, as of January 1, 1918, of two companies engaged in the insurance business. One was a corporation which had theretofore conducted its business under the name of Wagner-Taylor Co. Such company was organized about 1907 and was the successor to a theretofore existing partnership which had been in business from about 1865. The insurance business conducted by both the partnership and the corporation had been profitable. The other business taken over had theretofore been conducted under the name of Edson & Co.
    2. The current assets and liabilities of the two preexisting businesses were retained and liquidated by them and only the so-called “ good will ” of the two businesses was transferred to the petitioner upon its incorporation. The petitioner was organized with a paid-up capital stock of $25,000 par of 7 per cent cumulative preferred stock and $50,000 par of common stock divided into shares of $100 each. These shares of stock were issued to the stockholders of the two businesses which had been combined and were held during the year 1918 as follows:

    8. Each and all of the above stockholders devoted all of their time to the active conduct of the petitioner’s business. They had an understanding that no stockholder should engage in any other business, but each should devote his entire energies to the business of the petitioner, and this agreement was observed throughout the year 1918.

      4.Salaries were paid to the stockholder officers for the year 1918 as follows:

    Louis M. Wagner and John C. Taylor devoted all their time to the supervision of the business and to the soliciting of business. Harry A. Randall was in charge of the records of the corporation. Robert P. Bishop was in charge of the agency department and solicited business principally from other brokers. Henry Edson specialized as an expert on marine insurance, and Thomas S. Strobhar had charge of the engineering work, which consisted of estimating risks and in devising ways and means of lessening them and thereby lowering the premium rates. No persons were employed as solicitors of business.
    5. No cash or other tangible property was paid in at incorporation. The capital stock was issued for the good will and agency contracts of Wagner-Taylor Co. and Edson & Co. Upon incorporation, Louis M. Wagner and John C. Taylor each loaned the corporation $5,000 as a working fund. These amounts were credited to their personal accounts. During the year the petitioner expended $12,500 for furniture and fixtures.
    No money was borrowed from banks during the year with the exception of $35,000 borrowed on December 24, 1918. This amount was borrowed for a period of 30 days, and was for the purpose of enabling the petitioner to meet its commitments. Under date of December 18, 1918, the Board of Directors of the corporation passed a resolution directing the treasurer to call in $2,500 par value of preferred stock and to pay therefor $1,350 per share, or a total of $33,750. On the same date, the Board of Directors declared a dividend of 40 per cent on the common stock. They also directed the treasurer to distribute bonuses to the employees, other than stockholders, in the total amount of $4,292.75.
    6. During the year 1918 the petitioner conducted a well systematized insurance office. It had in its employ at December 31, 1918, in addition to its 6 stockholders, 21 other employees. The business was divided into a number of departments, among which were the automobile department, the marine department, the fire agency department and the fire direct department. Its principal office was located in Philadelphia, but it had a branch office in New York City. One of the stockholders also conducted an insurance office at Haddonfield, N. J., all of the business of which was turned over to the Philadelphia office.
    7. The ordinary business of insurance agencies in Philadelphia and New York City is divided into two classes, brokerage and agency. A broker is one who obtains insurance business from assureds and places it through agents of insurance companies. An agent is a representative of the insurance company in a particular locality and his interest is in obtaining business both from the public and from other brokers. The petitioner was both a broker and an agent. It represented fourteen or fifteen different companies as agent in the city of Philadelphia. Its brokerage commission was at higher rates than its commission on the agency business. In any case where the business was obtained from another broker the broker got his commission and the petitioner received only what is called an overwriting commission.
    8. In obtaining business from the public the petitioner advanced as an inducement the superiority of the services rendered by it in obtaining the necessary coverage. Such services consisted of (a) drafting the written-in portion of the policy so as not to run counter to the rules and exceptions of the insurance companies, (b) classifying the risks so as to obtain the lowest rates, (c) rendering engineering services in suggesting improvements or changes in the assured’s property which would lower the risks and, therefore, lower the premiums, (d) obtaining prompt and fair settlement in case of loss, and (e) advising the insured when the insurance was about to expire.
    9. Personal acquaintance and confidence in insurance brokers are important factors in getting and holding business. The broker is expected to work for the interest of the assured. If the service which is rendered by the insurance broker or agent is satisfactory, the business man will continue to insure through such broker or agent. Constant personal attention is necessary to retain business. The stockholders of the petitioner made it a point to fraternize with business men and constantly to maintain friendly relations with them. They made it a point to visit their clients frequently throughout the year. In this manner they were enabled not only to acquire new clients, but to retain their old clients. Advertising was not indulged in by the petitioner because it was found to be unprofitable.
    10. In soliciting insurance business petitioner’s representatives made no promises to extend credit to the assured or broker beyond the time allowed by insurance companies for the payment of premiums on insurance, nor did they encounter any competition from other agents or brokers where such competitors were offering credit beyond the period allowed by the insurance companies.

      11. The assureds relied primarily on the individual stockholders of the petitioner corporation to take care of the business entrusted to the petitioner. They did not inquire as to, or specify which insurance company the business was to be placed with, and after the business was placed any communications in regard thereto were ad- ■ dressed to the individual who secured the business and not to the petitioner company. Much of the property insured by the petitioner during the year 1918 was outside of the City of Philadelphia. It is customary in Philadelphia for business men to have one insurance agent handle all his insurance business, whether or not the property or risk is located in Philadelphia.
    12. When the petitioner received a large risk it was customary for it to place the risk among the several companies which it represented as agent. If the entire risk could not be placed with such companies the balance of the risk was placed with other brokers or agents. In the placing of such excess risks with other agents, it was customary to place the risk with agents who would also place excess risks with the petitioner.
    13. During the year 1918 the petitioner had no income from Government contracts of any kind, or from trading in any commodity as a principal. Its business was solely the obtaining and placing of insurance and the net premiums on such insurance business amounted to $1,702,420.36, upon which the petitioner received commissions of $184,371.45, or an average commission of approximately 11 per cent of the premiums. Its only other income was interest in the amount of $572.37.
    14. Of the $184,371.45 commissions on business written in the year 1918, $78,041.79 represented the petitioner’s commissions on business placed by the assureds directly with petitioner, and $106,329.66 represented the petitioner’s commissions upon business coming to it through other brokers. Upon such business commissions were allowed to other brokers in the following departments of the petitioner’s business as follows:
    Auto department_$25, 850. 74
    Fire department- 31, 001. 23
    Fire agency department- 123, 525. 39
    Marine department- 23, 890. 63 .
    New York office_ 6, 790. 85
    Total- 211, 058. 84
    15.The balance sheet submitted with petitioner’s return for 1918 is as follows:

      Statement of assets and, liabilities as of December 31, 1918.

    ASSETS
    Cash_ $13,037.98
    Trade accounts and notes receivable. 265, 495. 74
    Investments:
    Third Liberty loan 4%-- 2, 600. 00
    Fourth Liberty loan- 5, 500. 00
    8,000. 00
    War Savings Stamps. 709. 61
    Loans and advances:
    To others_ 4, 857. 08
    Deferred charges. 449.68
    Fixed assets:
    Office furniture— 12, 500.00
    Good will_ 75, 000. 00
    380, 050. 09
    LIABILITIES
    Notes payable to others_ 35, 000.00
    Accounts payable:
    Trade- 207,250. 42
    Others- 7, 302.55
    Accrued expenses:
    Commission due subagents (estimated)_ 5,000.00
    Contingencies_ 3, 667. 76
    Capital stock outstanding_ 75, 000.00
    Surplus- 46, 829. 36
    380, 050.09
    16. Whenever a policy of insurance was written by the petitioner, the boobs of account showed a- charge to the assured of the total amount of premium and a credit to the insurance company of the amount of the premium payable to it after the deduction of petitioner’s commission; the petitioner’s commission was credited to a commission account. The petitioner had 60 days from the date of the writing of the policy within which to make remittance to the insurance company. The assured was charged with the commission as of the date of the policy and in a great majority of the cases the assured paid the amount of the premium before remittance had to be made by the petitioner to the insurance company'. Remittances were made to the insurance company, however, without regard to whether the assured had paid the petitioner. The accounts repeivable from brokers as of December 31, 1918, amounted to $122,672.54 and the accounts receivable from the assureds amounted to $140,329.26. The total accounts receivable on December 31, 1918, was $263,001.80, and the notes receivable on the same date were $2,493.04. The amount owed to insurance companies as of the close of the year was $207,250.42. This amount was after the deduction of petitioner’s commission.
    17. From 80 per cent to 90 per cent of the premiums received by the petitioner during the year 1918 were premiums on renewal business. The petitioner kept careful watch of expirations of policies and within 30 days, or thereabouts, of the expiration of the policy the assured was advised of the expiration of his policy and the renewal of the policy was solicited by letter or a renewal policy was sent to the assured. This work was entrusted to clerks. If the assured refused to authorize the renewal of the policy and the policy was of any consequence one of the officers endeavored to obtain a renewal of it.
    18. In its employ the petitioner had for a part of the year 1918 an expert who handled workmen’s compensation insurance. It also had in its employ certain persons who acted as adjusters upon claims for loss under policies which it had written.
    19. Petitioner filed a personal service corporation tax return for the year 1918. Personal service classification was denied by the Commissioner and tax liability was determined under section 328 of the Revenue Act of 1918.
   OPINION.

