author: Smith:

text:
    Appeals of GEORGE ANTONOPLOS and KAST ANTONOPLOS.
    Docket Nos. 3925, 4013.
    Submitted October 14, 1925.
    Decided April 16, 1926.
    Value of note received in part payment for shares of stock sold determined.

      Paul E. Hutchinson, Esq., for the taxpayers.

      F. 0. Graves, Esq., for the Commissioner.
    Before Littleton, Smith, and Teussell.
    These appeals are from determinations of deficiencies in income tax for the year 1920 in the amount of $2,877.57 in the case of each taxpayer. The deficiencies arise from the action of the Commissioner in increasing the profit reported by the taxpayers as having been realized from the sale of certain shares of stock of the Olympic Amusement Co. by a partnership in which the taxpayers each had a one-third interest.
    FINDINGS OE PACT.
    1. The taxpayers are brothers, and, with another brother, Peter Antonoplos, were during 1920 members of a partnership carrying on business under the name of Antonoplos Brothers. Each of. the brothers had a one-third interest in the partnership. Some time prior to April 19, 1920, the partnership acquired 1,800 shares out of a total of 3,600 shares of the Olympic Amusement Co., a Pennsyl-vánia corporation organized in 1919, paying therefor $170,000. The other 1,800 shares had been acquired by John Eichleay Jr. Co. at a cost of $153,000.
    2. On March 19, 1920, Antonoplos Brothers gave an option to John Eichleay Jr. Co. to purchase their 1,800 shares of stock in the Olympic Amusement Co. at a price of $225,000, of which amount $10,000 was paid at the time of the signing of the option agreement. The second paragraph of that agreement provided:
    2. Vendees to pay to vendor tlie snm oí One Hundred Seventy Five Thousand ($175,000.00) Dollars in cash upon the acceptance of this option and delivery of the stock as herein provided, the down money of Ten Thousand ($10,000) Dollars aforesaid to be applied in part payment thereof, and the balance of Fifty Thousand ($50,000.00) Dollars in four (4) months thereafter, said deferred payment to be secured by the collateral promissory note of vendees with the delivery and pledge of four hundred (400) of said shares of stock to vendor as collateral security, with interest at six per cent, and with the right and privilege, however, to vendees to pay said note and redeem said collateral at any time before maturity, in which ease interest shall run only to date of payment of said note. ,
    3. The vendee corporation failed to pay the amount of $165,000 on April 20, 1920, because it was unable to secure the money. The shares of stock were, however, turned over to John Eichleay Jr. Co., which company made payments to Antonoplos Brothers in a net aggregate amount of $65,000 prior to June 24, 1920, which payments were in addition to the original payment of $10,000. On June 24, 1920, Antonoplos Brothers wanted to speculate to' the extent of $100,000 in Greek drachmas and on that date attempted to collect from John Eichleay Jr. Co. the balance of $150,000 still owing them. An agreement was then entered into between Peter Antonoplos, representing Antonoplos Brothers, and John Eichleay Jr. Co., which reads as follows:
    THIS AGREEMENT
    Made and concluded tbe $4th day of June, 1920, between John Eichleay Jr. Go., a corporation of tbe State of Pennsylvama by its undersigned officers of tbe City of Pittsburgh, County of Allegheny, State of Pennsylvania, parties of tbe first part,
    AND
    PETER ANTONOPLOS of tbe same place, party of the second part. WITNESSETH:
    That whereas tbe parties of tbe first part have borrowed in the name of tbe said corporation from the party of tbe second part One Hundred Thousand ($100,000.00) Dollars upon tbe following terms and conditions, to wit:
    That at tbe date of tbe above loan the rate of exchange of dollars to drachmas, tbe unit of currency of tbe Kingdom of Greece, was $1.00 purchased 9.45 drachmas, and that $100,000.00 could purchase 945,000 drachmas.

      The parties of the first part agree and promise to pay to the party of the second part the difference in drachmas between the rate of exchange of the date of the above loan and the rate of the date of any part or whole payment, i. e., the parties of first part agree and promise to pay as many thousand dollars, United States Currency, as will purchase 945,000 drachmas at the date of the payment of any part or of the whole debt.
    Payments are to be made as follows_ _interest at No %.

    And the said parties hereto bind themselves, their heirs, successors or assigns to the true performance of this agreement.
    Hi # ⅝ ⅝ ⅝ jjs ⅜
    On September 10, 1920, the price of Greek drachmas was $10.05 per hundred, at which rate the cost of 945,000 drachmas was $100,-642.50. Under its agreement with Antonoplos Brothers, John Eich-leay Jr. Co. was on that date indebted to Antonoplos Brothers to the extent of $642.50 in addition to its unpaid indebtedness on the transaction by which it acquired the 1,800 shares of stock of the Olympic Amusement Co. The vendor partnership then wished to discontinue their speculations in Greek drachmas and again called on the vendee corporation and demanded the balance then due them, which on that date was $125,642.50. John Eichleay Jr. Co. was still unable to make payment in full but agreed to pay $15,000 cash and to give its note without interest for the payment of $140,000 four months from September 10, 1920. A part of the consideration for this note was the cancellation of the contract of September 10, 1920. The face of this note was $29,857.50 in excess of the amount then owed Antonoplos Brothers by John Eichleay Jr. Co. This note was to be secured by collateral consisting of 1,000 shares of 10 per cent cumulative preferred stock of the Olympic Amusement Co. When Antonoplos Brothers sold the 1,800 shares of stock of this company to John Eichleay Jr. Co. only one class of stock was outstanding. Subsequent to March 19, 1920, and prior to September 10, 1920, the capitalization of this company had been changed from 3,600 shares of stock of a single class to 3,000 shares cumulative 10 per cent preferred nonvoting stock and 600 shares voting common stock. The note for $140,000 above referred to was secured by the deposit of two certificates for the aggregate amount of 1,000 shares of the preferred stock above referred to. The by-laws of the Olympic Amusement Co. contained restrictions upon the transfer of the stock. It was provided that any stockholder desiring to sell his stock should first offer it to the other stockholders, and if it was not taken it should not be transferred to any person not acceptable to the board of directors, and in case of a dispute upon this point the issues should be settled by arbitration. The by-laws also provided that each certificate of stock issued by the company should have stamped or printed across its face the following:

      The transfer of this certificate of stock is restricted by the by-laws of this company. Olympic Amusement Company.
    The two certificates put up as collateral to secure the note of John Eichleay Jr. Co. for $140,000 had the words above quoted written across their face. The agreement by which the certificates were put up as collateral provided “As and if payments are made on account of this note, said first parties [John Eichleay Jr. Co.] may lift the collateral thereon as payments are made.”
    4.Upon the receipt of the note of John Eichleay Jr. Co. secured by collateral, Antonoplos Brothers attempted to have it discounted at the Diamond National'Bank in Pittsburgh, Pa., in which Anto-noplos Brothers, deposited their funds and to which John Eichleay Jr. Co. was known. The bank refused to make any loan upon the note. The note provided that the maker could pay all or any part of the note prior to maturity and,, during the year 1920, the maker paid $15,000 upon it. Additional payments were made as follows:
    1921_$69,000
    1922 _ 20,000
    1923_ 3,000
    1924 _ 2, 000
    The balance of $31,000, plus interest, was still unpaid at the date of the hearing and John Eichleay Jr. Co. denied liability for such payment.
    5. During the fall of the year 1920, a number of sales of preferred stock of the Olympic Amusement Co. were made at par less commission for selling. In no case were any shares sold at a premium. The stock was issued subject to being called for payment at any time at $115 per share plus accrued dividends.
    6. The accounts of Antonoplos Brothers and those of the taxpayers for the year 1920 were kept on a cash receipts and disbursements basis and their income-tax returns were made upon the same basis.
    7. Antonoplos Brothers, in preparing their original partnership return for the year 1920, included an amount of $30,500 as profit upon the sale of the 1,800 shares of stock of the Olympic Amusement Co. to John Eichleay Jr. Co., and the taxpayers reported in their individual returns their pro rata shares of the admitted profit. The Commissioner, in auditing the partnership return for the year 1920, considered the note for $140,000 as the equivalent of cash and computed a profit upon the sale of the shares of $85,000.
   OPINION.

