text:
    Appeal of WOOD BROTHERS THRESHER CO.
    Docket No. 5877.
    Submitted February 9, 1926.
    Decided April 22, 1926.

      K. N. ParMnson, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from determinations of deficiencies in income and profits taxes for the calendar years 1918, 1919, and 1920, in the respective amounts of $512.39, $3,276.16, and $2,333.97, a total of $6,122.52. The taxpayer alleges error on the part of the Commissioner in (1) excluding from invested capital alleged value of good will acquired for stock; (2) excluding from invested capital $75,000, claimed to have been paid in in cash for patents; (3) refusing to allow as a deduction any exhaustion of the alleged purchase price of such patents; and (4) refusing to allow as a deduction an amount of $2,500, claimed to have been paid as brokerage commissions.
   FINDINGS OF FACT. .

The taxpayer is an Iowa corporation with its principal office at Des Moines. It was incorporated January 6, 1911, with an authorized capital stock of $600,000, of which $200,000 was preferred stock and $400,000 was common stock.

Upon its organization it issued $225,000 par value of its stock in exchange for tangible assets of a predecessor business having a fair market value of $206,772.51 in excess of liabilities assumed. As a part of such exchange it acquired the good will of such predecessor, which had a fair market value of $18,227.49.

On February 1, 1911, the taxpayer borrowed from two banks the amounts of $35,000 and $40,000, a total of $75,000. At a meeting held on the same date the stockholders approved the purchase from F. J. Wood of three United States patents and two applications for patents, for the sum of $75,000. The purchase was accomplished, payment was made to Wood, and the transaction recorded in the taxpayer’s cash book. Within two or three days thereafter, F. J. Wood purchased for cash 750 shares of the capital stock of the taxpayer at par value of $100 per share, and the taxpayer thereupon repaid to the banks the amount of $75,000 which it had borrowed.

Half of the stock so purchased by F. J. Wood was issued to him and half to his brother, R. L. Wood. The stock then outstanding was held as follows:

Shares

IP. J. Wood-_1,489
R. L. Wood_1, 489
E. E. Wood_ 11
R. J. Wood_ 11

During 1911, 23 shares were sold to other individuals at par.

The patents and applications for patents which the taxpayer acquired from F. J. Wood in 1911 were as follows:

United States Patent No. 730,028, being an improvement in Tenders for Traction Engines, issued to Eranz J. Wood, September 80, 1902;
United States Patent No. 818,009, being an improvement in Threshing Machines, issued to Franz J. Wood, April 17, 1906;
United States Patent No. 978,977, being an improvement in Driving- Gear for Traction Engines, issued to Franz J. Wood, December 20, 1910;
Application for United States Letters Patent, Serial Number 499,301, being an improvement in Band Cutter and Feeder for Threshing Machines, filed by Franz J. Wood, June 1, 1909 ; and
Application for United States Letters Patent, Serial Number 602,151, being an improvement on Traction Engines with special reference to Gas Tractors, filed by Franz J. Wood, January 12, 1911.

The devices described under these patents and under application No. 499,301 had been manufactured by the predecessor company, but no royalties were ever paid to the owner of them.

Under Patent No. 710,028, dated September 30, 1902, about 100 machines had been manufactured by the predecessor company and sold for $100 each. The manufacture of these machines was discontinued about 1907 and none have ever been made by the taxpayer.

The grain-threshing machine covered by Patent No. 818,009, dated April 17, 1906, has been manufactured both by the taxpayer and its predecessor. During the four years prior'to 1911 about 100 of the threshers had been manufactured and sold at from $800 to $1,200 each. In the year 1923 the taxpayer manufactured between 700 and 1,000 of the machines. At the time of transfer and on March 1, 1913, such patent had a fair market value of $25,000.

Under Patent No. 978,977, dated December 20, 1910, the taxpayer’s predecessor manufactured two engines in 1910 and the taxpayer built six in 1911. The taxpayer was unable to sell these engines at a profit and discontinued manufacturing them in 1911. At the time this patent was secured it was considered by the inventor to be a valuable patent, but shortly thereafter the market for the patented device ceased.

The device described under application for Letters Patent No. 499,301 was manufactured by the predecessor company and is still manufactured by the taxpayer with some improvements.

Under application No. 602,151 the taxpayer made one tractor, which did not prove satisfactory, and the manufacture of the machine was discontinued.

During 1918 a Chicago brokerage firm discounted notes of the taxpayer on which commissions, discounts, and exchange charged during the year amounted to $4/166.02. Of this amount the taxpayer paid $2,266.02, leaving $2,500 of the total charges for-the year unpaid. There is no evidence as to the time such notes were to run or as to what amount of interest accrued during the year.

In determining the deficiency, the Commissioner refused to include in invested capital any value for good will or for the patents, and refused to allow any deduction for exhaustion of the patents.

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


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of HOME LAUNDRY CO.
    Docket No. 6047.
    Submitted January 28, 1926.
    Decided April 22, 1926.

      Wm. H. Lawrence, Esq., for the taxpayer.

      Bruce A. Low, Esq., for the Commissioner.
    Before SteRNíiagen, Lansdon, and ARUNdell.
    The Commissioner determined deficiencies in income taxes for the years 1919 to 1922, inclusive, in the amount of $4,516.50. So much of the deficiencies as are in dispute arose from the disallowance of a portion of the salary paid to Mary A. Lotz, vice president and treasurer of the petitioner.
   FINDINGS OF FACT.

The petitioner was incorporated May 1, 1917, under the laws of the State of Maryland, and during the taxable years in controversy operated a laundry in Baltimore. Prior to incorporation the business was operated for a number of years as a partnership under the name now used by the corporation. Capital stock in the’ amount of $30,000 was issued, 178 shares being owned by Joseph Lotz, president of the petitioner, and 120 shares by Mary A. Lotz, vice president and treasurer. The amount of the original capital outlay was $2,000, which amount was increased by permitting the earnings to remain in the business.

During the years in question petitioner had about 50 employees; it operated six wagons and five automobile trucks, had approximately 3,500 customers, and did an annual business of about $100,000.

John Lotz was the president and general manager of the petitioner during the years 1919 to 1922, inclusive, and devoted all of his time to the business.

The corporate minutes of April 5, 1917, contain the following:

Upon motion duly made and seconded and unanimously carried the salary of Joseph Lotz as president was fixed at $25 a week, the salary of Mary E. Lotz as vice-president and treasurer, with the additional allowance of $30 for household expenses was fixed at $25 per week until other [wise] determined by the Board of Directors of this company.

An agreement was signed by Joseph and Mary A. Lotz under date of April 3,1917, which reads as follows:

This agreement was entered into in duplicate the 3rd of April, 1917, by and between Joseph and Mary A. Lotz, husband and wife, of Highland Town, Baltimore City, Maryland, that as president of said corporation Joseph Lotz shall receive the salary of $25 per week, that as vice-president and treasurer of the said corporation Mrs. Mary A. Lotz shall receive a salary of $25 per week, and also $30 per week to he withdrawn for household expenses to be paid to the said Mary A. Lotz, in addition to the said salary.

The arrangement set forth above was not followed by the petitioner.

On January 1, 1919, by order of the president, the salary of Mary A. Lotz was increased from $55 to $65 a week. On January 1, 1920, the president increased the salary of Mrs. Lotz to $90 a week, and on February 4-, 1921, her salary was increased to $100 a week, by order of the president. The salary of the president was increased from $25 to $50 a week on January 1, 1920.

The idea of operating a laundry originated with Mrs. Lotz, and during the early days of petitioner’s existence she devoted all of her time to its success and was largely responsible for its growth and prosperity. With the success of the business assured, Mrs. Lotz devoted less time to the details, did less manual labor than formerly, and, during the taxable years in question, spent only a portion of each day at the laundry. Her home was located only a few feet from the plant and it was convenient for her to come over from time to time during the day, as occasion demanded-, and this was her practice. Her duties consisted of supervising the assorting of the laundry as it came in and investigating and settling complaints, and, during periods when her husband was sick, she took active charge and managed the business.

The sums paid to Mrs. Lotz for salary were reported by her in her income-tax returns and tax paid thereon.

The amount paid to Mrs. Lotz by the petitioner during the taxable years 1919 to 1922, inclusive, was compensation and constitutes an allowable deduction from petitioner’s gross income for the respective years in which paid.

Order of redetermination will be entered on 15 days' notice, wnder 'Bule 50.


text:
    Appeal of ESTATE OF F. M. ROBINSON.
    Docket No. 6341.
    Submitted February 20, 1926.
    Decided April 22, 1926.

      John E. McClure, Esq., for the taxpayer.

      W. H, Lawder, Esq., for the Commissioner.
    Before Arundell and Lansdon.
    The Commissioner determined a deficiency in income tax for 1920 in the amount of $1,016.30, of which $1,014.02 is in controversy. The only issue is whether an amount of $6,144, interest on a certain note, was income of F. M. Robinson, or of his wife, who is alleged to have been the owner of the said note, during the period over which the interest represented by such payment- accrued.
   FINDINGS OF FACT.