Smith:

Section 200 of the Revenue Act of 1918, so far as is material to the disposition of the case above, defines personal service corporation as follows:

The term “ personal service corporation ” means 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; * * *.

In claiming the benefit of an exception to the general method and extent of taxing corporations, the burden is upon the petitioner to show that it clearly comes within the term of such exception. Hubbard-Ragsdale Co. v. Dean, 15 Fed. (2d) 410. We are of the opinion that the petitioner has not satisfied the first requirement of a personal service corporation, namely, that its income is to be “ ascribed primarily to the activities of the principal owners or stockholders.” The petitioner was the successor of two insurance agency businesses which had done a profitable business. The capital stock of the petitioner was all issued for such good will. We are of opinion that much of the income of the petitioner was attributable to that good will. The major portion of the income of the petitioner was from renewals of policies written prior to 1918. Witnesses for the petitioner testified that they seldom lost clients. It appears that the stockholders of the petitioner watched the renewal business, but the evidence does not show that the renewal business was ascribable primarily to their activities. Furthermore, it appears that the major portion of the income of the petitioner was from business which came to it through other brokers. More than one-half of its commissions came from that source. Of course, it was necessary that the stockholder officers of the petitioner be on friendly relations with those other brokers, but it does not appear that personal services were primarily responsible for this business. See Appeals of Joseph Emsheimer Insurance Agency, 1 B. T. A., 649; W. J. Perry Corporation., 1 B. T. A. 788; Thos. J. Baker, Jr., & Co., 2 B. T. A. 13; Harry S. Kaufman, Ltd., 2 B. T. A. 177; Hurst, Anthony & Watkins, 3 B. T. A. 53; Houseal-Simons Agency, Inc., 3 B. T. A. 370; Conklin-Zonne-Harrison Agency, Inc., 3 B. T. A. 544.

We are not satisfied by the evidence that capital was not a material income-producing factor in earning the income For the year 1918 the petitioner had a net income, after the deduction of officers’ salaries in the amount of $49,000, of $46,829.36. It was testified that the average commission earned by the petitioner upon its premium income for 1918 was approximately 11 per cent. If this held true with respect to the uncollected premiums at December 31, 1918, the commission upon those premiums was $29,204.53. This amount deducted from the total trade accounts receivable at the close of the year would leave $236,291.21 as the portion of the accounts receivable payable to the insurance companies in respect of those premiums. The amount owed to the insurance companies at the close of the year was, however, only $207,250.42, which would indicate that the petitioner was financing its clients to the extent of $29,040.79 at the close of the year. It is furthermore to be noted that although the petitioner had a large net income for the year 1918, nevertheless it found it necessary to borrow $35,000 at the close of 1918 in order to finance its commitments as of the close of the year. The cash on hand at December 31, 1918, was only $13,037.98. We are of the opinion that it has not been shown that capital was not a material income-producing factor for the year 1918.

Judgment will he entered for the respondent.

Philmi’S and Trammell concur in the result.


text:
    Estate of Jacob Voelbel, Walter W. Voelbel, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6009.
    Promulgated June 10, 1927.
    1. Reasonable attorneys’ feos agreed upon between an executor and attorneys, are deductible items from tbe gross estate, although not paid or settled by the probate court.
    2. In the absence of evidence as to whether or not the will provides for specific bequests, or as to other conditions of the will, the Board is unable to determine whether the Commissioner committed error in disallowing' executors’ commissions.

      Rutherford S. Moorhead, Esq., for the petitioner.

      J. F. Greaney, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in estate tax on the estate of Jacob Voelbel, in the amount of $476.52. The items in controversy were the values of real estate and amounts deducted as attorneys’ fees and executors’ commissions. The contest in regard to the value of the real estate was abandoned at the hearing.
    FINDINGS OF FACT.
    Jacob Voelbel died November 20, 1928, testate. His will was probated in the Surrogate’s Court, Kings County, New York, December 28, 1923.
    Rutherford S. Moorhead is, and was in December, 1923, attorney for the estate of Jacob Voelbel. In the early part of December, 1923, he agreed with Walter Voelbel to serve as such attorney in the administration proceedings incident to that estate for a fee of not less than $7,500, nor more than $10,000. Walter Voelbel agreed to pay him $7,500 and in the event, after services were rendered, he, Moorhead, thought he should receive more, he was to present his claim for the excess to the surrogate for approval or disapproval. The gross value of the estate was $293,383.03, of which $4,293.49 was personal property and the balance was real estate. The real estate was heavily encumbered by mortgages. Among the deductions claimed were—
    Undertaker’s bill and funeral expenses_ $347. 55
    Administration expenses- 2, 002. 50
    Debts due by Jacob Voelbel at date of deatb, exclusive of mortgages. 9, 980.46
    Taxes due on real estate- 8, 063. 09
    Debts secured by mortgages on real estate at date of death_ 118,385. 00
    The administration of the estate has not been closed, hence no final report has been filed and the claims for attorneys’ fees and exec-«tors’ commissions have not been acted on by the court and no part of either has been paid.
   OPINION.

Love : Section 403 of the Revenue Act of 1921 provides:

That for the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * *■ *.

Section 222 of the New York Surrogate’s Court Act provides:

An executor, administrator, guardian or testamentary trustee may pay from the funds or estate in his hands from time to time, as shall be necessary, his legal and proper expenses of administration necessarily incurred by him, including the reasonable expense of obtaining and continuing his bond and the reasonable counsel fees necessarily incurred in the administration of the estate. Such expenses and disbursements shall be set forth in his account when filed, and settled by the surrogate.

Section 281 of the same act provides:

Upon the disposition of real property of a decedent, as prescribed in this act, the executor or administrator disposing of the property, must be allowed by the surrogate out of the proceeds of the sale brought into court, his commissions and expenses; and such further sum as the surrogate thinks reasonable, for the necessary services of his attorney and counsel therein.

The pertinent parts of section 285 of the same act provide that executors shall be paid commissions on money received and paid out by them, as follows:

5 per cent on first $2,000.
2 y2 per cent on next $20,000. iy> per cent on next $28,000.
2 per cent on all above $50,000.
The value of any real or personal property, to be determined in such manner as the surrogate may direct, and the increment thereof, received, distributed or delivered shall be considered as money in making the computation of commissions. But this shall not apply in case of a specific legacy or devise.
❖ # * * sis * *
If the gross value of the principal of the estate or fund accounted for amounts to $100,000 or more, each executor, administrator or guardian or testamentary trustee is entitled to full compensation on principal and income allowed herein to a sole executor * * *.

The petitioner claims the right to deduct from the gross estate, besides other administration expenses, not in controversy, the $7,500 attorneys’ fees and $11,637.38 as executors’ commissions, which amount represents double the statutory commissions allowed a sole executor. He claims the right to those deductions regardless of the fact that they have not been paid, and regardless of the fact that they have not been presented to the surrogate for approval, and invokes the decision of the Board in the Appeal of Samuel E. A. Stern et al., Executors, 2 B. T. A. 102.

The Commissioner urges that administration expenses, such as those under consideration, being subject to the orders of the court, and not having been paid, or “ settled ” by the court, do not come within the purview of section 403, supra, as expenses that “ are allowed by the laws of the jurisdiction, * * * under which the estate is being administered.” Upon that point we believe the Stern case is controlling, and that regardless of the fact that the claims have not been paid, or passed upon by the court, they are deductible in an otherwise proper situation. In James D. Bronson et al., Trustees, 7 B. T. A. 127, the Board held that reasonable trustees’ fees and attorneys’ fees paid, where there was no probate of the will, were proper deductions in determining the value of the net estate for the purpose of the estate tax.