Smith:

The taxpayers claim the right to report their profits in respect of the sale of 1,800 shares of stock of Olympic Amusement Co. by Antonoplos Brothers in 1920 on an installment basis. Their

claim is predicated on article 42 of Regulations 45. It is untenable, however, in view of the provisions of sections 212 (d) and 1208 of1 the Revenue Act of 1926. The former provides:

See. 212. ⅜ ⅜ ⅜ (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a , sale or other disposition of real property, if in either case the initial payments do.not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. [For retroactive application of this provision see Section 1208.]

Section 1208 provides that section 212 (d) shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such acts as amended.' ' It will be noted, however, that the payments made by the purchasers of the 1,800 shares of stock of Olympic Amusement Co. during the year 1920 were in excess of 25 per cent of the total purchase price. The taxpayers are not entitled to make returns of income in respect of this transaction upon an installment basis.

What was the amount of profit realized by Antonoplos Brothers from the sale of 1,800 shares of stock in the Olympic Amusement Co. to John Eichleay Jr. Co. ? The cost of these shares was $170,000. The sales price was $225,000. Up to September 10, 1920, Antonoplos Brothers had received $100,000 cash and on that date they received $15,000 additional cash and a note for $140,000, which note was secured by collateral. The Commissioner has made his determination of a deficiency upon the basis that the note had a cash value of $140,000. We think that it had no such value. Antonoplos Brothers attempted to discount it but could not,even obtain a loan upon it. There is some evidence that the collateral was worth par and no more. This would indicate that the collateral behind the note'had a value equal to $100,000. On the note $15,000 was paid prior to December 31, 1920. Based upon a value for the note of $100,000 the consideration received by Antonoplos Brothers during 1920 amounted to $215,000. The determination of a deficiency should be made upon the basis that the profit realized by Antonoplos Brothers during the year 1920, in respect of the sale of the shares of stock, was $45,000.

Order of redetermination will be entered on 15 days1 notice, under Rule 50.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Appeal of BELL & CO. and HOLLINGS-SMITH CO.
    Docket No. 5789.
    Submitted February 15, 1926.
    Decided April 16, 1926.
    The amount of the reduction in excess-profits tax liability for 1918, resulting from the computation of the tax under section 328 of the Revenue Act of 1918, is not a credit against the tax redetermined for 1918 after the deduction from the net income of a net loss sustained for the year 1919.

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

      Robert AL. Littleton, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Tettssell.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1918 of $18,391.50.
    FINDINGS OE FACT.
    The taxpayers were affiliated corporations for the years 1918 and 1919 and were proprietary medicine manufacturers. They returned a net income for 1918 of $1,715.70, upon which no tax was assessed, since they were entitled to a credit of $2,000. Their true net income for 1918 was $74,776.78. They sustained a net loss for 1919 of $35,933.62. Tax liability for the year 1918 was determined by the Commissioner as follows:
    NET INCOME.
    Consolidated net income, Bureau letter dated Aug. 15, 1924:
    Bell & Co_$24, 049. 99
    Hollings-Smith Co_ 14, 783.17
    Total_ 38, 833.16
    TAX COMPUTATION.
    Profits tax, section 328- 15,902.76 *
    Net income-$38, 833.16
    Less:
    Profits tax_$15,902.76
    Exemption_ 2, 000.00
    - 17,902. 76
    Amount taxable at 12 per cent_ 20,930.40
    - 2, 511.65
    Correct tax liability. 18,414.41
   OPINION.

Smith :

The taxpayers assign as error on the part of the Commissioner, in determining a deficiency in income and profits tax for the year 1918, that he failed to give them the full benefit of both the special assessment and the net loss provisions of the taxing statute. They represent that they had a net income for 1918 of $74,766.78, upon which the tax due under section 302 of the taxing statute was $48,918.42, or 65.42 per cent of the total; that they applied for relief under section 328, and that the Commissioner found that comparative corporations paid only 40.95 per cent of their net income in profits taxes, and that their tax liability in accordance therewith was $30,617, or a reduction in tax liability of $18,296.42; that they sustained a net loss for 1919 of $35,935.62; that after the deduction of this net loss from the net income of 1918, as provided in section 204 of the statute, the taxable income for that year was $38,833.16, upon which the tax due under section 302 was $20,166.53; that against this tax liability they are entitled to a credit of the saving of $18,296.42, to which they became entitled as a result of giving them relief under section 328. In their brief the taxpayers summarize their contentions as follows:

l£ taxpayers liad suffered no net loss in 1919, the profits tax for 1918, under section 302, would be-$48,913.42
Under section 328 tbis tax would be reduced to 40.95% of $74,766.78 (net income)_$30,617.00
Effecting a saving (without reference to 1919) of_$18,296.42
The taxpayers should not lose the benefit of any of this saving because of their misfortunes in 1919. Therefore — ■
The profits tax under section 302 on the reduced taxable income for 1918 (due to 1919 net loss) of $38,833.16 is_$20,166.53
Deduct the saving taxpayers are entitled to under 328_$18,296.42
Amount of profits taxes correctly due for 1918 is_ $1,870.11

It seems to us that the claim of the taxpayers is without merit. There is no provision of law by which the saving to which the taxpayers became entitled as a result of having their tax liability determined under section 328 may be applied as a credit against the tax redetermined for the year 1918, as the result of the deduction from the net income of 1918 of the net loss for 1919.

In the redetermination of the taxpayers’ liability for 1918, the Commissioner has assumed that the taxpayers’ true net income for 1918 was $38,833.16, and he has given them relief under section 328 upon the basis that their net income was that amount. We think that this is the greatest measure of relief that can be afforded the taxpayers under the statute.

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


text:
    Appeal of KNAPP & SPENCER CO.
    Docket No. 5648.
    Submitted March 2, 1926.
    Decided April 16, 1926.

      William D. Harris, Esq., for the taxpayer.

      L. 0. Mitchell, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRUSsell.
    This is an appeal from the determination of deficiencies in income and profits tax for the calendar years 1919 and 1920 in the amounts of $2,291.19 and $506.80, respectively.
    The question in issue is the amount which the taxpayer was entitled to include in invested capital for these years in respect of the property acquired on December 31, 1915, from the Hardware Building Co. in exchange for that company’s entire capital stock. The taxpayer claimed $105,000 representing the cost of reproduction less an estimated amount for depreciation of the building from the date of its construction. The Commissioner rejected this valuation and determined the amount which the taxpayer might include in invested capital to be the original cost plus additions to December 31, 1915, less exhaustion, wear and tear at the rate of 2 per cent per annum.
   FINDINGS OP PACT.

The taxpayer is an Iowa corporation organized in 1885, engaged in the wholesale hardware business, with principal office at Sioux City. In 1901 it caused to be organized a corporation known as the Hardware Building Co., the entire capital stock of which, amounting to $105,000 par value, was issued to it in exchange for a certain building and land upon which it was located.