F. M. Robinson, the decedent, was a resident of Atlanta, Ga., during the year 1920. Sometime between January and July, 1919, he gave his wife a certain promissory note, bearing interest at the rate of 6 per cent per annum, executed by Asa G. Candler, Inc., in the amount of $204,800. This gift was made in the presence of a witness and was effected by endorsement and delivery of the note.

On December 31, 1919, Asa G. Candler, Inc., issued its check, payable to the order of F. M. Robinson, for interest on the note in question for the six-month period, from July 1, 1919, to December 31, 1919, in the amount of $6,144. Early in January, 1920, F. M. Robinson endorsed such check, and the proceeds were deposited either to his credit or to the credit of his wife, and its amount was included by Mrs. F. M. Robinson in her income for 1920, and tax paid thereon. Neither the decedent nor his wife kept any regular books of account. They made separate income-tax returns for the year in question on the cash receipts and disbursements basis. The amount of $6,144 was not income of the decedent.

Order of redetermination will be entered on 15 days' notice, under Bule 50.


author: Graupner:

text:
    Appeal of COVINGTON & PEYTON, INC.
    Docket No. 3379.
    Submitted January 10, 1926.
    Decided April 22, 1926.
    Value of good will not determinable.

      Wm. H. DeLacy, Esq., lor the taxpayer.

      L. 0. Mitchell, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This appeal is from the determination of a deficiency in income tax in the amount of $798.60 for the fiscal year ended January 31, 1922. The taxpayer alleges error on the part of the Commissioner in refusing to allow an item of good will in the computation of invested capital.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of Virginia, with its principal place of business at Charlottesville, and is engaged in the operation of a crockery and chinaware store.
    From August 1, 1896, to December 3, 1918, the store was operated by E. A. Peyton and B. W. Covington as partners, each having an equal share. On December 3', 1918, the interest of Covington in the business, expressly including good will, was purchased by T. P. Peyton, a brother of E. A. Peyton. No particular amount in this transaction was ascribed to the value of the good will. The Peyton brothers conducted the business as equal partners until April 15, 1920.
    , On April 15, 1920, the taxpayer corporation was formed with a capitalization of $40,000, divided into 400 shares having a par value of $100 each. All the capital stock was issued in equal shares to the two partners, who turned over to the corporation the entire business, including, as shown by the minute book, the stock of goods, book accounts, assets, and good will.
    At a later time, the date not being shown, the corporation wrote upon its books the sum of $7,801.15, as representing good will. This amount was determined upon by the stockholders as being the amount which, added to the physical assets, was sufficient to bring it up to $40,000, the par value of its issued and outstanding capital stock.
    On the date of the incorporation, the Peyton brothers sold 20 shares of stock to H. S. Peyton, another brother, for $2,000, and 40 shares to B. T. Morrow for $2,000 and a promissory note for $2,000.
   Graupner:

Since there was a change of ownership after March 3, 1917, and an interest or control of 50 per cent or more remained in the owner of the predecessor business, the provisions of section 331 of the Revenue Act of 1921 are applicable. The taxpayer has failed to establish by satisfactory evidence the value of the good will, if any, when acquired by its predecessor, and accordingly is not entitled to include the claimed value of the item of good will in its invested capital. Appeal of W. F. Severa Co., 3 B. T. A. 664.

The deficiency is $798.60. Order will he entered accordingly.


text:
    Appeal of EDWARD J. McDONNELL.
    Docket No. 6194.
    Submitted January 26, 1926.
    Decided April 22, 1926.

      Jacob Kromherg, O. P. A., for the taxpayer.

      D. D. Shepard, Esq., for the Commissioner.
    Before Graupner and Trammell.
    This is an appeal from the determination of a deficiency in income tax in the amount of $538.47 for the calendar year 1922. The deficiency arises from the ruling of the Commissioner that the taxpayer constructively received the amount of' $5,525 in the year 1922, in addition to the salary actually paid to him in cash for that year.
   FINDINGS OF FACT.

The taxpayer is an individual residing at White Plains, N. T.

In 1922, and for many years prior thereto, he was employed by William Green, a corporation located at New York City. His salary for 1922 was $10,400, of which he actually drew in cash $4,475, the balance, $5,525, being credited to him on the books of the corporation. The withdrawal by the taxpayer of only a part of his salary was in accordance with a verbal agreement made in January, 1922, with William Green, the principal stockholder, that he would draw only an amount sufficient for his living expenses. The taxpayer owned one share of stock in this corporation of a total of 1,000 shares outstanding.

The balance sheet of the William Green corporation as of December 31, 1922, showed a surplus of $207,021.91. Included in the assets was an item of $435,204.56, representing charges against the Leslie Judge Co., Inc., which that company was unable to pay.

In 1922, the taxpayer was secretary of the William Green corporation and treasurer of the Leslie Judge Co, William Green became the sole owner of the Leslie Judge Co. in February, 1921, and, for the succeeding 10 months in 1921 and for the year 1922, the two corporations filed consolidated income-tax returns.

The only record that the taxpayer kept of his receipts and expenditures was a check book. His income-tax returns have been filed on a cash receipts and disbursements basis.

The amount of $5,525 was not available to the taxpayer in 1922 and did not constitute income to him in that year.

Order of redetermination will be entered on IB days’ notice, wider Bule 50.


author: Arundell:

text:
    Appeal of BUMP CONFECTIONERY CO.
    Docket No. 451.
    Submitted October 23, 1925.
    Decided April 22, 1926.
    A liability to respond in damages for breach, of contract occurring in 1920, which taxpayer does not admit to the injured party and does not accrue on its books, is not a proper deduction for the taxable year in which the breach occurred.

      E. H. Grimm, Esq., for the taxpayer.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    The Commissioner has determined a deficiency in income and profits taxes for the year 1920 in an amount less than $10,000.00. The deficiency arises from the refusal of the Commissioner to permit the petitioner to deduct from its income for the year 1920 an amount paid in settlement of a suit for breach of contract, on the ground that such amount was neither paid nor incurred within the taxable year.
    FINDINGS OP PACT.
    The petitioner is an Illinois corporation and is now and was duripg 1920 engaged in the confectionery business at Anna.
    During the month of June, 1920, it entered into a contract or contracts with the American Sugar Refining. Co. of New York for the purchase of three carloads of sugar at 22% cents per pound, deliveries to be made one carload each in August, September, and October of 1920. Between the date of the contracts and the time of the delivery of the first carload, sugar had taken a sudden and substantial drop in price. During this period the petitioner attempted to cancel its order for August delivery, but the American Sugar Refining Co. declined to release it from its contract and made shipment. The petitioner then refused to accept delivery. Thereafter, and within the year 1920, the sugar was sold by the consignor for the account of petitioner.

      Petitioner also made an effort to cancel its order for the two carloads of sugar that were to be shipped in September and October. On September 8, 1920, the American Sugar Refining Co. definitely advised the petitioner that it could not accede to the request to cancel the contracts. These two carloads of sugar, however, were not in fact shipped, but in each instance the petitioner was advised of the intention of the American Sugar Refining Co. to hold it liable for failure to fulfill its obligations. Thereafter, and during the year 1920, repeated efforts were made by the American Sugar Refining Co. to secure a settlement of its claims against' the petitioner, and to that end negotiations took place between representatives of both parties; on December 31, 1920, no definite settlement had been reached, and in January, 1921, the American Sugar Refining Co. instituted suit against petitioner for $30,000 damages by reason of the breach of contract.
    In October, 1921, a compromise settlement was reached, based on the ability of petitioner to pay rather than upon the damage suffered by the American Sugar Refining Co. by reason of the breach of contract. The amount determined upon was $11,000. Settlement was made by the payment of $1,500 in cash and the giving of 36 notes, one due each month for three years.
    The petitioner did not enter on its books during the taxable year any amount covering the estimated damages, nor did it admit to the consignor any liability for damages due to the breach. No deduction was taken in its original income-tax returns in respect of this transaction. The petitioner’s books were kept on the accrual basis.
   OPINION.

Arundell:

The petitioner urges its right to take as a deduction in its income-tax return for 1920 the amount of damages incurred by breaching its contracts with the American Sugar Refining Co. That the contracts were breached in 1920 is unquestioned. The petitioner could not accept delivery of the shipments and remain solvent, and it therefore deliberately chose to break its contracts, knowing full well that to do so would make it liable in damages for the breach. It did not, however, during the taxable year, admit its liability to the consignor, or enter on its books an estimate of the damages due. Negotiations looking toward settlement were carried on during 1920 without success, and in January, 1921, suit was instituted in which damages were asked in the sum of $30,000. In October, 1921, a settlement was reached, based on the capacity of petitioner to pay.

We do not believe that the breach of contract, standing alone, under the circumstances here in question, furnishes the basis for an accrual of possible damages. With the breach there of course arises a cause of action by the injured party, which it may or may not see fit to pursue. Should it, for reasons of policy, or otherwise, not demand damages, the obligor may escape payment. Conceding that it may be proper to accrue any approximation, it is certainly essential that there be a recognized obligation to pay before one’s right to accrue arises, and a mere liability to suit is not sufficient. Where the liability is denied and the injured party takes no action to compel payment, there is no basis for an accrual, and any amount set up on the books to take care of this liability would be in the nature of a contingent reserve which, as we have held in the Appeal of Consolidated Asphalt Co., 1 B. T. A. 79, is not permitted under the Revenue Acts.