In the instant case the attorneys’ fees had been agreed upon and appear to be reasonable. The rates of commissions to executors are fixed by statute, and when the services have been performed no discretion is vested in the court to vary such rates, or refuse to allow them.

However, the Commissioner raises another question in his brief. The will was not offered in evidence. There is no evidence as to who the executors are, other than that there is a reference made to Walter Voelbel as one of the executors. Whether there was another, and if so, who, is not disclosed. The appeal to the Board is by “ Walter W. Voelbel, one of the executors in the above entitled estate.” The record does not disclose whether or not there were any specific bequests. The New York statutes exclude specific bequests in computing the value of the gross estate as a basis for computing executors’ commissions. Moreover, unless for special reasons, such as the payment of debts, real estate does not form a part of an estate for administration, but goes direct to the devisee named, if any, or to the heir, charged with the indebtedness with which it may be encumbered.

We have no means of determining from the record in this case whether there were specific bequests, and if so, how many, of what value, hence no way of determining the value of the gross estate upon which commissions may be computed.

This last point does not apply to the attorneys’ fees, and under the decision in the Stern case, supra, we hold such fees to be a deductible expense.

By reason of the fact that the evidence is insufficient to enable us to find that the petitioner has correctly computed the commissions, we sustain the Commissioner on that point.

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


author: Tktjssell :

text:
    Des Moines Improvement Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8573.
    Promulgated June 10, 1927.
    INCOME. — Petitioner's contracts for the construction of three apartment buildings provided as a part of the consideration that it should execute and deliver to the contractor three second mortgages of $15,000 each, upon the completion and acceptance of the buildings. Prior to such completion and acceptance, the contractor needed cash and petitioner executed the three second mortgages to be used as collateral. Petitioner and the contractor negotiated as to payment of cash in lieu of the said mortgages, and upon the completion and acceptance of the buildings the contractor accepted $33,200 cash in final settlement in lieu of the three mortgages totaling $45,000. Eelci, the difference, $11,800, was not gain or income, but merely a reduction in the contract price or cost of the buildings to petitioner.

      R. F. Johnson, Fsg., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    This proceeding is for a redetermination of a deficiency in income tax for the year 1923. The Commissioner’s deficiency letter, dated September 22, 1925, asserts deficiencies in income tax in the amounts of $15490 for the calendar year 1920 and $958.33 for the calendar year 1923. Only the year 1923 is involved in this proceeding.
    The petitioner alleges that the Commissioner erred in adding to its net income for the year 1923, the amount of $11,800 as “ discount on purchase of second mortgage.”
    findings of fact.
    The petitioner is an Iowa corporation with its principal place of business at Des Moines.

      On June- 22,1922, the petitioner entered into three separate written contracts with the Fleisher Construction Co. (hereinafter referred to as the contractor), each contract providing for the construction of an apartment house in the City of Des Moines, Iowa. The provisions of each of the three contracts were identical, except as to the description of the lands upon which the apartment buildings were to be erected, and among other provisions not material in this proceeding, provided that petitioner pay the contractor $125,000; $10,000 cash, a first mortgage of $100,000 and “ upon the completion and acceptance of the building the owner will make to the contractor a second mortgage secured by the leasehold and the rents in the sum of $15,000.”
    The contractor sold each of the first mortgages in the form of a bond issue of $100,000 to the Iowa Loan and Trust Co., from which the money was drawn as the construction progressed on the three buildings. When the buildings were nearly completed the contractor came to petitioner and asked that the three second mortgages be executed and delivered at that time to enable the contractor to use the said mortgages as collateral to borrow money to finish the buildings. The petitioner at first refused because the buildings had not been completed and accepted as provided by the contracts and at that time the petitioner and the contractor discussed a cash payment by petitioner in lieu of the second mortgages. However, the contractor needed cash immediately to pay its pay roll and current bills, so petitioner executed and delivered on or about March 8, 1923, the three second mortgages of $15,000 each to be used as collateral, although the buildings had not been completed and accepted at that time. The contractor endeavored to sell the three second mortgages, but could find no market for them. The petitioner and the contractor continued their negotiations as to a cash payment in lieu of the mortgages, considering deductions, overcharges, method of payment, etc., and on or about June 8,1923, when the three buildings, although not completely finished, were accepted by petitioner with the contractor’s promise to finish a few small jobs, they agreed orally to modify their written contracts, the contractor was paid and accepted $33,200 cash in final settlement and the three second mortgages totaling $45,000 were returned to the petitioner and canceled.
    On its books of account the petitioner treated the second mortgage transactions here involved differently from any prior mortgage account. When the three second mortgages were issued, notations were entered upon the books under the heading “ Memorandum Account ” and were not reflected in the property accounts nor in the monthly trial balances, for the transaction had not been closed, the buildings had not been completed and accepted. Upon the acceptance of the buildings and the final settlement and payment under the petitioner’s and the contractor’s contracts as' modified by agreement, the petitioner entered the $33,200 upon its books as a part of the cost of the buildings in the same manner as all other previous cash payments had been entered.
    The respondent treated the transactions here involved as a purchase for $33,200 by the petitioner of its three second mortgages or obligations totaling $45,000 at a discount of $11,800 and added the latter amount to petitioner’s income for the year 1923.
   OPINION.

Tktjssell :

The respondent has taken the position that petitioner in March, 1923, incurred an indebtedness of $45,000 and that when it satisfied it by the payment of $33,200 in June, 1923, there resulted an income to petitioner in the amount of $11,800. The petitioner’s position is that the transaction resulted in no taxable gain or income, but merely reduced the cost of the buildings to petitioner and that the whole transaction was not completed until the acceptance of the buildings by petitioner and the final cash payment was made.

At the hearing on this proceeding respondent laid considerable stress upon the bookkeeping methods of petitioner, and placed three revenue agents on the witness stand, but we are unable to perceive the materiality of mere booking entries in the case at bar.

We feel that it is unnecessary to recite any of the facts in our apinion for they are clear and concise as set out in the findings of fact. The transaction here involved, was one transaction which was not completed until the buildings were completed and accepted by petitioner as provided by the executory contracts and prior to such time the parties by agreement, modified their contracts by reducing the amount petitioner had to pay for the buildings. Instead of paying $45,000 plus interest over a term of years, the petitioner reduced the total cost of its buildings by paying $33,200 cash in June, 1923, and such transaction resulted in no taxable gain nor income to petitioner.

The deficiency, if any, should he recomputed m accordance with the above fundings of fact a/nd opinion. Order of redetermination will be entered on 15 days' notice, pu/rsuazni to Rule 50, a/nd judgment will be entered accordingly.


author: Tktjssell:

text:
    Lynchburg Colliery Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3998.
    Promulgated June 14, 1927.
    Deduction foe loss. — The taxpayer breaehe'd a contract in 1917; settled its liability therefor in 1918; kept its books on the accrual basis; did not admit its liability to the injured party during 1917; did not accrue on its books any reserve to meet the damages during 1917, but did charge off the loss in 1918 when paid and took a deduction therefor in its 1918 tax return. Held, return was made in accordance with taxpayer’s method of accounting as required by section 212(b) of the Revenue Act of 1918 and it can not now claim the loss as a deduction for 1917.

      A. T. Henderson, G. P. A., for the petitioner.

      Shelby S. Faullcner, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in the amount of $18,501.27 in income and profits taxes for the calendar year 1917. The deficiency letter appealed from determined deficiencies for the years 1917 and 1918, but this proceeding involves only the year 1917.
    The petitioner alleges that the Commissioner erred in refusing to permit the petitioner to take as a deduction in the year 1917 a loss sustained by reason of the breaching of a contract upon the part of the petitioner.
    FINDINGS OF FACT.
    The Lynchburg Colliery Co. is a West Virginia corporation organized in 1902 and engaged in the business of mining and selling bituminous coal. Its mines and general offices are located at Vanetta, W. Va. J. T. Noell, Jr., the president, resides at Lynchburg, Va., and T. A. Deitz, treasurer and general manager, resides at Charleston, W. Va.
    The officers of the petitioner are also the president and manager, respectively, of the Deitz Colliery Co., the mines of which are located about two miles from those of the petitioner.
    In June, 1916, J. T. Noell, Jr., as president of the petitioner and of the Deitz Colliery Co., entered into a contract with the West Virginia Coal Co. of Richmond, Va., for the sale of 50,000 tons of coal at a rate of 90 cents per ton for 25,000 tons and 95 cents per ton for 25,000 tons. The petitioner and the Deitz Colliery Co. were to ship 25,000 tons each, shipments to commence on July 1, 1916, and to continue in approximately equal monthly quantities until June 30, 1917.