For years prior to December 31, 1915, the taxpayer and the Hardware Building Co. made separate tax returns of income received. All income of the Hardware Building Co.- was paid to the taxpayer in the form of dividends and included by it in its returns for the years 1909 to 1915, inclusive. On December 31, 1915, the outstanding capital stock of the Hardware Building Co., amounting to $105,000, was owned by the taxpayer. On December 31, 1915, the land and building hereinbefore mentioned were transferred by the Hardware Building Co. to the taxpayer in exchange for its own capital stock of the par value of $105,000 and the assumption by the taxpayer of a mortgage of $50,000, whereupon the Hardware Building Co. was immediately dissolved. On January 26, 1916, an appraisal was made of the building and its appurtenances which showed a reproduction cost of $167,277.09. This amount was reduced by the appraiser to $152,546.96 by an estimated amount for depreciation. On the same date the insurable value of the building and its appurtenances was fixed by the appraiser at $136,042.23. The values of the building and its appurtenances were segregated and entered by the taxpayer upon its books upon the basis of cost of reproduction as of January, 1916, less an estimated amount for depreciation, as follows:

Building_$136, 513. 59
Elevator_ 3,245.00
Heating plant_'- 2,161.20
Electric wiring_ 679. 08
Sprinkling apparatus_ 7,418.85
Warehouse equipment- 5, 219. 33
Total_ 155,237. 65
Keal estate at cost- 20, 000. 00
175,237. 65

No question is raised as to the value of the land.

For the purpose of eliminating appreciation, the taxpayer set up on its books the sum of $20,237.65 as a depreciation reserve.

In arriving at the amount to be included in the taxpayer’s invested capital for 1919 and 1920 on account of the building acquired from the Hardware Building Co. for the latter’s capital stock, the Commissioner determined the original cost of the building to have been $103,920.29. To this amount he added $5,284.17, the cost of additions to December 31, 1915, giving the building on that date a total cost of $109,204.46, which he reduced in the amount of $28,704.02, representing exhaustion, wear and tear at the rate of 2 per cent per annum to December 31, 1915.

The deficiencies are $2,291.19 for the calendar year 1919 arid $506.80 for the calendar year 1920. Order will be entered accordingly.


author: Littleton :

text:
    Appeals of J. H. GOADBY MILLS, FRANKLIN THOMPSON, and HORATIO S. SHONNARD.
    Docket Nos. 5211, 5212, 5213.
    Submitted December 14, 1925.
    Decided April 19, 1926.
    An individual keeping Ms books upon a calendar-year basis and being a member of a partnership keeping its books upon a fiscal-year basis is required, under the provisions of section 218 (a) of the Revenue Act of 1918, to report as taxable income his proportion of the net profits of the partnership for its entire accounting period ending within his calendar year, notwithstanding a portion of such profits was received by him during the first six months of. the partnership’s accounting period falling within his preceding calendar year.

      William D. Bitter, Esq., for the taxpayers.

      J. Arthur Adams, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tettssell.
    These appeals, which were consolidated and heard together, are from determinations by the Commissioner of deficiencies and over-assessments as follows:

    The issue concerns the question of whether the profits of a partnership for its fiscal year ending June 30 should be included in the income of the partners, who kept their accounts on the calendar-year basis, for the calendar year in which the accounting period of the partnership ended, when such profits were determined and distributed by the partnership monthly.
    FINDINGS OF FACT.
    On June 80, 1917, these taxpayers formed a partnership under the firm name of Shonnard, Mills & Co. at New York City for the purpose of carrying on a general commission business in stocks, bonds, and commodities as a member of the New York Stock Exchange.
    From June 30, 1917, to July 1, 1919, the partnership adopted as its annual accounting period the fiscal year ending June 30 and filed its tax returns accordingly, the first return embracing the fiscal year ending June 30, 1918, and the'second return embracing the fiscal year ending June 30, 1919. Shortly after the last-mentioned date the partnership applied to the Commissioner for permission to change its accounting period from a fiscal year to a calendar year and such permission was granted on March 2, 1920. The partnership, accordingly, within the time required by law, filed a return on the calendar year basis for the year 1919 embracing the period from the close of its fiscal year on June 30,- 1919, to December 31, 1919. The members of the partnership adopted the calendar year as their annual accounting period and filed their tax returns accordingly for the years 1917, 1918, and 1919.
    Throughout the period here in question, June 30, 1917, to Decern- ' ber 31, 1919, the partnership balanced its books on the last day of each month and was enabled thereby to ascertain its profits or losses for each month. Immediately after the books were thus balanced it distributed and paid over to the individual partners, month by month, the monthly profits of the partnership. As a result there were actually distributed and paid over to the taxpayers, according to their respective interests, the following sums in each of the calendar years 1917, 1918, and 1919. The amount received in 1917 represented the distributions during the last six months of that year. The first amounts shown as having been received during 1918 and 1919 represent distributions during the first six months of those years and the second amounts represent distributions during the last six months of those vears.

    The distributions thus made, when computed according to the accounting period of the partnership, follow:

      Upon auditing the returns of the taxpayers for the calendar years 1917, 1918, and 1919, the Commissioner, proceeding on the theory that profits of a partnership having an accounting period different from that of the partners constitute income to the partners in the year in which the annual accounting period of the partnership ended within the annual accounting period of the partners, held that such distributions, the total of which throughout the accounting periods of the partnership corresponded with the net income of the partnership in such periods, should have been accounted for by them in their respective calendar year returns as follows:

    In the case of each taxpayer, the first amount appearing under 1919 represents the total distribution made by the partnership throughout its entire fiscal year ending June 30, 1919. The second amount represents total distributions made by the partnership throughout the last six months of 1919, when it changed to a cal-, endar-year basis.
    The Commissioner also held that in those years in which the tax rate of one calendar year differed from that of another the tax liability of the partners should, in respect of such partnership income, be determined by first ascertaining the net income of the partnership in each of its accounting periods and then apportioning such income to the calendar years of the individual partners according to the percentage which the number of months in each accounting period of the partnership bore to the twelve months in each of the calendar years; the result being that with respect to the partnership income ■ in the fiscal year ending June 30, 1918, one half was apportioned to 1917 and subjected to 1917 rates, and the other half was apportioned to 1918 and subjected to 1918 rates; and, with respect to the partnership income in the fiscal year ending June 30, 1919, one half was apportioned to 1918 and subjected to 1918 rates, and the other half was apportioned to 1919 and subjected to 1919 rates. For the year 1919 the Commissioner held that the partners should report as income received in that year the whole amount of their respective shares of the partnership’s income for the 12-month period corresponding to the fiscal year of the partnership ending June BO, 1919, and for the 6-month period representing the last half of 1919' when the partnership changed to the calendar-year basis, or a total of 18 months.
   OPINION.

Littleton :

The partnership of which these taxpayers were members adopted as its accounting period from June 30, 1917, to July 1, 1919, a fiscal-year period ending June 30, 1918, and June 30, 1919. It changed to the calendar-year basis upon the close of its fiscal year on June 30, 1919. The partners were, at all times, on the calendar-year basis and rendered their returns on the cash receipts and disbursements basis. Section 213 of the Revenue Act of 1918 provides, after setting forth the items to be included in gross income, that “the amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.” Section 218 (a) provides:

That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner’s net income is computed.

The taxpayers contend that, since the partnership balanced its boobs each month and paid over do them monthly, the profits according to their respective interests, the amounts thus received constituted income to them in the year in which received for the reasons that (1) section 213 of the Revenue Act of 1918 provides that all items of income are to be included in gross income for the taxable year in which received and, unless an exception is read into section 218 (a), the income of a partnership formally distributed monthly should be accounted for by the partners in the year in which received; (2) in the case of personal service corporations, which are taxed in the same manner as partnerships, distributions are to be accounted for by the distributees in the year in which received; (3) section 224 of the Revenue Act of 1918 requires partnerships to make returns, stating specifically the items of gross income and deductions allowed, and to include therein the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each partner; that the partnership is not required to1 report its distributions but only the undistributed income; (4) under section 221 partnerships having the control, receipt, custody, disposal, or payment of fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual shall deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 8 per cent thereof and shall make return thereof on or before March 1 of each year, and shall on or before June 15 pay the tax, and that income upon which any tax is required to be withheld at the source shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return; (5) subsection (a) of section 218 of the Revenue Act of 1918 should not be construed so as to include within its provisions matters beyond the clear import of the language used and any doubt as to the provisions of that section should be resolved in favor of the taxpayer.