Petitioner places its reliance on the Appeal of Producers Fuel Co., 1 B. T. A. 202, but in that case there was an admission of liability within the taxable year and an actual accrual on the books. We believe the distinction vital and can not regard the Producers Fuel Co. Appeal as controlling. We have also pointed out in the Appeal of New Process Cork Co., 3 B. T. A. 1339, the inapplicability of the reasoning of the Supreme Court in the case of United States v. Anderson, 269 U. S. 422, to a situation such as is here present. There the court was dealing with the deductibility of munitions taxes, which were measured by the profits made from the sale of munitions within the taxable year. The court found that the amount was susceptible of definite ascertainment at the close of the year and was a proper accrual within the year. In the case before us the sugar was never received; consequently none of the income for the year was derived from its sale or disposition and there was no necessary relationship between the income for the year and this transaction making necessary its accrual to clearly reflect the income of petitioner. We believe the -Commissioner’s determination is correct, and so find.

Order of ‘redetermination will he entered on 10 days’ notice, under Rule 50.

On reference to the Board, Phillips dissents.


text:
    Appeal of LOUIS KRATTER.
    Docket No. 4723.
    Submitted November 17, 1925.
    Decided April 22, 1926.

      Donald Horne, Esq., for the taxpayer.

      J. W. Fisher, Esq., for the Commissioner.
    Before Trussell arid GreeN.
    This appeal is from a determination of a deficiency in income tax for the year 1920, in the amount of $1,279.96. The taxpayer alleges that the Commissioner erred in disallowing as a deduction from gross income for the year 1920 the amount of $15,000, paid by him in the year Í921 in settlement of liability incurred in 1920.
   FINDINGS OF FACT.

The taxpayer is an individual residing at Brooklyn, N. Y. He is, and was during the year 1920, engaged in the wholesale grocery business in Brooklyn.

On May 28 and June 7,1920, the taxpayer contracted in writing to purchase from the American Sugar Befining Co., hereinafter called the Befining Company, 1,020 barrels of sugar, at 22% cents a pound, delivery to be made during the months of July to December, 1920, inclusive. The taxpayer in July, 1920, accepted and paid for under these contracts one delivery, consisting of 30 barrels of sugar. When the next delivery was sent to him a short time later he refused to accept it because the market price of sugar had declined. On two or three other occasions the Befining Company attempted to deliver sugar to the taxpayer under these contracts, which the taxpayer refused to accept. Altogether, the Befining Company sent to the taxpayer four truckloads of sugar, only the first of which he accepted. The last attempt made by the Befining Company to deliver sugar to the taxpayer under these contracts was in October, 1920. Sugar began to decline shortly after the taxpayer’s orders were placed, and between that time and the end of the year 1920 the price dropped from $22.50 to $4.80 a hundred pounds. It was this decline which caused the taxpayer’s breach of the contracts mentioned.

Each time the taxpayer refused to accept a delivery of sugar from the Befining Company he had a telephone conversation with the representative of that company in which he was warned that the Befining Company would have to sue. About two months after the first delivery he received a letter from the Befining Company to the effect that it intended to sue. After the last refusal to accept delivery of sugar, he also received a letter in which the Be-fining Company informed him it would sue for the balance of the difference between the contract price of the sugar and the market price, and for expenses of storage, etc. The taxpayer in each of his conversations with the representative of the Befining Company stated that he could not accept the sugar because it would ruin him. The total difference between the contract price and the market price of the sugar covered by the taxpayer’s breach of contracts amounted to about $47,000.

No record was made on the taxpayer’s books of the sugar orders until sugar was delivered. Then the Befining Company was credited with tbe amount of tbe shipment, and when payment was made it was charged with the amount thereof. There was, therefore, no book entry with' reference to the sugar covered by the contracts referred to, except for the first delivery of 30 barrels. This was in accord with the taxpayer’s usual method of handling purchases of merchandise. The taxpayer did not enter, on his books the estimated loss that he would sustain under the contracts involved herein. The first entry of any kind made on his books of account in regard to this loss was in 1921, after it had been adjusted.

Early in the year 1921 the taxpayer formed a corporation, L. Kratter, Inc., which took over all of the assets of. the business theretofore conducted by him and all of its liabilities, with the exception of his liability to the Befining Company under the contracts of May 28 and June 7, 1920. Subsequently, the taxpayer entered into negotiations with the Befining Company to settle his liability to that company for breach of his contracts. After negotiations the Befining Company accepted $15,000 in full settlement of the taxpayer’s liability, and .a written contract of settlement was entered into by L. Kratter, Emanuel Kratter, and L. Kratter, Inc., on October 24, 1921. Payment of the $15,000 was actually made by the corporation and charged to the taxpayer’s personal account on the corporation’s books.

The taxpayer did not deduct, in his return for the year 1920, any amount on account of the loss involved therein. However, he subsequently claimed the right to deduct as a loss for the year 1920 the amount paid to the American Sugar Befining Co. under the settlement of October 24, 1921. The Commissioner refused to allow the deduction.

The deficiency is $1,379.96. Order will be entered accordingly. .


text:
    Appeal of ROY E. CRUMMER.
    Docket No. 3008.
    Submitted November 25, 1925.
    Decided April 22, 1926.
    Profit on sale ojE an undivided interest in a partnersbip for sbares of stock in a corporation determined.

      E. W. Washington, Esg., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before SternhageN, LaNSdoN, and AruNdell.
    The Commissioner determined a deficiency in income tax for the calendar year 1919 in the amount of $13,266.73. That portion of the deficiency in dispute arises from the Commissioner’s method of computing the gain derived from, the sale by petitioner of an undivided interest in a partnership for stock in a corporation.

      FINDINGS OF FACT.
    The petitioner was from 1911 to 1919 a member of the copartnership of D. E. Dunne & Co., and from January, 1919, to May 15, 1919, he was a member of the firm of Brown-Crummer Co., a co-partnership.. On May 16, 1919, he became vice president of the Brown-Crummer Co., a corporation, which position he still holds.
    The firm of D. E. Dunne & Co. started business as a municipal bond house in July, 189T, and continued in business under that name until January 2,1919. Petitioner is a nephew of D. E. Dunne, and in 1911 was given by the latter a one-half interest in the partnership of D. E. Dunne & Co. Thereafter, the partnership continued to operate with Crummer and Dunne as equal partners until January 2, 1919, when Dunne disposed of his interest therein to Warren E. Brown.
    In January, 1919, Brown purchased from Dunne the latter’s interest in the partnership of D. E. Dunne & Co., consisting of the good will and going business, for which he paid $50,000 in cash. Immediately thereafter, there was formed the copartnership of Brown-Crummer Co., in which each held a one-half interest. Brown at the same time contributed $100,000 in cash to the new partnership and Crummer contributed his one-half interest in the business and cash or securities of the value of $100,000. The business continued until May 15,1919, during which period Crummer disposed of a portion of his interest in the partnership so that on May 15, 1919, he held an undivided 41% per cent interest in the copartnership of Brown-Crummer Co. During* the period from January 2, 1919, to May 15, 1919, the business earned profits in the amount of $6,111.43.
    On May 16,1919, petitioner and Brown and other members of the copartnership conveyed their- interests therein to Brown-Crummer Co., a corporation. The value of the stock received in exchange for the partnership assets was $314,629.89, and the value of the stock received by the petitioner was 44% per cent of that amount.
    The business was operated under the name of D. E. Dunne & Co. from 1897 to October, 1911, the principal owner during this period being D. E. Dunne. In October, 1911, Dunne transferred a one-half interest in the business to petitioner, but before doing so distributed all of the earnings and money invested in the business so that D. E. Dunne & Co. started operations with no assets other than the name, good will, and office equipment theretofore used in the business.
    For some years prior to 1909 and 1910, J. E. Dunne, an uncle of D.- E. Dunne, owned a one-fourth interest in the partnership of D. E. Dunne & Co. He had invested in the business $25,000, with the understanding that he would receive interest at the rate of 6 per cent on the money so invested and an additional interest in the profits. His interest in the business was purchased in 1909 or 1910 by D. E. Dunne, who at that time repaid the $25,000, gave by way of interest $7,500, and in addition J. E. Dunne was paid $12,500, making a total of $45,000. The partnership of D. E. Dunne & Co. had made profits between the years 1897 and 1909 of approximately $160,000. The business continued to be operated successfully and was making money on March 1, 1913, and continued as a profitable venture to January, 1919, when Dunne sold his interest to Warren E. Brown.
   OPINION.

Arundell:

The petitioner does not dispute the taxability of the profit from the transaction whereby he sold his undivided interest in the copartnership of Brown-Crummer Co. to the corporation of the same name for stock. The point of disagreement is the cost of petitioner’s undivided interest in the partnership of Brown-Crum-mer Co. The Commissioner has used as a basis $100,000, which petitioner paid in to the partnership in cash or securities of that value. Petitioner contends that in addition he paid in to the partnership his one-half interest in the going business and good will of D. E. Dunne & Co. and that the March 1, 1913, value of that interest must be added to his cost in determining the basis on which gain or loss is to be computed. The good will in the partnership of D. E. Dunne & Co. cost Crummer nothing, but was a gift from his uncle, and we are unable to determine the March 1, 1913, value in question from the meager facts in evidence. We can not on the evidence presented fix a value, nor are we persuaded that any value in fact existed. No records were produced showing the earnings of the partnership either before or subsequent to March 1, 1913, and such figures as were testified to were given as estimates and approximations. The value of good will in a partnership can not be determined on such evidence, and on the facts as they appear in the record we are constrained to approve the Commissioner’s determination.