      In July, 1916, a second contract between the parties was entered into which contract called for the shipment of 30,000 tons of coal (the petitioner and the Deitz Colliery Co. to ship 15,000 tons each) at a rate of $1.05 per ton. Shipments under the terms of this contract were to commence on August 1, 1916, and continue in approximately equal monthly quantities until August 1, 1917. The shipments under .the second contract were to be made immediately after the shipments under the first contract.
    Under the terms of both of the said contracts, the West Virginia Coal Co. was to make payment for the coal shipped during the month succeeding the month of shipment. Neither of the two contracts made any provision for strikes, lockouts, labor difficulties or car shortages.
    Monthly shipments on the two contracts were made regularly until December, 1916, when a fire in the mine of the Deitz Colliery Co. caused that company to cease shipments altogether. The petitioner continued monthly shipments of coal from January, 1917, to and including June, 1917, but in smaller quantities than called for by the contracts due to its difficulty in securing labor and cars. During this period from January to June, 1917, the West Virginia Coal Co. continually demanded more coal from the petitioner, threatened suit from time to -time and withheld the payment of money due the petitioner for coal already shipped during 1917. In June, 1917-, J. T. Noell, Jr., went to Richmond, Va., and had a conference with the officers of the West Virginia Coal Co. and endeavored to secure a guarantee of the payment for all coal shipped, but that company refused to give the guarantee. Noell desired to ship as much coal as the petitioner could to the end of the contract and receive a guarantee of payment therefor. He did not desire to be the plaintiff in an action to recover the money due the petitioner, but would rather have been the defendant, if the West Virginia Coal Co. desired to bring action on account of the undelivered coal.
    On June 28, 1917, two days after the above-mentioned conference, Noell sent the following telegram to the West Virginia Coal Co.:
    Having had no definite answer to my letter June seventh or to my personal request of day before yesterday, I have wired Deitz today to cease shipping you any coal.
    On the same day Noell wired Deitz as follows:
    Cease shipping coal to West Virginia Coal Company. Am writing.
    At the time the petitioner stopped shipping coal to the West Virginia Coal Co. there were still 13,404 tons of coal due the latter company under the contracts, which required the petitioner to ship 40,000 tons, but the petitioner did not ship any more coal at any subsequent date under those contracts.

      Noell testified that he knew that the petitioner was liable on the contracts which it breached, but never iormed an opinion as to the extent of its liability because of the conditions surrounding the breach and because he thought the matter could be compromised. During July and October, 1917, T. A. Deitz, treasurer and general manager of the petitioner, had a conference with E. S. Simpson, president of the West Virginia Coal Co., and tried to effect a settlement, but made no definite offers. On one occasion Simpson offered to take 17,700 tons of coal as settlement and on another occasion Deitz offered Simpson $5,000 but merely to feel him out. No basis for compromise was effected during 1917.
    In August, 1917, the West Virginia Coal Co. brought attachment proceedings in Chancery Court, Richmond, Va., against the petitioner, the Deitz Colliery Co., and several of the petitioner’s debtors located in that city. • In the suit the West Virginia Coal Co. claimed damages in the sum of $59,000 against each of the two companies, the petitioner and the Deitz Colliery Co. A motion to dismiss this suit was filed by the two defendant companies on the ground that the attachment was invalid. The defendant’s answer was prepared and depositions of the plaintiff’s witnesses were taken, but the case never came to trial.
    During the fall of 1917, Deitz wrote Noell many letters urging him to compromise and in December, 1917, Deitz wrote Noell that he thought the West Virginia Coal Co. would get judgment if the case was tried, but that he also thought they could settle for about $20,000. Also, Deitz suggested to Noell that the liability should be compromised and settled prior to the close of the year 1917, so that a deduction for the amount of the loss could be taken for that year. However, it appears that Noell had hopes of having the suit dismissed. No evidence has been submitted to the effect that the petitioner actually admitted liability to the West Virginia Coal Co. during 1917.
    Some time during 1918 the attorney for the petitioner and the Deitz Colliery Co. convinced the West Virginia Coal Co. that the Deitz Colliery Co. was not liable for the breach of its contracts because the fire in its mines rendered it impossible to make delivery of coal and, also, that the petitioner was not liable for the Deitz Colliery Co.’s breach of contract as had been claimed by the West Virginia Coal Co. In November, 1918, the petitioner’s liability, for its failure to ship the full 40,000 tons of coal required under the two contracts, was compromised for $25,000, which amount the petitioner paid by check; the suits were dismissed, and the West Virginia Coal Co. paid the petitioner by check $2,190.77, which amount stood on the petitioner’s books on December 31, 1917, for coal shipped to the West Yirginia Coal Co. under the contracts but not paid for.
    The petitioner kept its books and made its tax returns on the accrual basis. In the year 1917, the petitioner did not accrue on its books any approximately accurate estimate of its liability as a reserve to meet the damages, but it did charge off $2,190.77, the amount-owed it by the West Virginia Coal Co. for coal shipped, and in its 1917 tax return deducted the said amount as a bad debt. In 1918 the petitioner entered upon its books as a loss the difference between $2,190.77 and the $25,000 paid in 1918 in settlement of its liability under the breached contracts and deducted that amount as a loss in its 1918 tax return.
    The Commissioner disallowed the deduction of $2,190.77 as a bad debt deduction for 1917 and allowed the petitioner a deduction of the full $25,000 as a loss for the year 1918. No amended returns for the years 1917 and 1918 have been filed.
   OPINION.

Tktjssell:

Under the facts set forth in this proceeding, the petitioner claims it is entitled to a deduction of $25,000 as a loss for the year 1917 and the Commissioner’s position is that the said deduction has been properly allowed by him for the year 1918.

While the liability to respond in damages for the breach of two coal contracts may have attached during the year 1917, the petitioner corporation did not appear to recognize such liability in any amount. It did not set up upon its books any liability on account of such breach of contracts or recognize the same in any way in its accounting system until the year 1918, when it settled its liability by the payment of the sum of $25,000. At that time it entered the amount so paid as an expense for the year 1918.

In the audit of this petitioner’s income and profits-tax returns for the years 1917 and 1918, the respondent has allowed the deduction of the $25,000 as and when claimed by the petitioner in accordance with its books of account. The petitioner now claims a deduction for the year 1917 while still retaining and holding the benefit of the same deduction for the year 1918. The $2,190.77 originally claimed by petitioner as a bad debt for the year 1917 was not ascertained to be worthless during that year and was properly restored to gross income for the year 1917 and the full amount of $25,000 appears to have been allowed for the year 1918.

The deficiency for the year 1917 is $18,601.27. Judgment will be entered accordingly.


author: Littleton:

text:
    Chas. N. Manning, Louis des Cognets, Sr., and Geo. K. Graves, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8111-8113.
    Promulgated June 14, 1927.
    The unextinguished cost of buildings removed in order to obtain a 99-year lease upon the land represented the cost to tbe lessor of suck lease and should be exhausted over the term of the lease.

      Jesse I. Miller, Esq., and W. A. Hifner, Jr., G. P. A., for the petitioners.