The Commissioner contends that section 218 (a) requires that the distributive share of the partners of the net income of the partnership for its accounting period ending within the fiscal or calendar year of the partners be included as income to the partners in the year in which the partnership’s accounting period ends, regardless of when the income is actually distributed.

In the enactment of section 218 (a) Congress ignored for taxing purposes the existence of the partnership and framed the law so as to treat the gains and profits of the partnership as if they were gains and profits of the individual partners. Unlike a corporation, a partnership has no legal existence aside from the members who compose it; consequently, in order that the profits of the partnership might not escape taxation, Congress provided that its income should be taxed to the individual partners, the same as if they had received it direct without the intervention of the partnership.

When the accounting periods of the partners coincide with the accounting period of the partnership, the provisions of section 212 (b) and section 213 (a) govern the determination of income. The purpose of Congress in the enactment of section 218 (a) to the. effect that each partner should include in his net income “ his distributive share, whether distributed or not, of the net income of the partnership for the taxable year,” to cover a situation already taken care of by the provisions of sections 212 (b) and 213 (a), was to make more evident its intent to ignore the partnership and treat its profits and earnings as accruing directly to the partners. The use of the phrase “ whether distributed or not ” evidences an intent on the part of Congress to levy the tax against the same income with respect to which the tax would have been levied had the partnership been created a taxable entity and made liable for the tax instead of the partners in their individual capacities. And this is in consonance with the provisions of sections 212 (b) and 213 (a), for, if the partnership profits and earnings are to be treated as accruing directly to the partners, it is immaterial whether the earnings are distributed by the partnership or not, since the partnership, as an entity, is exempt from taxation but is recognized as an entity for the purposes of accounting and determining the net income upon which the tax is required to be paid by the partners in proportion to their respective interests therein.

In enacting the provisions of the second clause of the second sentence of section 218 (a), Congress gave recognition to the situation where the accounting periods of the partners do not coincide with that of the partnership, and it was necessary to specify the time as of which the partners should account for their distributive shares in the net income of the partnership. Had Congress failed to specify the time when a partner should account for his share of the net income of the partnership for its accounting period, the partners would have been required to account for their distributive shares of the partnership’s net income in accordance with the provisions of section 213 (a), that is to say, their distributive shares would be included in their income for the taxable year in which received or in accordance with the provisions of section 212 (b), which require that “the net income shall be computed upon the basis of the taxpayer’s annual accounting period,” and which would require the partners to report as income their distributive shares in the partnership earnings for the 12 months coinciding with their accounting period.

Except for the provisions of section 218 (a), the only way in which the partners’ distributive shares in the partnership earnings for the 12 months coinciding with their accounting periods could be determined under section 212 (b) would be by taking an allocable part of their distributive shares in the net income of the partnership for each of the partnership’s two accounting periods overlapping theirs. A partner having a calendar year basis and filing his return on March 15, and being a member of a partnership having an accounting period ending on June 30, would be unable to determine his distributive share in the earnings of the partnership for one of the two partnership accounting periods overlapping his until more than three months after his return was due to be filed. Section 213 (a) would be equally inapplicable to such a situation. In recognizing a partnership for accounting purposes, Congress realized that until the close of the partnership’s accounting period.it can not be determined whether or not the partnership has any net income. The earnings of the earlier months may be entirely eliminated by losses sustained in the closing months of the partnership’s accounting period, even to the extent of showing a net loss for the entire accounting period. Under such circumstances, it could not be said that distributions during the first months of the partnership’s accounting period constitute income to the partners when the ■operations of the entire accounting period show that the partnership sustained a loss.

The language of section 218 (a) is unambiguous and its meaning is readily apparent. It states that the amount to be reported as income by the partner in the case where the accounting period of the partner differs from that of the partnership is his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the hasis of which the partner’s net income is computed. This language ■conveys but one meaning, and that is that a partner must report as income his proportion of the net income of the partnership for its .accounting period which Congress has recognized for 12 months ending within his fiscal or calendar year. Under the language of this section it is immaterial when and how the partner’s share of the net Income of the partnership is reduced to his possession.

Upon careful consideration of the taxpayers’ contentions, the Board is of the opinion that section 218 (a) provides an exception to section 213 of the Revenue Act of 1918, and that the conclusion reached is not inconsistent with the provisions of subsection (e) of section 218, relating to personal service corporations, and subsection (b) of section 218 and subsection (c) of section 205 of the Revenue Act of 1918, relating to the computation of tax upon the net income of partnerships, or section 221, subsections (a) and (b) of the Revenue Act of 1918, or section 224 of that Act.

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


author: Love:

text:
    Appeal of THE TIMES-NEWS CO.
    Docket No. 5088.
    Submitted December 15, 1925.
    Decided April 19, 1926.
    Upon the facts, held, that certain payments were not ordinary and necessary expenses, but were distributions of profits.

      Evert L. Bone, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Marquette, Morris, Green, and Love.
    This is an appeal from the determination of a deficiency for the fiscal year ended September 30, 1920, in the sum of $12,798.93, of which $10,804.44 is in controversy. The taxpayer alleges error on the part of the Commissioner as follows:

      (a) Failure to allow as an expense a commission of $20,000, paid for negotiating the sale of the property of this corporation.
    (&) Failure to allow as an expense the salary of R. T. Dobson, amounting to $8,863,17 for this year.
    (c) Failure to allow as an expense sundry expenses during this year, amounting to $673.71.