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


text:
    Appeal of WARREN E. BROWN.
    Docket No. 2975.
    Submitted November 11, 1925.
    Decided April 22, 1926.
    Profit on sale of an undivided interest in a partnership for shares of stock in a corporation determined.

      II. W. Washington, Esq., for the taxpayer.

      Arthur J, Seaton, Esq., for the Commissioner.

      Before Sternhagen, Lansdon, and Arundell.
    The Commissioner has determined a deficiency in income tax for the calendar year 1919 in the amount of $25,037.67. So much of the deficiency as is in dispute arises from the computation of the gain derived by petitioner from the sale of his undivided interest in a partnership for stock of a corporation.
    FINDINGS OF FACT.-
    The petitioner was a member of the copartnership of Brown-Crummer Co. from January, 1919, to May 15, 1919, and thereafter was president of the Brown-Crummer Co., a corporation.
    On or about the first of January, 1919, petitioner purchased from D. E. Dunne a one-half interest in the going business and good will of D. E. Dunne & Co., a copartnership, for $50,000 in cash. Immediately after this purchase, petitioner paid in to the Brown-Crummer Co., a new copartnership, the sum of $100,000 in cash and transferred to this new partnership, without consideration, the one-half interest in the going business and good will of D. E. Dunne & Co., which he had previously purchased from Dunne for $50,000. The new partnership consisted of petitioner and Boy E. Crummer, each owning a one-half interest, the cost to petitioner of his one-half interest in the Brown-Crummer Co., a copartnership, being $150,000.
    Shortly after the organization of the partnership of Brown-Crummer Co., a 1% per cent interest in the partnership was sold by petitioner, thus reducing his interest to 48ys per cent.
    The Brown-Crummer Co., a copartnership, continued in business from January, 1919, to May 15, 1919, during which time the partnership earned the sum of $6,111.43. On the 16th day of May, 1919, the partners of the Brown-Crummer Co., a copartnership, exchanged their undivided interests in the copartnership for capital stock of the Brown-Crummer Co., a corporation, having a fair market value of $314,629.89. Immediately after the transfer of the assets of the partnership to the corporation, the partners held the entire outstanding stock of the corporation in the same proportion as their interests in the partnership before the transfer.
   OFINION.

Arundell:

The profit realized on the transaction whereby petitioner transferred his undivided interest in the copartnership to the Brown-Crummer Co., a corporation of the same. name, is taxable under the provisions of section 202 (b) of the Bevenue Act of 1918. We have found that the cost of petitioner’s one-half interest was $150,000, from which should be deducted the 1% per cent interest in the partnership disposed of by him, and to the remaining sum there should be added his distributive share in the partnership profits for the period ended May 15, 1919; the resulting amount will be the basis for computing profit.

Upon liquidation of the partnership of Brown-Crummer Co. on May 15, 1919, petitioner’s share of the partnership profits, which amounted to $6,111.43, was taxable to him under the provisions of section 218 (a) of the Revenue Act of 1918.

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


author: Sternhagen

text:
    Appeal of J. R. VANSANT.
    Docket No. 4274.
    Submitted November 10, 1925.
    Decided April 22, 1926.
    Tbe evidence is insufficient to support a redetermination of deficiency.

      E. E. Whitcombe, Esq., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.
    Before Steunhagen, LaNSdoN, and ArttNdell.
    The Commissioner, after an examination of the petitioner’s income-tax returns for 1919, 1920, and 1921, determined an overassessment of $27.37 for 1920 and a deficiency of $3,952.23 for 1921. The petition, while stating that all three years are in issue, controverts only the determination that the income from a certain contract job is entirely returnable for 1921.
    FINDINGS OF FACT.
    The petitioner is a building contractor at Kansas City, Mo. During 1919, 1920, and 1921 he was engaged in the performance of numerous building contracts, all of which, except one, were performed within approximately one year’s time. It had been his practice to include the income from these contracts, except the club contract hereinafter referred to, in the return for the year in which the performance of the contract was completed, which in each case was the year in which the income was received.
    One contract, for the construction of the Kansas City Club, was made May 15, 1919. The petitioner and one Rector were to furnish all necessary equipment, let the subcontracts and supervise the work, and were to finance the building to the extent of $650,000. A financing concern underwrote this amount of first mortgage bonds of the club at 90. The contractors were to receive 10 per cent of the total cost of the building, which was originally estimated at about $1,200,000, and were to pay the discount on the bonds, $65,000, out of their commission. The excavation, foundation, and structural steel had been let and completed when they secured the contract, so, in order to receive the full amount contemplated, they were to be allowed IS per cent on all subcontracts let and work actually performed by them. The performance of this contract would normally require more than one year. '
    Beginning July 15, 1919, statements were submitted periodically, either weekly or semimonthly, showing material and labor cost and 13 per cent additional as- compensation, and these statements were approved and certified by the architect and paid promptly. This was true as to the first 20 statements, which covered advances for material and labor of $325,035.49, commissions of $42,254.63, total of $367,290.12. These amounts were reported by petitioner as income in the year in which received. He had at this time paid $30,000 as discount on bonds.
    In May, 1920, the club and the contractors had a disagreement, which was settled in June, after which the club paid most of the bills for material directly and repaid the contractors for pay rolls only. From the time of this settlement the petitioner submitted statements which included 13 per cent on bills paid directly by the club as well as on material and labor paid by him.
    On December 8, 1920, the contractor was removed from the job, which at that time had not been completed, and another contractor was employed to complete the building. At the time of his removal the petitioner had been paid commissions of $42,254.63, out of which he had paid $30,000 discount on bonds, $2,238.65 to Eector, and $6,093.62 for equipment, a total of $38,332.27, leaving net commissions of $3,922.36. He had a claim against the club for $30,685.21 for material and labor, and $32,909.54 for unpaid commissions, a total of $63,594.75.
    The claim was finally compromised and an agreement of settlement with the club was made and signed January 29, 1921, whereby petitioner was to receive $62,000 and was to be relieved of paying the balance of $35,000 discount on bonds. Payments were made by the club as follows: February 1, 1921, $31,000; March 1, 1921, $10,-384; March 30, 1921, $10,436.33; April 30, 1921, $10,489.01; a total of $62,309.34, which included interest of $309.34 on deferred payments. Of this total, petitioner received $52,575.75.

      In 1919 and 1920 petitioner purchased $6,616.31 worth of equipment for use on the club job, upon which the club paid $522.75 rental. The balance was offset against petitioner’s profit from the job.
    The entire profit from the job as computed by the Commissioner was included by him in petitioner’s 1921 income, “ for the reason it was not completed in 1920 or was the taxpayer able to compute the profit on the job if any in that year.”
   OPINION.

Sternhagen

: The foregoing facts are found from the admissions in the Commissioner’s answer and the revenue agent’s report of May 31, 1924, which the petitioner put in evidence. No other evidence was offered. The supplemental report of June 28, 1924, made apparently after the taxpayer’s protest had been considered and containing some modifications of income as indicated by the statement accompanying the notice of deficiency, was not offered and is not in evidence.

It is said that the petitioner kept his books of account and made his returns on the basis of actual receipts and disbursements and that the Commissioner has no right to change this to another basis, and especially so since the substituted basis does not in all the circumstances clearly reflect income. But the record lacks evidence of the basis, unless this can be inferred from the fact that, in the past when contracts were performed within a year, the petitioner returned as income the amounts received thereon. Assuming, however, the petitioner’s probable right to have his liability determined on the cash basis, the facts do not go far enough to enable the Board to compute the liability or to say that the Commissioner is in error. As to 1919, it may be true that the petitioner has the right to return income of the net commissions or compensation from the contract. As to 1920, from the figures in the findings, it is quite impossible to say what was actually received in the taxable year. In 1921, clearly he received a substantial amount, but whether it results in a net income of more or less than the amount of $30,513.70 which the Commissioner has determined, is not clear.

The petitioner obviously seeks a redetermination of his liability upon the basis of actual receipts and disbursements of the years in question, but his evidence is insufficient for the purpose.

The deficiency for 1921 is $3.p52.28. Order will be entered accordingly.


author: Steeniiagen :

text:
    Appeal of UNITY SCHOOL OF CHRISTIANITY.
    Docket No. 1799.
    Submitted February 4, 1926.
    Decided April 23, 1926.
    A corporation otherwise exempt from tax is not deprived of exemption because it carries on profitable or competitive activities in furtherance of its predominant religious, charitable, scientific, or educational purpose.

      Arthur B. Foye, O. P. A., and J. F. Pfiug, G. P. A., for the taxpayer.