      J. E. Marshall, Esq., for the respondent.
    The Commissioner determined deficiencies for the year 1921 of $2,229.45 against Chas. N. Manning, $1,971.69 against Louis des Cognets, Sr., and $1,527.08 against Geo. K. Graves.
    Petitioners each claimed a deduction of one-third of the unextin-guished cost of certain buildings purchased in equal interests in March, 1920, and demolished between November 1 and December 31, 1921.
    The Commissioner held that in view of the short period of time intervening between the acquisition of the real estate and the date on which the property was leased for 99 years, and the buildings located thereon were demolished, the petitioners were not entitled to any deduction as a loss under the provisions of article 142 of Regulations 62, providing that when a taxpayer buys real estate upon which is located a building which he proceeds to raze with the view of erecting thereon another building, the value of the real estate exclusive of all improvement is presumed to be equal to the purchase price of the land and buildings, and, accordingly, denied the deduction claimed by petitioners.
    The proceedings were consolidated for hearing and decision.
    FINDINGS OF FACT.
    Petitioners are residents of Lexington, Ky. For some time prior to 1920 they each had made a practice of investing money in real property in Lexington. In March, 1920, Chas. N. Manning and Geo. K. Graves owned certain property on Main Street in the City of Lexington. On March 28, 1920, petitioners purchased in equal interest certain property designated as 208-212 East Main Street, Lexington, adjoining the property owned by Manning and Graves for $81,638; $26,000 of this amount represented the cost allocable to the buildings upon a portion of the property, consisting of a two-story brick grocery store with rooms above, and a one-story brick garage. At the time this property was purchased, the store building and garage were under lease at a gross rental of $3,300 per annum. After the purchase petitioners increased the gross rental to $4,200 a year. Manning and Graves were interested in acquiring this property because it adjoined certain property which they already owned and they interested des Cognets in joining them in the transaction.
    At the time of the purchase, petitioners had no definite plans in mind in respect of any particular use to which they would devote the property other than to rent the buildings upon it. This property was within a short distance of and on the same street as the principal hotel in Lexington, and petitioners felt that in time the business section of the city would develop in that direction and that, if it should, this property would become very valuable. The property was purchased purely as an investment. Petitioners had no idea what they were going to do with the property at the time they purchased it. Some time after the purchase petitioners heard that the owners of the hotel near this property were considering the erection of an annex and an effort was made to interest these parties in this property. Nothing further developed concerning this. Subsequently, the building of the principal department store in Lexington burned and petitioners approached the management of the concern relative to the acquisition of this property for the new location of their store. These negotiations were fruitless. Thereafter there was talk that the City of Lexington would erect a new city hall and auditorium and petitioners endeavored to have the city acquire this property for that purpose. They were not successful in these efforts.
    Prior to October, 1921, petitioners learned that certain persons in Louisville, Ky., were contemplating the organization of a corporation to operate a chain of theatres, whereupon Graves went to Louisville and conferred with one of these gentlemen with a view of interesting him in the acquisition of the property owned by him and the other petitioners. This individual came to Lexington and examined their property, but gave petitioners no indication at that time that he was interested in the premises. Later he opened negotiations with petitioners to lease the property for 99 years and to erect thereon a theatre building. On October 31, 1921, the parties reached satisfactory terms and on that date petitioners leased the land to the Lafayette Amusement Co., a corporation, for a term of 99 years from November 1, 1921. The lessee agreed to and did in November and December, 1921, remove the buildings situated upon the property in consideration of the salvage obtained therefrom. The lease provided that the lessee would erect upon the whole of the land a theatre building at a cost of not less than $150,000, to be completed not later than December 81, 1922, and pay all taxes, insurance, and the cost of all repairs and upkeep of the buildings, unless the lease should become forfeited for failure to make payments as therein specified. The lease provided that in the event of forfeiture the buildings should become the property of the lessor and all rights of the lessee thereunder should cease in the event it should not redeem the property within the time specified in the lease by the discharge of all defaulted payments. The lease further provided that the lessee should pay no rental from November 1, 1921, to April 30, 1922, and that, thereafter, the annual rental should be—
    $4,800.00 írom May 1, 1922, to October 31, 1931.
    6,400.00 from Nov. 1, 1931, to October 31, 1941.
    7,040.00 from Nov. 1, 1941, to October 31, 1951.
    7,744.00 from Nov. 1, 1951, to October 31, 1961.
    8,588.50 from Nov. 1, 1961, to October 31, 1971.
    9,370.24 from Nov. 1, 1971, to October 31, 1981.
    10,307.26 from Nov. 1, 1981, to October 31, 1991.
    11,337.98 from Nov. 1, 1991, to October 31, 2001.
    12,471.77 from Nov. 1, 2001, to October 31, 2011.
    13,718.94 from Nov. 1, 2011, to October 31, 2020.
    The lessee was given the option to purchase the land at any time during the term of the lease or prior to forfeiture thereof for $133,-333 cash.
    The reasonable allowance for the exhaustion, wear and tear of the buildings upon this property for the years 1920 and 1921 was 3 per cent per annum.
   OPINION.

Littleton:

The sole question for decision in this case is whether the petitioners are entitled to a loss, on account of the voluntary demolition of certain buildings, under the provisions of section 214(a) (5) of the Revenue Act of 1921, which reads as follows:

(5) Losses sustained during the taxable year and not compensated for by Insurance or otherwise," if incurred in any transaction entered into for profit, though not connected with the trade or business * * *.

While the Commissioner, in his notice of deficiency, denied the loss as not satisfying the provisions of article 142, Regulations 62, yet in his answer to the petition, he says that the loss is not allowable since the petitioners were compensated for any loss suffered by them through the demolition of the buildings.

In this latter contention, we are constrained to concur. Prior to the execution of the lease the petitioners held certain property which they had purchased for investment purposes without any definite idea of the manner of its utilization other than that they, as prudent business men, would use it to their advantage. From March, 1920, until October 81, 1921, they derived income from the property through the rental of the buildings. After several fruitless attempts to make a satisfactory sale or lease of the property, a 99-year lease was executed for the land under which the lessee agreed to erect a building thereon, costing not less than $150,000, and to pay a net rental in excess of that which the petitioners were receiving from the structures already located on the land.

While no provision was made in the lease as to the buildings then on the land, the very nature of the building to be erected made it necessary for the existing structures to be torn down. The razing of the buildings was agreed upon at the time of the execution of the lease. The petitioners gave the lessee the option of tearing down the old buildings and retaining the salvage as compensation for its work in their destruction, or the petitioners agreed to demolish them and keep the salvage. The lessee agreed to demolish and remove the buildings on the terms offered. The cost to petitioners allocable to these structures which were demolished was $26,000. The question is whether a deductible loss of this cost less depreciation was sustained through demolition.

Prior to the execution of the lease the petitioners had land and buildings from which they were deriving income in the form of rent, and also land. After the execution of the lease, they had only the land and were lessors under a more advantageous lease than they formerly had. Did they part with the buildings, without receiving compensation therefor, quid pro quo? That the lease in question was a favorable one is admitted by the petitioners and that they improved their position thereby is shown by the fact that their rentals were substantially greater under the new lease than those being received prior to October 81, 1921, from the old buildings. But the petitioners say that they could not have been compensated in 1921 under the lease for the loss since they did not begin to receive rentals thereunder until 1922. We are not impressed by the logic of this argument. The acquisition of something from which income will be derived in futuro has a value in money’s worth in the same sense as something which will produce income m praesenti. The value may differ on this account, but this does not alter the fact that each has a compensating value which may be recognized as having money’s worth.

Taken by itself, the petitioners undoubtedly would be said to have sustained a loss in the demolition of their buildings, but when considered in connection with the entire transaction entered into on October 31, 1921, the Board is of the opinion that the removal of the buildings was fully compensated for in the rights acquired under the lease and that the cost of the buildings, less sustained depreciation, is properly allocable to the cost of securing the lease. In other words, there was in this instance what amounted to a substitution of assets; instead of an asset in the form of buildings, the petitioners now have another asset, viz., a lease, the giving up or voluntary destruction of the buildings being a necessary incident to the acquisition of the lease.

Since, however, the lease acquired had a definite life of 99 years, the cost of the buildings, less sustained depreciation, which entered into securing the lease, are properly amortizable over the life of the lease, and a deduction from gross income should be allowed under the provisions of section 214(a) (8) of the Revenue Act of 1918, for the exhaustion of this asset over a 99-year period from the date the lease was signed. Appeal of Grosvenor Atterbury, 1 B. T. A. 169.

Judgment wül be entered on 10 days' notice, under Rule 50.

MillieeN not participating.


author: Teussell :

text:
    Electro Magnetic Tool Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7096.
    Promulgated June 14, 1927.
    Invested Capital. — The value of patents and inventions protected by applications for patents determined for the purpose of invested capital.

      M. J. Sporrer, Esq., for the petitioner.

      W. H. La/wder, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes in the aggregate amount of $5,675.08 for the years 1918 and 1919, as asserted by the Commissioner. The whole amount is not in controversy.
    The petitioner alleges that the Commissioner erred in excluding from its invested capital for the years 1918 and 1919, an amount of $25,925 for intangible assets as provided for by section 326 (a) (4) of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation with its principal office at Cicero.
    Prior to December 10, 1908, George H. Rowe was the owner of United States Letters Patent No. 894,782; pending applications by him for United States Letters Patent Nos. 437,577 and 458,305; and pending application by him for British Letters Patent No, 15,874.