      (d) Failure to include as income for this year recoveries on bad debts previously charged off, amounting to $434.36.
    The Commissioner admits the last three assignments of error but denies the first assignment of error.
    FINDINGS OF FACT.
    The taxpayer is a Michigan corporation, engaged in the business of publishing a daily newspaper at Ann Arbor.
    In the year 1919, the taxpayer had outstanding 3,064 shares of capital stock, of which 3,062 were owned by R. T. Dobson; one share by J. A. Dobson (wife of R. T. Dobson); and one share by H. A. Whitker, a nephew. R. T. Dobson, the principal stockholder, was also general manager of the taxpayer. For some time prior to 1919-the said Dobson was in ill health and wished to be relieved of the responsibility of managing this business. A son, R. T. Dobson, Jr., had been assisting his father to some extent but did not desire to remain in the newspaper business. Several attempts had been made to sell the paper without success. Some efforts were made by its attorney, Prof. H. A. Wilgus, of the University of Michigan, to-interest the Union Trust Co. with a proposition to operate the paper-under a trusteeship.
    In or about the month of September, 1919, the board of directors of the taxpayer, consisting of R. T. Dobson, J. A. Dobson (wife of R. T. Dobson), and H. A. Whitker (nephew of R. T. Dobson),, passed a resolution authorizing the said R. T. Dobson, J. A. Dobson, R. T. Dobson, Jr., and Angela Dobson (wife of R. T. Dobson, Jr.) to» sell its property and to be paid as compensation the amount received by the taxpayer in excess of $60,000. The pertinent parts of the-minutes of the meeting of the board of directors are as follows:
    Minutes of a meeting of the Board of Directors of The Times News Com»--pany, incorporated, held at the office of the company in Ann Arbor, Mich.,, at 10 o’clock, A. M., on the 11th day of September, 1919.
    * * * * * * *
    R. T. Dobson moved that The Times News Co. authorize R. T. Dobsoni. Senior; J. A. Dobson, Russell T. Dobson, and Angela Dobson, or either of them, to sell the property of The Times News Co., including the assets of every kind or nature of the said company including all trademarks, copyrights, fra» chises, associated press membership, good will, subscription lists, books of account, subscription contracts, furniture, files and records, printing presses, lineotype machines, stereotyping machines, fixtures, cuts, photographs, scrapari-ums, libraries, type, galleys, composing tables, and cabinets, electric motors, appliances, tools, apparatus, paper, ink, and all other supplies and accounts and notes, bills receivable advertising contracts and name, and all other property of every kind for the sum of Sixty Thousand dollars, and that the said parties shall be entitled to whatever sum in addition they may sell the same for within the next thirty days, as a commission for their services in making the sale. Motion was seconded by H. A. Whitker and motion being put to vote was carried unanimously. On motion the board of directors adjourned.
    (Sgd) R. T. Dobson
    “ .1. A. Dobson
    “ Henry A. Whitker.
    On the samé day the stockholders, being also the directors, approved the action of the board of directors. The pertinent parts of the minutes of the said meeting are as follows:
    Minutes of a meeting of the stockholders of The Times-News Company, Incorporated, held at the office of the company in Ann Arbor, Mich., at 7:30 o’clock, P. M. on the 11th day of September, 1919.
    ⅝ ⅜ ⅜ ⅜ sfc ⅜ ⅝
    R. T. Dobson, presented a resolution unanimously passed by the Board of Directors authorizing certain persons named therein, to sell all of the property, assets, good will, franchises, accounts, contracts, and interests of every kind and character for a sum of sixty thousand dollars, and agreeing to pay as commission for such sale if made within thirty days from the time named all sums over and above the aforesaid amount to the parties mentioned in the sale. Mr. Dobson moved that the shareholders approve action of the Board of Directors in reference to the sale of the property as the above resolution provides. On being put the motion was unanimously carried. Adjourned.
    (Sgd) R. T. Dobson
    “ J. A. Dobson
    “ Henry A. Whitker.
    In the meantime tbe said Professor Wilgus bad been negotiating with the Booth Publishing Co. to purchase the paper. Under date of September 12, 1919, he wrote a letter, a copy of which was given to K. T. Dobson, which reads as follows:
    Mr. Ralph Booth,

      Booth Publishing Co., Detroit, Michigan.

    My Dear Sir:
    In accordance with my promise, upon my return to Ann Arbor this afternoon, I requested Mr. Dobson to send you at once copies of The Daily Times News, from September 2nd, until today, inclusive. He told me they would be sent this evening.
    Mr. Dobson assures me that he can show you detailed monthly statements of income and expenditures, and assets and liabilities, for each month since he has controlled the paper, and will be glad to do so if you care to see them. I presume he can give you full information as to paid circulation, although I did not mention that to him. He will undertake to answer definitely any question you may ask, if possible, relating to the business, if you should come out, or send some competent person. He requested me to ask you to communicate with me, or telephone him, when your representative may be here, in case one comes, in order that matters may be discussed at his house, rather than at the office. He will then arrange to inspect things at the office and the plant at a convenient time of the day.
    In reference to the specific question you asked me, as to price, I answered you correctly that Mr. Dobson valued his property somewhat higher than the sum you named. He, however, had not contemplated cash payment in full. That makes some difference. And while I may be mistaken, I believe there is a probability, (as perhaps you may have inferred from what I said this morning), that if a check for the amount you named were available at one of the banks here, I could secure almost immediately an agreement to sell, and, if your examination proved satisfactory, I could have delivered to you a completed and properly executed bill of sale of the property as a going concern, free and clear of all incumbrances, and the possession of the same, together with a lease of the part of the building used by the newspaper, for a term of some years, at a reasonable rental, and also with a further agreement that Mr. Dobson would not engage in the newspaper or printing or publishing business here or elsewhere, directly or indirectly, if such were desired.
    If I can be of any service in giving further information or otherwise, I will be glad to do so.
    The negotiations resulted in the sale of the business of the taxpayer to the said Booth Publishing Co. in October, 1919, for $80,000. Under date of September 30, 1919, the minutes of the board of directors pertinent to the sale read as follows:
    Minutes of a meeting of the Board of Directors of The Times News Company, incorporated, held at the office of the company in Ann Arbor, Mich., at 11 o’clock, P. M. on the 30th day of September, 1919.
    ⅜ ⅜ ⅜ ⅝ ⅜ ‡ *
    K. T. Dobson presented a proposition for the purchase of all of the property of The Times News Co. from the Booth Publishing Company of Detroit for the sum of Eighty Thousand dollars, the said property to include all of the assets of every kind or nature of said company * * * Mr. Dobson moved that the proposition be accepted and the officers of the corporation be authorized upon the approval of the shareholders to make, execute, and deliver whatever paper and documents may be necessary and proper to complete the sale and transfer of said property to said The Booth Publishing Company of Detroit, Mich., that said Times News Co., be dissolved and its affairs wound up as of the date of September 30th, 1919; * * * that E. T. Dobson shall
    be trustee for the purpose of receiving the consideration mentioned for the Company and carrying out the provisions of the terms of the sale and accounting to the parties interested for the amounts due them and for making the payment of commissions for the sale as agreed upon; and that this resolution be submitted to the shareholders for their approval. The motion was seconded by H. A. Whitker and upon being put to vote was unanimously carried.
    On motion the Board of Directors adjourned.
    (Sgd.) E. T. Dobson,
    “ J. A. Dobson,
    “ Henby A. Whitker.

      Under the same date the minutes of the stockholders’ meeting showed a formal ratification of the action of the board of directors respecting the sale.
    A commission of $20,000 was paid to the four persons mentioned in the resolution of September 11, 1919, in the sum of $5,000 each; and said commission was deducted by the taxpayer from its gross income for the fiscal year ended September 30, 1920. The amount of the commission was disallowed as such deduction by the Commissioner and added to income, resulting in the deficiency in controversy.
   OPINION.

Love:

The Commissioner has conceded all the assignments of error, except the one relating to the alleged $20,000 commission, so that the sole issue remaining is whether or not said amount is a proper deduction from income as an ordinary and necessary business expense.

The taxpayer insists that it has the legal right to dispose of its assets and deduct a commission for such sale as an ordinary and necessary business expense, and further points out that it has conformed to all the formal and legal prerequisites in the form of directors’ and stockholders’ resolutions. The taxpayer also urges that the corporate entities should be preserved throughout and that the relationship of the stockholders, directors, and the parties receiving the alleged commission should be disregarded. With these general principles we do not disagreee, but to our minds there are some very apparent facts in this proceeding that put the taxpayer beyond the pale of these principles and force us to look into the true significance of the transaction.

The taxpayer would have us believe that, at the time of the resolution authorizing the commission, there were no prospective sales in sight and that Professor Wilgus subsequently, while on his trip to negotiate with the Union Trust Co., came in contact with the Booth Publishing Co., which ultimately purchased the assets of the taxpayer. The written evidence disproves this theory. The letter of September 12, 1919, written by Professor Wilgus to the Booth Publishing Co., and a copy of which was sent to B. T. Dobson, discloses that negotiations were already well under way with the Booth Publishing Co. Irrespective of this fact;- there are several outstanding facts we should not overlook.

In the first place, It. T. Dobson was, for all practical purposes, the sole stockholder, director, and owner of the business, there being but two outstanding shares for qualifying purposes. In the second place, it is very apparent that J. A. Dobson (his wife), D. T. Dobson, Jr. (his son), and Angela Dobson, (wife of his son), performed no services and were in no way instrumental in securing the sale of the property. B. T. Dobson, as sole owner, had to finally agree to the terms of the sale, but performed no services in securing the buyer. Professor Wilgus was the sole factor in bringing the buyer and seller together and closing the transaction. His compensation is not in dispute. Why then should a liberal commission be paid to third parties who clearly performed no services and had nothing to do with the transaction? Stripping the transaction of all legal formalities, it appears that the father agreed to pay himself, his wife, his son, and his son’s wife $5,000 each, as the result of a sale negotiated by Professor Wilgus, and as a mere distribution as the profits of that sale.