      Briggs G. Simpioh, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and ARundell.
    The Commissioner determined deficiencies for the fiscal years ended April 30, as follows: 1917, $399.09; 1918, $390.62; 1919, $17,394.70; and 1920, $14,280.29; a total of $32,464.70. The petitioner contends that it is exempt from tax under section 11 (a) (sixth) of the Revenue Act of 1916, section 201 (b) of the Revenue Act of 1917, and section 231 (6) of the Revenue Act of 1918; and, if it be not wholly exempt, it is nevertheless entitled to the exclusion from gross income of certain amounts received, as it contends, as gifts.
    FINDINGS OF FACT. ■
    The Unity School of Christianity is a corporation created on April 14, 1914, under the business corporation law of Missouri. The articles of incorporation contain the following:
    Seventh — That the corporation is formed for the following purposes: The purposes of this corporation are to establish and maintain a School, Institute or College, for the instruction in and the promotion of Christianity and the principles and studies for the intellectual, moral, spiritual and physical development and improvement of mankind, and for the promotion of the harmony, health and happiness of mankind, and to apply such principles and teachings for such purposes, including the treating of diseases and ailments of persons anywhere; and also in connection therewith, to further carry out these objects, this corporation shall have power to establish and maintain a sanitarium for the treatment and healing of diseases and ailments of persons, and to receive and treat patients; to furnish food and other aids and necessaries recommended by this corporation; to use all lawful and usual methods and means of educating, aiding and treating its students and patients; to provide such instruction and aid to persons who personally attend the courses of study and instruction, as well to those who are at a distance; to grant diplomas and confer degrees on its students who are deemed proficient and fitted to receive them.
    For the accomplishment of these objects it has power to establish branch organizations; to establish a library or libraries; to print, publish and bind and distribute such books, magazines, papers and other literature as will further carry out the objects of this corporation. To lease suitable buildings and equipment, and to acquire by purchase or gifts such personal and real property as may be necessary to carry out the objects of this corporation; and to receive subscriptions and donations of real and personal property to be applied to the uses and purposes of the corporation; to take, hold, and manage real and personal property conveyed to it in trust, the income from which is to be applied to the uses and purposes of this corporation, and to execute such trusts; to mortgage or otherwise encumber any of its property, or to sell and convey the same; to permit the use of any of its property for religious, educational, benevolent, or other lawful purposes.
    On April 29, 1921, there was duly added to the first paragraph quoted the following:
    Provided that no dividends shall ever be declared or paid but all profits and property of this organization shall be used to carry out the purposes of the organization or some part thereof.
    The work of the corporation and the idea underlying it originated in. 1886, when the founder, Charles Fillmore, and his wife, Myrtle, determined to devote themselves to spreading the belief that physical healing and spiritual elevation were inherent in what they regarded as right thinking as it had been revealed to them from a study of the Bible and the teachings of Jesus. They regarded all unhappiness and physical ailment as subject to being completely overcome by directing thought into the channels of love, justice, and righteousness. They regarded the teachings of Jesus, as found in the Bible, as expressing the fundamental religious truths, but they believed that these truths were equally effective to assist all persons irrespective of sect.
    The prinicipal feature of the movement is what is called “ silent unity,” the underlying idea of which is the efficacy of silent prayer and devotion simultaneously made by persons in various places. For example, at 9 o’clock each evening everyone throughout the world is asked to join in prayer wherever they may be. As a result of this practice many people have expressed their belief in its effectiveness to bring them relief from bodily and other pain. To-day the membership in silent unity exceeds 100,000 persons throughout the world.
    The means of communication and propaganda originally adopted was the publication of periodicals and tracts, and this has continued to be a substantial means of communication and expansion.
    Long before the incorporation, the Fillmores and their two sons were occupied entirely with the Unity movement and had devoted their property to it. They organized the corporation because they believed that by so doing the work would be carried on more conveniently and more impersonally. They then transferred their property, including real estate, to the corporation in exchange for its entire 50 shares of stock of $5,000 par value, which was divided equally, among the four. The corporation was organized under the business corporation law instead of that for religious and charitable corporations, because they were advised that their desire to print literature made this necessary. They did not intend to pay dividends to the stockholders; no dividends have been declared or paid, and all earnings have been used for the purposes of the movement.
    On August 8, 1918, the four Fillmores, who owned all the stock, made and published the following declaration of trust:
    Whereas, the undersigned are the legal owners and holders of all the capital stock of Unity School of Christianity, and corporation of Missouri; and,
    Whereas, we have by good management largely increased the number of members and adherents of the School, and have also made material progress and gains for the corporation; and in accomplishing this result have been aided and encouraged by the many members enrolled and adherents of the School.
    Now, therefore, Know All Men By These Presents, that we, Charles Fillmore, Myrtle Fillmore, Lowell Fillmore and Royal Fillmore, the undersigned, being desirous of firmly establishing, further promulgating and of perpetuating the principles and teachings of Unity School of Christianity as the same now are established and taught by us and expressed in the printed books, magazines and pamphlets issued under our direction or with our approval, and as these principles and teachings may be added to or corrected from time to time; and desirous of being helpful generally in all matters pertaining to education and in fixing high and broad ideals and standards of correct living and thinking for all persons, and more particularly for all persons who are now or may be hereafter enrolled on our books as members or adherents of the .School aforesaid.
    Do now declare that we hold all our right, title and interest in said corporation (represented by said capital stock) in trust, and dedicate same to be used to carry out the purposes herein expressed and referred to, so that all persons who now are or may hereafter be members and adherents may, while so enrolled and upon proper application, receive the benefits of all the principles and teachings and other help that the School can give; reserving, however, to ourselves and our successors the right to manage and control the business and properties, and to a reasonable compensation for our time and services, and to name our successors who will carry out the purposes herein declared.
    In witness whereoe, we have hereunto set our hands and seals this 3rd day of August, 1918, at Kansas City, Missouri.
    Charles Fillmore [seal] Myrtle Fillmore [seal]

      i Lowell Fillmore [seal]
    Royal Fillmore [seal]
    This was published in an attempt to put the property entirely out of the hands of the Fillmores as personal owners and to make it clear to others that they did not regard it as belonging to tuem personally.

      The amendment to the articles of incorporation, which was made on April 27, 1921, to the effect that no dividends would ever be declared or paid, was adopted because the Fillmores wanted that fact to be made plain. They had never declared any dividends and they wanted to fix it so that none of their successors could declare any dividends.
    On June 22, 1923, the following declaration of trust was made, signed and published by the Fillmores:
    DECLARATION OF TRUST
    Whereas, the undersigned incorporated the Unity School of Christianity in April, 1914, as stockholders and directors; and,
    Whereas, the articles of association of said Company were amended on April 29th, 1921, by adding the following to the business purposes stated in said articles, to-wit: “ Provided, that no dividends shall ever be declared or paid, but all profits and property of this organization shall be used to carry out the purposes of the organization or some part thereof ”; and,
    Whereas, the undersigned claim no right or private property in the shares of stock of said corporation, but hold the same in trust for the purposes set forth in said articles of incorporation;
    Now, therefore, the undersigned, and each of them, do herein and hereby, jointly and severally, for themselves, their heirs and assigns, disclaim any right of private property in and to the shares of stock of said corporation and publicly declare that the same are now, and shall be at all times held in trust by the undersigned and their successors as Trustees for the purpose of carrying out the purposes for which this corporation was organized as set forth in said articles of association as amended during the life of said corporation and, so far as lawfully may be done, during the existence of said corporation by extension of the time under the laws of the State of Missouri or any corporation or organization that may lawfully and properly succeed it, and, as part of this declaration, said shares of stock in said corporation are hereby placed with and entrusted to the undersigned and their successors as Trustees for the purpose of voting the same at any and all meetings of said corporation or its successors, the object and purpose of this declaration of trust being, in every lawful way, to perfect and carry on' the work in all its branches necessary and proper to be done in carrying out the purposes of said corporation as set forth in its said articles of association as amended.
    This declaration of trust shall be spread upon and become a part of the records of this corporation.
    In witness whereof, we have hereunto set our hands and seals this 22 day of June, 1923.
    Charles Fillmore [seal] Lowell Fillmore [seal] Royal Fillmore [seal] Myrtle Fillmore [seal]
    Thereafter and ever since the certificates of stock of the corporation have carried the statement that they are issued and owned subject to the two declarations of trust dated August 3, 1918, and June 22, 1923.