      On or about December 10,1908, Rowe and five associates organized the Electro Magnetic Tool Co., which purchased Rowe’s patents, pending application, and the right to all subsequent improvements thereon for $26,000 par value of the corporation’s stock, and $1,000 in cash. Of the $50,000 capital stock of the said corporation, $24,000 was subscribed for by Rowe’s associates, who agreed to pay the corporation $100 per .share, as and when called for by the Board of Directors. Between December 10, 1908, and January, 1910, the company expended $8,723.16 for labor and material used in improving and developing the patents and patent rights involved in this action. This amount was exclusive of its expenses for rent, heat, light, taxes, officers’ salaries, etc., and was a capitalized development expense.
    On January 20, 1910, the stockholders of the Electro Magnetic Tool Co. sold all of that corporation’s assets, consisting of the patents and the improvements thereon, and also other property not exceeding a value of $2,000, to the Carthage & Western Illinois Electric Co. in consideration of $2,500 cash and $72,500 of the latter corporation’s stock, which was. issued to the stockholders of record of the Electro Magnetic Tool Co., which was dissolved. On January 20, 1910, the value of the patents and patent rights was $9,723.16. On or about January 15, 1910, approximately 51 shares at a par value of $100 per share of the capital stock of the Carthage & Western Illinois Electric Co. were subscribed for. On January 31, 1910, the name of the Carthage & Western Illinois Electric Co. was changed to Electro Magnetic Tool Co., the petitioner.
    The capital stock of the petitioner outstanding on March 3, 1917, was $103,700, of an authorized issue of $125,000, one-fourth of $103,-700 being $25,925, which latter amount petitioner included in its invested capital for the years 1918 and 1919, and which the respondent excluded from petitioner’s invested capital.
   OPINION.

Teussell :

The record of this action discloses that the predecessor corporation which acquired the patents and patent rights here in question issued to the inventor a portion of its capital stock and in addition paid to him $1,000 in cash, and that during the years 1908 and 1909 it made further -investments in these patents and patent rights in the nature of capitalized development, expenses so that at the time the predecessor corporation transferred these patents and patent rights to the petitioner, it had a cash investment therein in the amount of $9,723.16. The petitioner acquired all the assets of its predecessor for stock and cash and it appears that the $72,500 par value of stock of the petitioner issued to the stockholders of the predecessor company represented cash investments in patents and patent rights in the amount of $9,723.16 and that the petitioner is entitled for the taxable year to have said patents and patent rights so acquired reflected in its invested capital at their cost value of $9,723.16.

The deficiency may be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50. Judgment will be entered accordingly.


author: Love:

text:
    Warren-Smith Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6737.
    Promulgated June 14, 1927.
    Deduction of bad debts disallowed because not charged oil within the taxable year.

      J. D. Lydick, Esq., and M. O. Fox, G. P. A., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is a proceeding to redetermine a deficiency in income and profits tax for the year 1919. The amount of the deficiency stated in the notice of deficiency is $74.75. The petitioner alleges the amount in controversy to be $1,400.44.
    The only question is whether certain alleged bad debts, aggregating $3,044.44*, may properly be deducted from gross .income in the year 1919.
    FINDINGS OF FACT.
    The petitioner, in 1919, was a corporation of Oklahoma, doing a retail business in hardware and farming implements at Shawnee. As of December 31,1919, the corporation was dissolved and the assets were transferred to its stockholders, who thereafter conducted the business in partnership. The corporation had for several years done an extensive credit business among farmers. Most of the credits were represented by notes; the balance by open accounts.
    The notes were kept in a file, and were posted in a “bill receivable ” account in the ledger. There was also carried separately in the ledger an “ accounts receivable.” At the close of the year 1919, the bookkeeper discovered that the aggregate of the notes in the file was $3,634.59 less than the total of the charges of “ bills receivable” on the ledger. For the purpose of balancing the books, a credit of the amount of the discrepancy was made to the bills receivable account, and an offsetting charge made to an account designated “bad debts.” This resulted, when the latter account was closed, in a net deduction from income for bad debts of $3,389.33. This deduction was disallowed by the Commissioner.
    At the close of 1919 the petitioner held a number of notes which were then considered worthless, but none of them was actually charged off in that year. In subsequent years, they were charged off by the partnership that took over the business, as follows:
    1920_$1,633.66
    1921_ 740. 78
    1922_ 250. 00
    1923_ . 270.00
    1924_ 150.00
    3, 044. 44
   OPINION.

Love:

The petitioner contends that the debts in question were worthless in 1919 and the evidence tends to sustain in part this contention. But these debts were not charged off within the year. This omission, petitioner asserts, was an error which arose from the fact that a deduction was taken of the amount charged to bad debts in the process of balancing the accounts, and it was felt this amount represented approximately the loss for the year from bad debts.

The Revenue Act of 1918, section 234 (a) (5), requires that debts found to be worthless, in order to be deductible, must be charged off within the taxable year. A “ correction ” entry, made for the purpose of balancing the books, may not be construed into a charge-off of these debts. The record shows they were actually charged off over a period of five years, following the taxable year.

Judgment will be entered for the respondent.


author: Love :

text:
    Kib H. Warren, Petitioner, v. Commissioner of Internal Revenue, Respondent. William V. Roesch, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harry A. P. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2550-2552.
    Promulgated June 14, 1927.

      J. D. Lydiolc, Esq., and M. O. Fox, G. P. A., for the petitioners.

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

These proceedings are to redetermine deficiencies in income taxes for the year 1919 in the following several amounts: Kib H. Warren, $3,690.95; William Y. Roesch, $303/74; Harry A. P. Smith, $3,165.03.

The cases were heard and submitted with the case of Warren-Smith Hardware Co. v. Commissioner, 7 B. T. A. 292, upon a single record, it being stipulated that the same evidence, in so far as material, would apply to each case.

The question at issue in the present three cases is the amount of gain realized by petitioners on their shares of stock of the Warren-Smith Hardware Co. through the receipt of a liquidating dividend upon the dissolution of that company on December 31, 1919; and the only disputed point is the value of the assets of the company when taken over by the stockholders on that date.

FINDINGS OF FACT.

The Warren-Smith Hardware Co. was an Oklahoma corporation organized in 1908, with a capital of $20,000, and carried on a retail hardware and farming implement business in Shawnee. On December 31, 1919, the corporation was dissolved and its assets taken over by its stockholders in proportion to the amount of stock held, and the stockholders thereafter continued the business in partnership.

By agreement of counsel, there were introduced in evidence two tabulated statements showing the claims of the parties respectively as to the amount of gain realized, which are set out below:

Respondent's statement

The parties agree as to the amount of stock outstanding and its March 1, 1913, value. The controversy is over the value of the property liquidated and, hence, over the amount of liquidating profit. The items in dispute are bills (or notes) receivable, accounts receivable, and merchandise inventory. The book value of these items on December 31, 1919, was as follows:

Bills receivable_$26, 983. 25
Accounts receivable_ 14, 024. 87
Merchandise_ 43, 074.97

The company did a large credit business among farmers, and many of its accounts were with tenant farmers, who owned little, if any, property. It sold implements and equipment on notes secured by chattel mortgages on the articles sold. These articles depreciated rapidly in use, and the recovery value was small. Of the accounts receivable, 25 per cent arose within the preceding 6 months and the remainder were older. Of the notes receivable, not over 50 per cent were made in 1919, and the others were made in earlier years; many were renewal notes. We find the receivables had a market value on December 81, 1919, of not more than 65 per cent of the book value thereof, viz., bills receivable $17,539.11; accounts receivable $9,116.17.

The merchandise was carried in inventory at cost. About 25 per cent of it had been purchased within the preceding 6 months; the balance was purchased previously over a long period of time. The corporation had purchased several bankrupt stocks of hardware merchandise and at the time of dissolution still had some of that stock on hand. During several prior years the general trend of the market had been ascending. In the latter part of 1919 it was practically stationary.

We are unable to find from the evidence that the merchandise had a value on December 31, 1919, of less than the book figure.

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


author: Tiujssell:

text:
    Ralph H. Plumb, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3370.
    Promulgated June 14, 1927.
    Value oe Leasehold. — Value of a tenant’s leasehold acquired by-inheritance on March 2, 1917, determined on the basis of the present value of the average annual difference between the amounts to be paid under the terms of the lease made in 1908 and the amounts which the beneficiary might have been required to pay had he made a new lease on March 2, 1917.