We are of the opinion that the payments were not ordinary and necessary business expenses and that the amount thereof should be restored to the income of the taxpayer for the taxable year in question.

The Commissioner having admitted the other assignment of error, the deficiency should be computed in accordance with such admission.

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


text:
    Appeals of ALBINA CAVINATO, and STEPHEN CAVINATO and ALBINA CAVINATO.
    Docket Nos. 5235, 5236.
    Submitted February 20, 1926.
    Decided April 19, 1926.

      Clarence E. /Sutherland, Esq., for the taxpayers.

      Briggs G. JSimpich, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tbussell.
    These appeals are from determinations of deficiencies in the amount of $119.21 for the calendar year 1920 against Albina Cavi-nato, and in the amount of $182.89 for the calendar year 1921 against Stephen Cavinato and Albina Cavinato, arising from the action of the Commissioner in computing the deduction for exhaustion, wear and tear of a building at the rate o'f 2½ per cent per annum, based upon the physical life of the building, instead of over a period of 21 years, as contended for by the taxpayers.
    Both appeals involve the same question. Stephen Cavinato is a party to the appeal in Docket No. 5236 by reason of the fact that he and his wife, Albina Cavinato, filed a joint return for the calendar year 1921.
   FINDINGS OF FACT.

The taxpayers are residents of Fort Lee, N. J. On November 1, 1901, the trustees of The Sailors’ Snug Harbor in the City of New York, a corporation, leased to one Louis Moila certain land located in New York City, at a certain annual rental, plus taxes, for a term of 21 years. The lease provided that, upon the expiration of the term of 21 years, it should be renewed, or, upon failure of the parties to agree upon a renewal, the lessor of the land should purchase the building erected thereon by the lessees as follows:

Whereas, the party of the first part having brought an action against the party of the second part and others to recover possession of the said premises, has discontinued the said action at the request of the said party of the second part upon the express proviso and condition that the said party of the second part should surrender the aforesaid Indenture of Lease, and should accept this present lease containing a condition and proviso that the building now erected upon the said premises be removed and a new seven-story building erected thereon by, and at the exclusive expense of, the party of the second part ac•cording to certain plans heretofore filed with the party of the first part, numbered from 1 to 5, inclusive, and authenticated by the signature of the party ■of the second part, to be equipped and fully completed on or before the first day of November, 1902;
The said The Trustees of The Sailors’ Snug Harbor in the City of New York, the party hereto of the first part, in consideration of the rents and covenants Iieréinafter reserved and contained, hath granted, demised and to farm let And by these presents doth grant, demise and to farm let unto the said party -of the second part, ALL that certain Lot of Land, situate, lying and being in the Fifteenth Ward of the City of New York; being part of the lands of the ■said party of the first part, and distinguished on a map of its property in the said Ward, made by Edwin Smith, City Surveyor, dated April 13th, 1848, and filed in the office of the Register of the City and County of New York, by the Number 13S.
⅜ * ⅜ * ⅜« ⅜ ⅝
And it is hereby mutually covenanted and agreed, that at the expiration of the term hereby granted, if the said parties hereto shall agree upon a renewal of this lease, for a further term of twenty-one years, and shall by mutual consent fix upon the annual ground rent to be reserved in such renewed lease, then the said party of the first part, its successors or assigns, shall and will ■execute to the said party of the second part, his executors, administrators or ■assigns, at his or their expense, a new lease of the aforesaid premises for the term of twenty-one years, from and after the expiration of the term hereby .granted, at the annual ground rent payable half-yearly, agreed upon between the said parties as aforesaid. But if at the expiration of the term hereby .granted the said parties shall not agree upon a renewal of this lease, or upon ■the amount of the rent to be reserved for such renewed term, then each party -shall choose a disinterested person, and the said persons so chosen shall under ■oath appraise the land hereby demised, considering it as a vacant lot, at its full and fair worth at private sale; and they shall also under oath appraise the building to be erected on the said lot according to the plans and conditions hereinbefore recited, or any other building of like description as its substitute— which shall have been erected upon the said land according to plans approved1 by the party of the first part, its successors or assigns — at its then actual worth, without reference to the ground on which it stands; and in case the said appraisers shall differ in their valuation or appraisement either of the lot or building, they shall then choose an umpire, qualified as aforesaid, whose decision under oath, shall be final and conclusive.
And the said party of the first part, its successors or assigns, shall have the full liberty and choice either to pay to the said party of the second part, his-executors, administrators or assigns, the value of the said building so determined as aforesaid, or to grant a renewal of this lease unto the said party of the second part, his executors, administrators or assigns, at his or their expense, for the term of twenty-one years, from and after the expiration of the term hereby granted, at an annual ground rent of five per cent, on the valuation; of the said lot so determined as aforesaid.
And it is further mutually covenanted and agreed, that at the expiration of each and every term, which may be thereafter granted by each and every subsequent renewal of this lease, the said party of the first part, its successors- or assigns, shall still have and retain the full liberty and choice, either to grant a further renewal, for the further term of twenty-one years, at such annual rent, payable half-yearly, as shall be ascertained and determined in the manner aforesaid, or to pay unto the said party of the second part, his executors,, administrators or assigns, the value of the said building or its substitute, to be ascertained as aforesaid. And it is further mutually covenanted and agreed, by and between the parties aforesaid, that whenever the said party of the first part, its successors or assigns, shall refuse to grant a renewal of this lease as-aforesaid, the said building or its substitute shall be valued and paid for as aforesaid. Provided, always, that the said party of the second part, his-executors, administrators or assigns, shall not be compelled to surrender the premises until such payment be made or tendered. And it is further mutually covenanted and agreed, by and between the parties aforesaid, that in case the said party of the first part, its successors or assigns, shall at the expiration of the term granted by this lease, or at the expiration of any term which may be granted thereafter, by any subsequent renewal thereof, elect and choose to pay unto the said party of the second part, his executors, administrators or assigns, the value of the said building or its substitute, to be ascertained as aforesaid, and shall actually make such payment or tender the same, the said party of the second part, his executors, administrators or assigns, shall then deliver up the said building or its substitute, in the same order and condition in which it was at the time of its valuation as aforesaid, and also all and singular other the premises hereby demised, to the said party of the first part, its successors or assigns, without fraud or delay. And lastly, it is mutually covenanted and agreed by and between the parties as aforesaid, that each renewed lease shall contain the like covenants, provisos and conditions, as herein contained.

At some time prior to May 3, 1918, Albina Cavinato acquired the aforementioned lease and the building located upon the land covered by the lease. On that date the trustees of The Sailors’ Snug Harbor in the City of New York leased to Albina Cavinato the said land for a period of 21 years from May 1, 1918, at an annual rental of $900. This lease contained the same provisions relative to its renewal at the end of 21 years, or the purchase by the lessor of the building located upon the land, as the original lease herein quoted.

In their returns for each of the years the taxpayers deducted $3,000, as exhaustion, wear and tear of the building, computed upon a life for the building of 21 years..

The Commissioner allowed a deduction of $1,575, at the rate of 2½ per cent, based upon the physical life of the building.

On the authority of the Appeal of Eimer & Amend, 2 B. T. A. 603, and the Appeal of G. S. Slew a/it Go., 2 B. T. A. 1016, the deficiencies are $119.21 as to Albina Gavinato for the year 1920, and $182.39 as to Stephen Gavinato and Albina Gavinato for the calendar year 1921. Order will be entered accordingly.


author: Phillips:

text:
    Appeal of THE HUB, INC.
    Docket Nos. 3553, 3554.
    Submitted October 11, 1925.
    Decided April 19, 1926.
    1. Value of leasehold determined.
    2. An oral assignment of a leasehold interest in real estate is yoidable, and not void, and where the parties have recognized the assignment as valid, it can not be attacked by a third party.