      The four Fillmores reside on the property of the association and pay rent to it. As officers of the corporation their salaries during the years in question were as follows:

    The department of silent unity of the present organization is devoted primarily to the education of its members. It is “a school of religious research, inquiry and study.” The members, who number approximately 100,000, write in “ for help in health, happiness and prosperity, and all things connected with their daily lives.” The purpose of the school is through correspondence to teach members or students who are ill or unhappy “to change their minds; they are thinking along wrong lines; they must apply a little of the law of love and the law of justice and righteousness, and in that way start into a new trend of thought.” The founder testified:
    We have various ways of handling those eases, according to the character of the case. Sometimes we all get together and pray. We have what is called the silent prayer method, and we follow out there the command of Jesus that we should get together in His name. We recognize that Jesus Christ is the head of the work; that Jesus Christ is right here in our midst today carrying on His work. We are one department of that work. We reach such a state of consciousness that we function through a spiritual ether very much like the radio. People who follow our teachings lay down the personal and rise into the spiritual, and get the consciousness that we have. It is not only a psychological consciousness, but it is a teaching. We teach the people directly what we think they should do, especially as to the law of love and justice and righteousness, trying to iron out all the differences in life, as we recognize the difference in life of any man is the result of discord in states of mind, so that silent unity is primarily a part of the correspondence school, and the work of that deparment is their teachings, hut to their teachings they add this inner spiritual power which helps people through their faith and better understanding. * * *
    Q. Is there ever any charge made for the prayer to those who ask for the help of silent unity?
    A. No, sir. We started out with this proposition, that we should never charge for our spiritual work, that prayers could not be paid for, and that following the early Christians, we gave without money and without price.
    Q. How is it that you receive income through the silent unity?
    A. Just as any other religious school needs help. Our people understand that we are supported by a free-will offering. In other words, we have no other source of income except through tithes.
    The organization has several departments and sources of income. The principal department is silent unity and the principal source of income is received from those who regard themselves as benefited. These. amounts are not solicited, although in some cases they are given by reason of specific benefit or service received. No service or help is given by the association expressly in consideration of compensation received. Such service or assistance is given freely and the incoming revenues are regarded by the petitioner as freewill contributions.
    The other departments are as follows: Publications, inn or cafeteria, farm, reading room and library, field work for the encouragement of unity centers and study classes, good words club, radio, and silent seventy.
    There are several publications, including “Weekly Unity — Practical Christianity for Practical Christians,” “ Monthly Unity — A Magazine Devoted to Christian Healing,” “ Wee Wisdom — A Child’s Magazine Devoted to Practical Christianity,” published monthly. There are also numerous books and pamphlets, such as the Wee Wisdom picture books, consisting of compilations for children of pictures and poems taken from “ Wee Wisdom.” There are various illuminated and illustrated copies of mottoes and poems, all of a similar character, such as those entitled “A Real Friend,” “ Father,” “ The Lord’s Prayer,” “ Truth,” “ Love’s Service.” A publication called “ The Unity Inn Cook Book ” contains a selected group of 4 vegetarian recipes for the purpose of establishing that good palatable and nutritious foods can be prepared without meat and in keeping with the association’s belief that it is unnecessary to destroy life '"'■in order to live. No advertising has ever been solicited or accepted for any of the publications. Sometimes the publications produce a gain and at other times a loss, and from May 1, 1916, to April 30, 1921, there was a net loss of $26,828.44.
    Some of the books are sold in general bookstores. In respect of the children’s books “ the idea was not to make money on it; the idea is to get that book out so that we won’t lose anything on it, and at the same time get it into the hands of as many children as we can, that is, get the cost as low as possible, consistent with what it actually costs to publish and distribute. We don’t seek to make a profit on it.”
    “ The purpose of operating the inn was to demonstrate that a good appetizing, satisfying and substantial meal could be served without meat.” It serves the public in general and is not confined to members of the organization. For the entire period from May 1,1916, to April 30,1921, it has been conducted at a loss of $9,187.54.
    The farm is a recreational place for unity workers and produces some food for the inn, but not enough to supply all of its needs. Eventually the farm is intended to become the headquarters of the entire organization so that it may move out of the city and have room enough to expand. The expense of producton for the two years ended April 30, 1921, was $8,413.95 in excess of the amount received from the inn for produce delivered.
    The reading room and circulating library is open to the public without restriction and furnishes information about books. Unity literature is sold- there for the purpose of furthering unity work.
    The department of field work is for the promotion of unity centers throughout the world to encourage the spread of unity teaching.
    The good words club was organized to promote the use of constructive language to take the place of “ idle words, slang, criticism, faultfinding and all those things that are not good, for life.”
    The radio is used to broadcast church services on Sundays, devotional services on Tuesday evenings, an educational and popular program Thursdays, and a popular and a healing service program Saturdays. •
    The silent seventy is an organization for the distribution of free tracts and literature.
    None of these departments is conducted for the purpose of making a profit. A detailed cost accounting system is maintained so that each of these departments may fix its prices so as to yield as nearly as possible no more than the cost of maintenance and operation.
    “ Financial gain is not the end to which the activities of the corporation are directed; in no case.”
   OPINION.

Steeniiagen :

The petitioner claims to be exempt from income and profits taxes by virtue of the provisions of the revenue acts in effect- during the taxable years in question, which provide that .the following organizations shall be exempt from taxation thereunder :

Corporations organized and operated exclusively for, religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual. .

This is section 231 (6) of the Revenue Act of 1918, and the Revenue Acts of 1916 and 1917 contain a substantially similar provision for exemption.

This provision is similar in all respects, for the purposes of the present proceeding, to that considered by the Supreme Court in Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578. It is apparent’ that the- court regarded the general purpose and the primary functions and activities of the organization as the principal matters to be considered. That is to say, a corporation failing in the primary attribute of being a religious, charitable, scientific of educational organization requires no further consideration, for it is in no event within the exempting provision. If it be not one of this class, it is unnecessary to consider the remaining qualifications prescribed by the statute, since they are only restrictions upon corporations of the principal character exempted. In the Trinidad case it was stipulated that the plaintiff was organized and operated for religious, benevolent, scientific and educational purposes, and that it had income from rents, dividends, interest, alms and the sale of stocks, wine, chocolate and other articles. In behalf of the Government it was contended that the plaintiff was not operated “ exclusively ” for religious, charitable or educational purposes, but that its sales were matters of business which prevented it from being exclusively of the character required by the statute. The Government’s contention was described by the court as follows:

The defendant concedes that the plaintiff is organized and operated for religious, charitable and educational purposes and that no part of its net income inures to the benefit of any stockholder or individual, but contends that it is not “ operated exclusively ” for those purposes, and therefore is not within the exception in the taxing act. Stated in another way, the contention is that the plaintiff is operated also for business and commercial purposes in that it uses its properties to produce income, and trades in wine, chocolate and other articles. In effect, the contention puts aside as immaterial the fact that the income from the properties is devoted exclusively to religious, charitable and educational purposes, and also the fact that the limited trading, if it can be called 'such, is purely incidental to the pursuit of those purposes, and is in no sense a distinct or external venture.

The court held against this contention and said:

Evidently the exemption is made in recognition of the benefit which the public derives from corporate activities of the class named, and is intended to aid them when not conducted for private gain. Such activities can not be carried on without money; and it is common knowledge that they are largely, carried on with income received from properties dedicated to their pursuit. This is particularly true of many charitable, scientific and educational corporations and is measurably true of some religious corporations. Making such properties productive to the end that the income may be thus used does not alter or enlarge the purposes for which the corporation is created and conducted. * * *
* * * In using the properties to produce the income, it therefore is adhering to and advancing those purposes, and not stepping aside from them or engaging in a business pursuit.

In respect of the transactions in wine, chocolate, and other articles, it was held that they were “ incidental to the work which the plaintiff is carrying on. That the transactions yield some profit is in the circumstances a negligible factor. Financial gain is not the end to which they are directed.”

The argument of the Commissioner here is similar in effect although substantially different in its emphasis. It is said that the several departments of the corporation, such as the inn and the publications, are conducted in competition with purely commercial ventures, so that every meal served at the inn takes so much from a competing restaurant and that each book sold deprives another publisher of a similar sale. This, it is said, deprives the corporation of an exclusively religious, charitable or educational character. As the basis for this contention it is apparent that the Commissioner relies upon the incidental statement by the court in the Trinidad case that “ it is not claimed that there is any selling to the public or in competition with others.”

For the purpose and operations of this corporation we must look to the evidence, and it is manifest that the entire reason for its existence is an altruistic purpose to promote a religion and the spiritual welfare of mankind. If for some unforeseen reason the corporation were no longer permitted or enabled to fulfill this purpose, it would have no cause to continue in existence. Neligion and education dominate its activities and all else is incidental to this end.

Can it then be said that the financial aspects of the conduct of the inn or of the farm or of the publication of the books and periodicals are such as to make the statutory word “ exclusively ” inapplicable? We think not. There is nothing in the statute which justifies the Government’s emphasis upon the competitive aspect of its selling. The inquiry must always be whether all of the activities of the organization in question are devoted to furthering its predominant religious, charitable, scientific or educational purpose— are all of its activities designed and carried on to advance religion, charity, science or education? If these purposes or any of them are the controlling reasons for the corporation’s existence and all things are devoted by it to that end, the congressional purpose of exemption, “made in recognition of the benefit which the public derives,” should not be defeated because its incidental features are to some extent profitable. It is only when such profits or net income are used for private rather than public benefit that Congress has taxed them.

It is said that the fact that the incorporation was under the business law is indicative of its commercial purpose. This might be significant if not otherwise explained, but it is not conclusive. A corporation so organized is not, merely because it is permitted thereby to engage in business, precluded from an exclusively charitable purpose. The purpose of its organization and operation is still a question of fact, and the evidence may be such as to show that its purpose was charitable despite the ordinary implications of the statute under which it was created. The suggestion also arises that the stated purposes expressed in the charter are entirely consistent with a corporation to be conducted for private gain — that a school or a sanitarium is not necessarily charitable or non-profitable. And this, indeed, is true. By its charter this corporation might lawfully have been used as the means of increasing the-wealth of its founders and stockholders. But the evidence is all to the effect that this was never the purpose or intent and has not been the effect. -Looking to the purpose, as the statute requires, it becomes a question again of fact, as disclosed by evidence, and this is not determined by what might otherwise have been consistent with the charter.