      Earl C. Mills. Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of the income-tax liability for the year 1919, for which the Commissioner has determined a deficiency of $7,403.28. The petitioner alleges error on the part of the Commissioner in failing to allow a value to a leasehold on real estate acquired by inheritance on March 2, 1917, and in consequence finding an incorrect profit on the sale by the petitioner in 1919 of a one-sixth interest in his business.
    FINDINGS OF FACT.
    The petitioner’s father, Henry Plumb, acquired on March 27,1908, a lease on Iiooms 208 Walnut Street and 218 Sixth Avenue, in Des Moines, Iowa, consisting of 1,100 square feet of floor area, together with the basement belonging to these rooms, for a period beginning May 1, 1908, and ending April 30, 1928. The lease provided, among other things:
    1. That tlie demised premises were to be used and occupied by the Lessee as a jewelry store and for no other* purpose whatsoever.
    2. That neither the Lessee nor others succeeding to the Lessee’s estate in the term, will assign said term of this lease or suffer the same to be assigned by operation of law (except by devise on descent in case of the death of the Lessee) or otherwise, or let or underlet said premises or any part therof, or use or permit the same to be used for any purpose other than as herein specified.
    ■The lease further provided:
    Lessor is to put in a spiral stairway, leading from room 218 Sixth Avenue to the basement.
    Lessor is to cut a door between the basement rooms.
    Lessor is to take out the partition walls between rooms 600 Walnut Street and 218 Sixth Avenue, and is to refinish the walls and ceilings after these rooms have been made into one.
    Lessor is to tile the floor, or that part of it, outside of the counters, cases, etc., as desired by the Lessee, except 52 inches along the east wall of the room.
    Lessor is to close the door in the southeast corner of room 600 Walnut Street, and fill the space between the columns with one plate glass.
    Lessor agrees that no other room in the Fleming Building, comprising the main building and the building west of it, formerly known as the O’Callaghan Building, shall be leased by it to a jeweler, during the term hereof.
    Lessee is to have the privilege of assigning this lease to an incorporated company, which Lessee intends to form, the Lessee and other stockholders of the incorporated company agreeing to individually sign the guaranty attached hereto.
    Lessee agrees to pay rent as follows:
    The first five years, beginning May 1, 1908 and ending April 30, 1913, Five Hundred Dollars ($500) a month or Six Thousand Dollars ($6000) a year for three years; and Five Hundred Forty-one & 66/100 Dollars ($541.66) a month or Six Thousand Five Hundred Dollars ($6500) a year for two years.
    And for the second five years, beginning May 1, 1913, and ending April 30, 1918, a rental of Five Hundred Eighty-Three Dollars & 33/100 ($583.33) a month or Seven Thousand Dollars ($7000.00) a year.
    And for the third five years, beginning May 1, 1918, and ending April 30, 1923, a rental of Six Hundred Twenty-five Dollars ($625) a month or Seven Thousand Five Hundred Dollars ($7500) a year.

      And for the fourth five years, beginning May 1, 1923, and ending April 30, 1928, a rental of Seven Hundred Bight & 33/100 Dollars ($708.33) a month or Eight Thousand Five Hundred Dollars ($8500) a year.
    On March 2, 1917, the petitioner inherited a two-thirds interest in the business, assets, and leasehold, upon the death of his father, Henry Plumb.
    On September 26, 1917, the petitioner leased an additional room, comprising 670 square feet, directly west of his other room at 602 Walnut Street, for a period from October 1, 1917, to April 30, 1928, at a rental of $500 a month. This space was inferior to that covered by the first lease, since it was an inside room and had one large pillar about the center of the area, whereas the first lease was on the corner and fronted on two streets. The lease provided, among other things:
    Lessor agrees to remove partition between tbis room and tbe present Plumb Jewelry Store, room 600 Walnut, to plaster wall and ceilings affected by removal of said partition.
    Lessor agrees to remove tbe present floor and install tiling sucb as is used in tbe present Plumb Jewelry Store.
    Lessor agrees to replace tbe present Walnut Street door and transom with tbe necessary iron frame and one plate glass and replace tbe corridor door opening with plate glass, and install spiral stairway leading from wbat was formerly room 218 Sixth Avenue to tbe basement.
    Lessee is to bave tbe privilege of assigning tbis lease to an incorporated company, formed by lessee, tbe lessee continuing responsible under tbis lease.
    On October 1, 1919, the petitioner sold a one-sixth interest in his business to his brother-in-law for $20,000 and in his income-tax return for the year 1919 claimed a loss of $17,500 on account of this transaction.
    Floor space acquired under the lease made in-1908 covered a corner store room having a frontage on Walnut Street of 16% feet and a frontage on Sixth Avenue of about 66 feet. The space acquired by the lease made in September, 1917, covered 670 square feet of floor space and the adjoining portion of the building fronting on Walnut Street. The growth of the City of Des Moines, and the surrounding tributary territory, has been steady and consistent from year to year from 1908 to the present time.
    The lease acquired by the petitioner by inheritance on March 2, 1917, had a fair market value on that date of $33,200.
   OPINION.

Tiujssell:

The record contains the testimony of six witnesses, all of whom had had long experience in the ownership, management, and dealing in properties in the City of Des Moines, and they each gave opinion testimony as to the value of the petitioner’s lease acquired by inheritance as of the dates approximating the dates of such acquirement. The values shown by this testimony ranged from $50,000 to $84,000 in the opinion of four of the witnesses. Two of the witnesses expressed the opinion that there was an annual profit in the petitioner’s lease of from $6,000 to $8,000 per year. These witnesses went into much detail as to the manner in which they made up their opinions of value. They took into consideration the value of the property, of the land and building, and of other land and buildings in the neighborhood. They also considered facts respecting actual lease transactions made in the immediate vicinity of the petitioner’s store, and were substantially unanimous in the opinion that the landlords could have made a lease in March, 1917, of the store property controlled by the petitioner on the basis of $14,000 or $15,000 per year. Some of these witnesses took into consideration the facts concerning the additional store space leased by the petitioner in September, 1917, and two of them testified that the corner floor space had a value over and above the adjoining inside floor space equivalent to 50 per cent of the value of the inside space.

Analyzing the facts.respecting the lease acquired by the petitioner by inheritance and the facts concerning the lease made by the petitioner in September, 1917, it is found that for the period from March 2, 1917, to April 30, 1928, under the original lease the total rental payments for the 11 years and 2 months aggregate $88,166.66. Under the terms of the lease made by the petitioner in September, 1917, at the value rental of $6,000 per year, beginning October 1, 1917, if extended to March 2, 1917, the total of the rentals to be paid would be $66,000, or an equivalent of $98.50 per square foot. If the differential in favor of corner floor space, in this case is taken to be 33y3 per cent of the rental value of the inside space, and the petitioner were making a new lease of the corner space in March, 1917, he would be required to pay for the term of 11 years and 2 months $131.33 per square foot, which for 1,100 square feet of floor space would make his total rent equal $144,463, which is $56,297 more than the rents which he must pay under the original lease. This $56,297 averaged over the period of 11 years and 2 months and reduced to present value by generally accepted discount formula produces a present value of the difference between what petitioner must pay under his present lease and what he might be required to pay under a new lease made in March, 1917, in the amount of $33,200. Northern Hotel Co., 3 B. T. A. 1099.

We, therefore, are of the opinion that on March 2, 1917, the lease acquired by the petitioner by inheritance had a fair cash value in the amount of $33,200, and that in computing the gain or loss from the sale of a one-sixth interest in the petitioner’s business, including a one-sixth interest in this lease, it should be computed by including in the assets sold the lease at the above stated value.

The deficiency may be recomputed in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will be entered accordingly.


author: Tettssell:

text:
    John Hoskins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10241.
    Promulgated June 14, 1927.
    1. March 1, 1913, Value of Heal Property involved in this proceeding, determined.
    2. Deductions. — Three notes executed by this petitioner in December, 1921, payable five years from date and delivered to petitioner’s children as compensation for services during 1921, held not deductible from gross income as a business expense paid during 1921, the petitioner having kept his books and made his income-tax return on the cash basis.