      James W. Ewing, W. D. Jamieson, and Harry Friedman, Esgs., for the taxpayer.

      Robert A. Littleton, Esg., for the Commissioner.
    Before Gratjpner, Trammell, and Phillips.
    Taxpayer appeals from the determination of deficiencies of $9,397.01 and $8,725.26, income and profits taxes for the fiscal years ended January 31, 1920, and January 31, 1921, respectively. The taxpayer alleges that the Commissioner committed error in refusing to allow as paid-in surplus the value of a leasehold acquired by the taxpayer as a gift from its principal stockholder, and in disallowing as a deduction from gross income for each of the years concerned an allowance for exhaustion of such leasehold. The questions involved are identical as to each of the appeals, and at the hearing the appeals were consolidated. .
    FINDINGS OP PACT.
    The taxpayer is a West Virginia corporation with its principal office at Wheeling.
    In or about the year 1893, one Fridenberg acquired the lot and building on the northeast corner of Market and Fourteenth- Streets, in the City of Wheeling. Fridenberg was not a resident of Wheeling and the property was called to his attention by one Sonneborn, the husband of Fridenberg’s youngest sister. Some time prior' to 1906, Sonneborn entered into the possession of the property for the purpose'of conducting a department store, and placed on the property improvements costing between $50,000 and $60,000. In 1906 the taxpayer was organized and the business was transferred to it, Sonneborn becoming and remaining the principal stockholder. During the years involved, Sonneborn owned approximately 75 per cent and additional stock was owned by his sons.
    In 1906 Sonneborn obtained a lease upon said premises at the annual rental of $4,800. This lease was not assigned to the taxpayer, which occupied the premises as a subtenant and paid Sonne-born rental at the rate of $10,000 per year. This lease expired on March 31, 1912. Under date of August 26, 1912, a lease of these premises was entered into between Fridenberg and Sonneborn, effective for a period of 15 years from April 1, 1912, at an annual rental of $10,000, payable quarterly. Shortly after the execution and delivery of such lease, and on or about April 1, 1913, Sonneborn delivered the lease to his son, an officer of the taxpayer, on behalf of the corporation, making an oral assignment thereof to the corporation, and it was placed in its safe. From and after April 1, 1913, all rental becoming due under the lease was paid by the taxpayer directly to Fridenberg.
    The premises were well located in the principal shopping district of Wheeling, and on April 1, 1913, the lease had a fair market value of $42,000.
   OPINION.

Phillips:

Both parties appear to concede the fact that the lease acquired by Sonneborn in 1912 was acquired by him in his individual capacity and not as a representative of the corporation of which he was president. Prior to that time the taxpayer had been his tenant, and there is nothing that would justify us in reaching any conclusion other than that this lease was taken by Sonneborn individually. The testimony is to the effect that Fridenberg declined to make the lease with the corporation, desiring to have the personal responsibility- of Sonneborn. The two questions presented are' whether any assignment of the lease was made by Sonneborn to the taxpayer and, if so, what value, if any, it had at the time of such assignment.

We are satisfied from the evidence that an assignment to the taxpayer took place on or about April 1, 1913. This assignment was oral, but the taxpayer was in possession of the property and the oral testimony that such an assignment took place is supported by; canceled checks showing that, after April 1, 1913, the • payments' were made by the taxpayer directly to Fridenberg, whereas, prior to that time, the payments were made to Sonneborn and by him to Fridenberg. It is the contention of the Commissioner that such oral assignment is void under the statute of frauds. It is sufficient to point out that, at most, such assignment was voidable only, and, the parties having recognized the assignment as valid, its validity can not be attacked by a third party. See discussion in the opinion in the Appeal of Denholm & McKay Co., 2 B. T. A. 444.

The more difficult question is the value to be assigned to the lease at the date of transfer to the taxpayer. It is taxpayers contention that the premises had a rental value of over $20,000 a year at the time the lease was made providing for a rental of $10,000 per year, and upon that basis taxpayer claims a value of $150,000. Much expert testimony was introduced, including testimony concerning other rentals at the same time in the same neighborhood and for approximately the same term. To our mind the record conclusively establishes that the property should have rented, on a 15-year lease, for a sum substantially in excess of the rental fixed in the lease, and certainly for at least $15,000 per year over the 15-year term. At the time of the assignment to the taxpayer the lease had 14 years to run. The present value of a payment of $5,000 per year over a period of 14 years is approximately $42,000, which we have found to be the reasonable value of the lease at the time it was assigned to the taxpayer.

Why the landlord should have been willing to make the lease at an amount so much less than the actual rental value is a question which has received serious consideration. He was a resident of Philadelphia and not familiar with property in Wheeling. The property was purchased by him for about $75,000 during the panic of 1893, upon the advice of Sonneborn, and proved to be an exceptionally attractive investment. Sonneborn had spent between $50,000 and $60,000 in improving the premises. The lessor was in a position to lease the property at a net rental of $10,000 per year and obtain a return of approximately 15 per cent upon the investment made by him in 1893. Considering these factors and the family relationship existing, it is not improbable that he was willing to leage it to Sonneborn for a sum which was less than could have been obtained from others, but, whatever may have been the motives which actuated the lessor, the taxpayer has established that the rental was much less than was being paid at the time for other similar property. On the other hand, we are not willing to accept those opinions which take into consideration the probability of an increase in rental value after 1912. It is quite possible that in 1912 it could have been foreseen that the rental value of the property would increase within the next 15 years, but, under the unusual circumstances in this appeal, we feel that the value to be attached to the lease should be confined to the circumstances actually existing in 1912 and 1913.

The taxpayer is entitled to include the $42,000 value of the leasehold in its invested capital, but earned surplus must be reduced by the pro rata exhaustion of such value to the beginning of each of the taxable years. In computing its income it is also entitled to a deduction of $3,000 for each of the years for exhaustion of the leasehold.

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


text:
    Appeal of H. J. BARTRON.
    Docket No. 2721.
    Submitted September 1, 1925.
    Decided April 19, 1926.
    In 1911 tbe taxpayer and Mary O. Horigan entered into an oral partnership agreement for the operation of a hospital. Shortly thereafter the parties were married. Both continued to devote their services and energies to the conduct of the hospital. Held, that a partnership existed between the taxpayer and his wife during the years 1919 and 1920.

      Morris D. Iiofyile, Esq., for the taxpayer.