In considering whether a corporation is religious, charitable or educational, we must always be guided by the character of the or'ganization and its activities. Religion is not confined to a sect or a ritual. The symbols of religion to one are anathema to another. What one may regard as charity another may scorn as foolish waste. And even education is to-day not free from divergence of view as to its validity. Congress left open the door of tax exemption to all corporations meeting the test, the restriction being not as to the species of religion, charity, science or education under which they might operate, but as to the use of its profits and the exclusive purpose of its existence.

We are of opinion that the purpose of the petitioner is within the statute, that its financial activities are only incidental to this-purpose and do not change it, and that its earnings are all devoted to this purpose. The petitioner was therefore exempt from tax and there is no deficiency.

Order of no deficiency will be entered.


author: Smith :

text:
    Appeal of PURDY & HENDERSON CO.
    Docket No. 5198.
    Submitted November 18, 1925.
    Decided April 23, 1926.
    ■ The income and profits tax paid by the taxpayer corporation to the government of Porto Rico during the year 1919 upon its income for the year 1918, under a law passed in 1919, is a credit against the income, war-profits, and excess-profits tax paid by the taxpayer corporation for the calendar year 1919 under section 238 (a) of the Revenue Act of 1918.

      E. St. Olair Thompson, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Smith, LittletoN, and Teussell.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1919 of $1,404.94. The taxpayer corporation 'kept its books upon an accrual basis, and the question in issue is whether an amount paid as income tax to the Government of Porto Rico during the year 1919, in respect of its income for the year 1918, is a proper credit against the tax paid under the provisions of Title III of the Revenue Act of 1918 upon income for the year 1919.
    FINDINGS OF FACT.
    The taxpayer is a New. Jersey corporation with its principal office in New York City. During the year 1918 it derived income from the carrying on of business in the Island of Porto Rico and1 became liable for income tax to the Government of Porto Rico in respect of such income. .It transacted no business in the Island after December 31, 1918.
    In 1918 the legislature of Porto Rico passed a law, which became known as Act No. 8 upon its approval on December 12, 1918, the preamble of which reads as follows:
    To continue in force the provisions of an act entitled “An Act to provide additional revenues for the people of Porto Eico, through the levying of certain additional income taxes, and for other purposes,” approved December 4, 1917, for the purposes of reconstructing.the insular buildings, and .aiding the municipalities, school boards and private persons in the reconstruction of buildings that have been damaged by reason of the recent earthquakes; to create a board; to authorize the Governor of Porto Eico to borrow certain amounts, and for other purposes:
    The tax levied by this act was imposed upon “ benefits or profits derived from any source in Porto Rico, received during the fiscal year, July 1, 1918, to June 30, 1919. * *
    In 1919 the legislature of Porto Rico passed a law—
    To provide revenues for the people of Porto Eico through the levying of certain income taxes; to repeal the Act of Congress of the United States of September 8, 1916, amended October 3, 1917; to repeal section 1 of Act No. 8 of the legislature of Porto Eico, approved December 12, 1918; to appropriate the sum of six hundred thousand eight hundred (600,800) dollars for the carrying out of the provisions of sections 2, 4, and 5 of the aforesaid • Act No. 8, and for other purposes.
    This is known as Act No. 80, and was approved June 26, 1919. The act provided in part as follows :
    TIME FOR FILING RETURNS
    Section 39. — -That returns referred to in the preceding sections shall be made to the Treasurer of Porto Eico before the first day of March of each year, or within the sixty days subsequent to the termination of the legal business year; Provided, That returns made for the calendar year 1918 may be used by the Treasurer for the liquidation and collection of the tax hereby levied, but the Treasurer may require .new returns whenever advisable and necessary for the purposes of said liquidation: Provided, further, That returns to be rendered of income accruing during the calendar year 1918 shall be in the hands of the Treasurer before August 1, 1919.

      FINAL PROVISIONS
    *******
    Section. 77. — That pursuant to the provisions of Section 5 of the Federal Act of October 3, 1917, granting power to the Legislature of Porto Rico to amend, alter, modify or repeal the income-tax laws in force in Porto Rico through proper legislation, there is hereby repealed in Porto Rico the Federal Act of September 8, 1916, as amended October 3, 1917, except that the same shall continue in force with regard to the levying and collection of all taxes accrued thereunder and for the levying and collection of all fines heretofore imposed or which it may be necessary to impose in connection with said taxes: Provided,, That for the calendar year 1918 no income tax shall be collected which is different from that established by this Act.
    * * # * * * *
    Section 79. — That Section 1 of Act No. 8, approved December 12, 1918, entitled “An Act to continue in force the provisions of an act entitled ‘An Act to provide additional revenues for the People of Porto Rico, through the levying of certain additional income taxes and for other purposes,’ approved December 4, 1917, for the purpose of reconstructing the Insular buildings and aiding the municipalities, school boards and private persons in the reconstruction of buildings that have been damaged by reason of the recent earthquakes; to create a board; to authorize the Governor of Porto Rico to borrow certain amounts, and for other purposes,” be, and the same is hereby repealed.
    The taxpayer corporation filed an income and profits-tax return with the Government of Porto Rico under the provisions of Act No. 8, after it had ceased to carry on business in the Island but prior to the date when the return was required to be filed, showing a tax due the Insular Government of $1,528.66. Check in payment of the tax bears date April 23, 1919. The payment was made at the time the return was filed. Under date of July 30, 1919, the Treasurer of Porto Rico addressed a letter to the taxpayer corporation which reads as follows:
    This Department begs to acknowledge receipt of your income tax return for calendar year 1918 and check No. 61, in favor of the Treasurer of Porto Rico, for the amount of $1,528.66, intended to cover payment of the income tax as ascertained by you on the net income shown by your return.
    You are also advised that this check is deposited in this Department pending examination of the above referred return and assessment of the tax in accordance with the provisions of the new income tax Act No. 80.
    A certificate over the signature of the Treasurer of Porto Rico admitted in evidence reads as follows:
    TO WHOM IT MAT CONCERN :
    This is to certify that Messrs. Purdy & Henderson, Inc., a corporation organized under the laws of the State of New Jersey and doing business in the Island of Porto Rico, have filed with the Bureau of Income Tax of this Department, their return of annual net income for the year 1918.
    That the income tax assessed on the net income shown by said return for calendar year 1918, amounting to $6,436.28, pursuant to the provisions of the Income Tax Law No. 80, entitled “ An Act to provide revenues for the people of Porto Rico through the levying of certain income taxes, etc., and for other purposes ” approved on June 26th, 1919, has been duly paid by said corporation under date of December 24th, 1919.
    Given under my hand and seal this 27th day of December, year ninteen hundred nineteen, in the City of San Juan, Porto Rico, at the request of the tax-payers Messrs. Purdy & Henderson, Inc.
    A further certificate over the signature of the Treasurer of Porto Rico reads as follows:
    TO WHOM IT MAT CONCERN-
    I, THE UNDERSIGNED, TREASURER OF PORTO RlCO,
    Do hereby certify: — That there was no tax assessed or collected under the act entitled “An Act to Continue In Force The Provisions Of An Act Entitled ‘An Act To Provide Additional Revenues For the People Of Porto Rico Through The Levying Of Certain Additional Income Taxes, And For Other Purposes ’, approved December 4th, 1917, for the purpose of reconstructing the insular buildings and aiding the municipalities, school boards and private persons in the reconstruction of buildings that have been damaged by reason of the recent earthquakes; to create a board; to authorize the Governor of Porto Rico to borrow certain amounts, and for other purposes,” approved December 12th, 1918, and otherwise known as Act No. 8 of 1918.
    That said Act No. 8 of 1918 was repealed and superseded by Act No. 80 of 1919, effective January 1st, 1918.
    In testimony whereof, I have hereunto set my hand and caused to be affixed the Official Seal of this Department, in San Juan, Porto Rico, on the third day of November of the year of our Lord nineteen hundred and twenty-five.
    In its income-tax return for the calendar year 1919, made under the provisions of Title III of the Revenue Act of 1918, the taxpayer claimed, as a credit against the total tax due, the $6,436.29 paid to the Government of Porto Rico during the year 1919 upon its income-tax return.to that government upon income received during the year 1918. The Commissioner has disallowed the credit of $1,528.66 of this amount, on the ground that such tax accrued during the year 1918 and was not therefore a credit against the tax payable under the Revenue Act of 1918 in respect of income of the year 1919.
    The taxpayer’s income-tax returns to the United States have been and are made on a calendar year basis and its books of account are kept upon the accrual basis.
   OPINION.

Smith :

The question presented by this appeal is whether $1,528.66 of the tax paid by the taxpayer to the Treasurer of Porto Rico during the year 1919 is a credit under the provisions of section 238 (a) of the Revenue Act of 1918 against the income and profits tax paid to the Government of the United States during the year 1919. The Commissioner takes the position that, inasmuch as the taxpayer kept its books of account upon the accrual basis, the tax in the amount of $1,528.66 payable to the Government of Porto Rico accrued in 1918 under the provisions of Act No. 8 of the Island, which was approved on December 12, 1918. This holding is predicated upon the definition of “ paid ” contained in section 200 of the Revenue Act of 1918, wherein it is stated that:

The term “paid,” for the purposes of the deductions and credits under this title, means “ paid or accrued ” or “ paid or incurred,” and the terms “ paid or incurred ” and “ paid or accrued ” shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212.