      W. F. Frame, Esq., and P. L. Billings, <7. P. A., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in the amount of $3,316.53 in income tax for the calendar year 1921, as asserted by the Commissioner in his letter dated October 27, 1925.
    The petitioner alleges that the respondent erred as follows:
    (1) That he placed a March 1, 1913, farm-land value of $150 per acre instead of a farm-and-coal-land value of $300 per acre on certain land alleged to have been known on said date to be underlain with coal, and that he used the former value in determining the gain realized on the sale of the land in 1921 for coal operations.
    (2) That he disallowed the deduction of compensation for services paid during 1921 by petitioner, to three of his children, as an ordinary and necessary business expense.
    (3) That in computing the deficiency he failed to allow a credit in the amount of $33.03 paid by petitioner upon the filing of his original return and that he allowed a credit of only the amount of $137.16 paid by petitioner upon the filing on August 5, 1923, of his amended return.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Earlham, Iowa, and was during the year 1921 and for many years prior thereto, engaged in the business of farming.

      In 1901 the petitioner purchased a farm consisting of 120 acres near Waukee, Iowa, lived thereon and farmed it from that time until it was sold in 1921. The purchase price plus cost of improvements made prior to March 1, 1918, was less than $150 per acre. Prior to 1901, the petitioner’s grantor, in drilling for water encountered a vein of coal, which fact was known to petitioner, but he did not know the exact thickness of the vein nor its depth from the surface. Along the creek which traversed petitioner’s farm there appeared an outcropping of coal.
    Prior to 1913 two test holes were drilled just across the road from petitioner’s farm on the adjoining farm owned at that time by one Chambers. In each hole there was encountered, at a depth of 200 feet, black coal-bearing slate and then a 3-foot vein of good coal. The holes were drilled a few feet further through a thin layer of fire clay below which black slate was again encountered. At that point the drilling operations ceased because of lack of funds. The second layer of black coal-bearing slate indicated that there existed a second vein of coal. The Chamber’s farm was located west of petitioner’s farm and the first test hole was drilled near the road between the two farms and the second test hole was drilled about 500 feet west of the first one, showing that the vein ran east and west at a uniform depth and thickness and strongly indicating that the same vein continued east under petitioner’s land. Prior to 1913 a test hole was drilled on the Aldrich farm, which is a short distance east of the petitioner’s farm but not adjoining, and coal was encountered at a depth of about 250 or 300 feet. Prior to March 1, 1913, petitioner had knowledge of the above related facts. It was generally-known throughout that vicinity that coal deposits existed and the farmers considered their land worth from $75 to $100 per acre over and above the farm land value because of such coal deposits.
    In March, 1912, a farm of 200 acres, located about one mile from the petitioner’s farm, was sold for $215 per acre, the vendee assuming an outstanding mortgage of $12,000 and paying the balance in cash. The vendor of this farm was at the time desirous of disposing of it for the reason that he owned two other farms, and he did not take into consideration in fixing his selling price any element of value other than ordinary farm value. The land and buildings on this farm were comparable to the petitioner’s farm in every respect except that the petitioner’s dwelling was larger and of better construction.
    The March 1, 1913, value of petitioner’s farm was $275 per acre. In 1921, the petitioner sold his 120-acre farm near Waukee for $400 per acre, to two men for coal-mining operations. The improvements placed on the said farm subsequent to March 1, 1913, in the amount of $1,060 and the depreciation sustained in the amount of $711 are not in dispute. The profit realized from the said sale amounted to $14,651.
    During the year 1921 the petitioner lived on and operated a 160-acre farm near Earlham, Iowa, which is approximately 25 miles from Waukee. The petitioner was 63 years of age in 1921 and not able to do much work except chores, and he employed his eldest son George, who was of age, to manage the farm. George lived on the farm, managed it subject to advice of his father and did a great deal of the work. Extra hands were hired during harvest season and were paid by petitioner. The produce was sold in petitioner’s name and he received the proceeds. As compensation for George’s services rendered during 1921, the petitioner executed on December 23, 1921, a note for $1,800 payable five years from date, and delivered the said note to George on or about the same date. The petitioner’s daughter Carol, who was of age, lived on the same farm with petitioner, helped with the household work, milked cows every morning and evening, helped him in the field during haying season and also helped shuck corn during the fall of the year. As compensation for Carol’s services the petitioner executed on December 23, 1921, a note for $1,200 payable five years from date and delivered the said note to Carol on or about the same date. In this proceeding the petitioner is claiming $400 as compensation paid Carol for her services outside of the household duties. The petitioner’s two minor sons also worked on the farm, but they received no compensation for their services.
    In July, 1921, the petitioner purchased a 240-acre farm near Earl-ham and employed his son Delbert, who was of age and who at that time was employed in Des Moines City, to manage that farm from August 1 to the end of the year 1921. Delbert lived on the 240-acre farm, operated and managed it and performed most of the work. He had hired help part of the time who were paid by the petitioner. The produce was sold in the petitioner’s name and he received all the proceeds. As compensation for Delbert’s services during the five months of 1921, the petitioner executed on December 23, 1921, a note for $1,200 payable five years from date and within four or five days from said date Delbert called at the bank of Earlham and received the said note.
    The petitioner was solvent, but inasmuch as the farms had operated at a loss during 1921, he did not have the cash to pay the above mentioned salaries and for that reason gave the said notes, which the said children have held in their own possession ever since. The year 1921 was the only year in which petitioner made such an arrangement with his children. •
    The petitioner operated on a cash basis and reported his income on the same basis.

      On or about March 15, 1922, petitioner filed his income-tax return for the year 1921, showing a tax liability of $33.03, which amount was paid by draft accompanying the return. Subsequently, in April, 1923, the petitioner filed an amended return for the year 1921 showing a total tax liability of $110.19 and paid the additional amount of $131.16. The collector of internal revenue for the district of Iowa made a return showing petitioner’s tax liability for the year 1921 to be $3,453.69. The respondent accepted this latter return and computed the deficiency in tax to be $3,453.69 less $131.16, amounting to $3,316.53, the amount in dispute in this proceeding. No credit was given for the $33.03 paid upon the filing of the original return.
    The respondent in accepting the return prepared by the collector of internal revenue determined the March 1, 1913, value of the land in question to be $150 per acre on the basis that it was not known at that time that there existed coal deposits on petitioner’s land and also he disallowed the deduction of the amounts of the three notes which petitioner gave to his three children for their services.
   OPINION.

Tettssell:

The record of this case establishes the fact that the petitioner’s farm is located in territory where coal deposits were generally found and that the drilling for coal had shown seams of merchantable coal on both the east and west sides of petitioner’s farm, and that there was an outcropping of coal on the petitioner’s farm. Witnesses thoroughly familiar with the territory and with land values there testified that where coal was believed to exist land values were in 1913 approximately $75 or $100 per acre higher, than land values where coal was not supposed to exist. A sale of comparable farm property, without reference to the element of coal-deposit values, established a value of $215 per acre in 1912, and from all the facts contained in this record, we are of the opinion, and have so found, that petitioner’s farm then had a value made up of both the farm-land-value element and the coal-deposit-value element and that the March 1, 1913, value of petitioner’s farm was $275 per acre.

The next question for consideration is whether petitioner should be allowed for the year 1921 a deduction as an ordinary and necessary business expense of the-total amount of the three notes given by petitioner to his children as payment for their services on the farms. We have not been informed as to the grounds upon which the respondent disallowed the said deductions. From the facts in this record we must come to the conclusion that there is serious doubt as to the reasonableness of the salaries in question. However, it is not necessary for us to decide the question of reasonableness, for the petitioner was on the cash basis and made his income-tax return upon the same basis, and while he incurred a liability to pay those three notes in December, 1926, he did not actually pay the salaries in 1921. Furthermore, we have no evidence that the three children George, Delbert, and Carol accepted the notes as payment of the compensation due them for their services. The notes constituted evidences of promises to pay certain amounts in December, 1926. The giving of the said notes did not constitute disbursements during the year 1921, and upon the cash basis of accounting and making of the income-tax return the amounts of the notes are not deductible as an expense paid during 1921. Cf. Warner L. Colvert v. Commissioner, 6 B. T. A. 623.

In the recomputation of this petitioner’s tax liability and the amount of the deficiency for the year 1921,. in accordance with the above findings of fact and this opinion, there should be allowed a credit in the amount of $170.19 which has been paid by petitioner for income tax for 1921.

Order of redetermmation will be made upon 15 days’ notice, pursuant to Rule 50, amd judgment will be entered in due course.