      Robert A. Littleto.n, Esq., for the Commissioner.
    Before Smith, James, LittletoN, and Teussell.
    The taxpayer appeals from a determination of deficiencies in income tax for the years 1919 and 1920 in the amounts of $4,459.88 and $241.88, respectively. The question in issue is whether an ordinary partnership existed between the taxpayer and his wife during the years 1919 and 1920.
    FINDINGS OF FACT.
    The taxpayer was licensed to practice as a physician and surgeon in 1906. In 1909 he located in Watertown, S. Dak. The hospital facilities of the place at f the time were very poor, and, soon after locating in Watertown, the taxpayer arranged with one Doctor Jones, an osteopath, to establish a hospital, which became known as the Watertown Sanitarium and Hospital. Mary C. Horigan was the superintendent and head nurse at the hospital. The taxpayer had no property at the time and Doctor Jones financed the hospital. Jones became ill in the early part of 1911, and, when it became evident that he would live but a short time, the taxpayer advised Mary C. Horigan that owing to his financial condition he could not continue to run the hospital unless she would enter into a partnership with him for the operation of it. This she consented, to do. The agreement was that both would devote their services to the hospital and that each should have a one-half interest in the profits. Both parties were without financial resources. The taxpayer had his training as a physician and surgeon and Mary -C. Horigan had her training as a graduate nurse. The taxpayer had some equipment for his office and Mary C. Horigan had some furniture. Doctor Jones died on April 24, 1911. The taxpayer and Mary C. Horigan were married on May 24, 1911. Prior to the time of entering into the partnership agreement Mary C. Horigan had received a salary as superintendent of the hospital. After the partnership agreement was entered into no salary was received by either Mary C. Horigan or by the taxpayer, and all receipts were used to meet necessary expenses. Any profits that accrued were used in the business of the hospital. At some time prior to 1914 a parcel of land was purchased by the taxpayer and his wife from partnership funds, the title to the land being taken in the name of Mary C. Bartron. During all the years following her marriage, up to and including 1920, Mary C. Bartron continued as superintendent and manager of the hospital, directing nursing, giving anesthetics, taking charge of post operative dressings, purchasing supplies, and attending to the business details of the running of the hospital.
    After the death of Doctor Jones the name of the hospital was changed, first to Bartron Sanitarium, then Bartron Hospital, and later, after additional physicians and surgeons had been hired, to Bartron Hospital Clinic. All of the income of the hospital during this period was deposited in a bank account kept in the fictitious name of the partnership. Checks in the name of the partnership were drawn either by the taxpayer or by Mary C. Bartron. The fact that the hospital was operated as a partnership was not generally advertised, although it was known to the officials of the bank in which the taxpayer’s money was deposited. As the business and the profits of the hospital increased a portion of the profits was invested in stocks, bonds, and in other property. Sometimes the title was taken in the name of the taxpayer and sometimes in the name of Mary C. Bartron. Only one set of books was kept for the hospital, and receipts from investments standing in the name of either the taxpayer or Mary C. Bartron were entered upon the books the same as receipts from hospital patients.
    When it became necessary to make out income-tax returns for 1917 the taxpayer sought the assistance of a deputy collector by the name of Casey. He was told of the partnership existing between the taxpayer and his wife. Inasmuch as he had no partnership blanks at the time, he made out a return for the taxpayer showing tbe receipt of a salary equal to one-half of the net profits from all sources, and made out a return for Mary C. Bartron showing the receipt of an amount of income equal to that returned by the taxpayer as salary but designated as profits from the hospital. Separate returns were filed for the years 1918 and 1919 in a similar manner, but a joint return was filed for 1920. These returns were all made under the direction of deputy collectors. In December, 1921, a revenue agent advised the taxpayer, after an examination of the books of account, that partnership returns should have been filed for all years.
   OPINION.

Smith :

There is no prohibition in the statutes of South Dakota against husband and wife entering into a valid partnership agreement. Section 171 of the Revised Code of South Dakota, 1919, in effect during the years 1919 and 1920, provides:

Either husband or wife may enter into any engagement or transaction with the other, or with any other person, respecting property, which either might, if unmarried, subject, in transactions between themselves, to the general rules which control the actions of persons occupying confidential relations with each other.

The statutes also provide that where a partnership is conducted under a fictitious name, the names of the partners shall be filed with proper county authorities, but the Supreme Court of the State has held in the case of Bovee v. DeJong, 22 S. D. 163; 116 N. W. 83, “ that a noncompliance with the requirement has no invalidating effect upon partnership transactions, as a compliance at any time removes all prior disability.”

We can not doubt from the evidence of record that the taxpayer and Mary C. Horigan, who later became the taxpayer’s wife, entered into a partnership agreement for the conduct of a hospital at Water-town, S. Dak., in the spring of 1911, prior to the date of their mar-riageon May 24, 1911. The marriage of the parties did not necessarily dissolve the partnership. It apparently was the intention of both parties that the partnership should continue. We think that the evidence proves the existence of a partnership between the taxpayer and his wife, Mary C. Bartron, during the years 1919 and 1920, and that the tax liability of each should be determined upon the basis that each one had a distributive share in the earnings of the partnership of one-half of the total.

Order of redetermination will ~be entered on 15 days’ notice, wider Rule 50.


author: Graupner:

text:
    Appeals of CHARLES T. PLUNKETT, WILLIAM C. PLUNKETT, LYDA F. PLUNKETT, and FLORENCE C. PLUNKETT.
    Docket Nos. 3701, 3756, 3757, 3758.
    Submitted December 2, 1925.
    Decided April 19, 1926.
    Difference between cost of Liberty bonds to a partnership and tbe par value of capital stock of a corporation received in exchange for the bonds in 1920 held to be a loss deductible by the partners in 1920.

      Samuel Friedman, Esq., for the taxpayers.

      M. N. Fisher, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    These appeals are from determinations of deficiencies in income taxes for the calendar year 1920 as follows: Charles T. Plunkett, $6,551.68; William C. Plunkett, $838.10; Lyda F. Plunkett, $837.84; and Florence C. Plunkett, $994.15.
    The deficiencies arose from the disallowance by the Commissioner of a deduction made in computing the net income of a partnership, of which the appellants were members, which resulted in increasing the distributive shares of the appellants. The deduction represents a loss claimed to have been sustained by the partnership in the exchange of certain Liberty bonds for capital stock of a corporation m 1920.
    FINDINGS OE FACT.
    The taxpayers are individuals residing at Adams, Mass., and in 1920 were members of the firm of W. C. Plunkett & Sons, a partnership.
    On December 30, 1920, the partnership transferred its assets, with the exception of accounts receivable and certain worthless securities, to a newly formed corporation, W. C. Plunkett & Sons Co., in exchange for capital stock of the latter having a par value of $399,700. The assets transferred were valued by the partnership as follows:
    Real estate and machinery_-$131,969.34
    Inventory_ 66,497.67
    Investments- 163, 659. 00
    Cash- 37,582.99
    Total- 399, 700. 00
    Included in the item of “Investments” were a number of Liberty bonds and Victory notes which had been purchased by the partnership at face value and at which value they were carried on the partnership books until December 30, 1920, when the bookkeeper reduced their value on the books. A list of the securities involved, with dates of purchase, cost, and fair market value on December SO, 1920, is as follows:

    The entire capital stock of the corporation, with the exception of three shares, was issued to the taxpayers, and has at all times been held by them.
   OPINION.

Graupner:

The entire capital stock of the corporation, with the exception of three shares, was issued in exchange for the assets of the partnership, and the taxpayers claim the right to deduct as a loss the shrinkage in value of securities, on the theory that the value of the capital stock received was neither more nor less than the value of the assets transferred to the corporation. The Liberty bonds exchanged for stock of the corporation had been purchased on various dates at a total cost of $150,600. At the time of the exchange their market value was $128,680.50, which was also the par value of the stock received therefor.

The Commissioner denies that the market value of the stock issued for the Liberty bonds was less than the cost of the bonds. It is true that.no market value of the stock was established by sales, as all the stock, with the exception of three shares, was issued to the members of the partnership and has since been held by them. “ The usual method of appraising stock issued for property where there is no evidence of the market value of the stock is to say that the stock is deemed equivalent in value to the property for which it was issued, and.by determining the value of the property one can determine the value of the stock.” Appeal of William Ziegler, Jr., 1 B. T. A. 186, 192.

Here we have assets with a market value of $399,100 exchanged for stock of equal par value. Included in the assets are bonds which have depreciated in value, but their market value at the time of the exchange is known. Using the rule laid down in the Ziegler Appeal as a basis to determine the fair market value of the stock, we are of the opinion that the partnership suffered a loss of the difference between the cost of the bonds and the par value of the stock received in exchange, which was based upon their market value at the time of the exchange, and the distributive shares of the partners should be determined accordingly.

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