It is significant that the Treasurer of Porto Rico did not accept the $1,528.66 paid to him as being the payment of a tax under Act-No. 8- This act ivas repealed before any revenues were collected under it and was superseded by Act No. 80, which-was approved June 26, 1919. The $1,528.66 which was sent to the Treasurer of Porto Rico by the taxpayer was accepted in part payment of the tax imposed by Act No. 80. This tax could not have accrued during the year 1918 for the reason that the taxing statute under which it was imposed was not in existence in 1918. The tax was paid, in the year 1919 and it accrued during the same year. The taxpayer is entitled to have the payment credited against the income and profits tax paid to the Government of the United States during the same year.

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


author: Smith

text:
    Appeal of RIVES S. BROWN, Executor, Estate of LUCY C. LESTER, Deceased.
    Docket No. 6056.
    Submitted February 20, 1926.
    Decided April 23, 1926.
    Value of inventory at tbe date of tire death of the decedent determined.

      PL. A. Mihills, O. P. A., and Thomas D. Merimeiher, G. P. A., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before Smith, James, LittletoN, and Teussell.
    This appeal is from the determination of a deficiency in income tax of Lucy C. Lester, from January 1, 1920, to the date of her death on March 28, 1920, in the amount of $6,503.40. The point in issue is the value at the date of the death of the decedent of an inventory of a business carried on by the decedent under the name of Lester Live Stock & Grain Co.
    FINDINGS OF FACT.
    Several years prior to the decedent’s death on March 28, 1920, the decedent engaged her nephew to carry on the business theretofore conducted by her husband, who died about 1914. It was agreed that the business should be conducted under the name of Lester Live Stock & Grain Co. All of her business transactions were carried on under the name of this company. In the determination, of the net income of the decedent for years prior to 1920, an inventory was taken- of practically the entire assets' óí the decedent.' In this inventory there was included not only merchandise, which was the subject of sale, but all of the personal property used in the business, including machinery and equipment. The inventory of merchandise was taken at cost, which, on December 31, 1919, was in excess of the market value. The amount of the merchandise inventory on that date was $32,863.31. Upon the death of Lucy_ C. Lester on March 28, 1920, it was discovered that the decedent by her will had not disposed of all of her property. There was no residuary legatee named and there were numerous items of property owned by her which she had not mentioned in her will. It at once became necessary to determine the value of ail of the personal property of the estate, and the Circuit Court for Henry County, Va., ordered an appraisal made as of March 31, 1920, by five appraisers. These individuals started to make an appraisal soon after March 31, 1920, and the appraisal was filed on May 4, 1920, and duly accepted by the court. This appraisal showed the value of merchandise on hand at March 28,1920, to have been $15,843.19, and this amount was used by the petitioner in the computation of the net income of the-decedent from January 1 to March 28, 1920.
    Subsequent to May 4, 1920, the merchandising business theretofore' conducted under • the name of Lester Live Stock '& ■ Grain Co. was conducted by Lives S. Brown and his sister as a partnership. The books of this company for the entire calendar year 1920 showed a net loss from operations of $36,368.32, and in arriving at the net income of the decedent from January 1 to March 28, 1920, the Commissioner deducted from the income from other sources $9,092.08, representing three-twelfths of the net loss sustained by the Lester Live Stock & Grain Co. for the year 1920. This contrasts with a loss claimed by the petitioner for the decedent for the same period of $23,703.67.
   OPINION.

Smith

: The question presented by this appeal is the value of the merchandise inventory of the Lester Live Stock & Grain Co., conducted by the decedent as a sole proprietorship, at the date of the death of the decedent, namely, March 28, 1920. Prior inventories of this business had been taken by the petitioner, the executor of the will of the decedent. He took no inventory at or about March 28,1920. An inventory was, however, taken by five appraisers under the direction of the court and they reached a value of the inventory of merchandise as of that date of $15,843.19. On behalf of the taxpayer it is claimed that this inventory should be used in determining the amount of the loss actually sustained by the business from January 1 to March 28, 1920. The Commissioner contends, however, that he has never permitted the establishment of the market value of inventories by means of an appraisal, as is contended for in this appeal; that in article 1584 of Eegulations 45 (1920 edition) it is stated that under ordinary circumstances “ market ” means the current bid price prevailing at the time of the inventory for the particular merchandise in the volume in which ordinarily purchased by the taxpayer, and is applicable in the case of goods purchased and on hand; that it is also required that the taxpayer show both the cost and the market price of the article included in the inventory; that no effort has been made by the petitioner to show even approximately what it might have cost the petitioner to replace this inventory as of March 31, 1920.

At the hearing it was stipulated by both parties that the merchandise inventory at January 1, 1920, was $32,863.31. This was the amount shown by the return of the decedent on December 31, 1919. It was proven at the hearing that the merchandise inventory taken by the five appraisers as of March 31, 1920, was $15,843.19. Apparently in every case this inventory was valued at less than the cost, and from the evidence it would appear that the prices placed upon the merchandise appraised was the full market value. We are of the opinion, in view of the stipulation made by the parties, that the income-tax liability of th& decedent for the period January 1 to March 28,1920, should be determined upon the basis of a value of the merchandise inventory of the Lester Live Stock & Grain Co. at March 28, 1920, of $15,843.19.

Order of redetermination will he entered on 15 days' notice, under Rule 50.


text:
    Appeal of GUS LINN.
    Docket No. 1935.
    Submitted February 2, 1926.
    Decided April 23, 1926.

      Josephus O. Trimble, Esq., for the taxpayer.

      B. G. Simpioh, Esq., for the Commissioner.
    Before Smith, James, LittletoN, and Teussell.
    This appeal is from the determination of a deficiency in income tax for the year 1918 in the amount of $2,291. In his petition the taxpayer assigns as error (1) that the Commissioner has erroneously computed his income from a farming venture, it being contended that only a portion of the profits from this enterprise belonged to the taxpayer and that the balance belonged to his son; (2) that the Commissioner has not allowed the taxpayer certain deductions on account of bad debts which he contends became worthless during the year 1918; (3) that the taxpayer erroneously computed the profit realized upon the sale of shares of bank stock by reason of the fact that the cost price used in the determination was incorrect. The last assignment of error has been abandoned by the taxpayer.
   FINDINGS OF FACT.

During the year 1918 the taxpayer was a resident of Kimball, Nebr.; was the owner of a hardware store and of stock in a bank at Kimball; and carried on the business of farming. The farm which he operated was leased from his son, Yernon Linn, and on it he raised a crop of wheat. Under the lease agreement, he had to bear all the expense of putting in the seed, harvesting, threshing, and hauling the wheat to the market, and to pay as rental for said land one-half of the wheat crop raised. On this farm the taxpayer raised and marketed during 1918 approximately 4,800 bushels of wheat, which were sold for $8,685.55. The expenses paid by the taxpayer for planting, harvesting, and hauling the wheat to market' were $2,546.01. He paid his son for rental the sum of $4,342.77. The net profits realized from the farm rented were $1,796.76.

During the taxable year the taxpayer also owned a farm which he leased to John Shafer under a contract by which the taxpayer was to receive as rental one-half of the proceeds from the sale of hay and one-fourth from the sale of potatoes raised on the farm. The total receipts from the hay were $750.70, and the total receipts from potatoes were $1,556.78. The net profits realized by the taxpayer from this farm in 1918 were $764.54 ($375.35 from the hay and $389.19 from the potatoes).

The Commissioner determined the income of the taxpayer from farming operations during the year 1918 to have been $7,196.23. The actual profit realized from such operations was $2,561.30.

During the taxable year the taxpayer ascertained that the makers of the notes set forth in the table following had left the country, and charged them off the books of account of the hardware store as worthless. To the date of the hearing nothing had been collected on these notes.

Notes of—
H. J. Erickson, due Feb. 1, 1917___$52. 90
Robert Cole, due Feb. 5, 1913_148.10
H. J. Erickson, due Dec. 7, 1914_ 28. 50
L. Christensen, due Jan. 1, 1915_ 14. 50
Ted Ware, due Aug. 1, 1915_ 25. 00
Ted Ware, due Oct. 1, 1915_$80.00
Boy Bohrer, due Feb. 1, 1916_ 30. 50
G. M. Clark, due May 11, 1916-1_ 9. 55
G. H. Caffee, due July 1, 1917_ 73.95
J. ,M. Cox, due May 24, 1918_218. 50
Total_ — 1_681. 50

The following is a statement of debts ascertained to be worthless and charged off during the year, the deduction of which was disallowed by the Commissioner:

The Commissioner allowed the deduction from gross income of 1918 of $808.91 for debts ascertained to be worthless. The amount allowable is $2,187.55 plus $808.91, or $2,996.46.

Order of redeterrrdnation will be entered on 15 days’ notice, under Bule 50.


text:
    Appeal of JOHN J. O’NEILL, Jr., et al., Executors, Estate of JOHN O’NEILL, Deceased.
    Docket No. 5185.
    Submitted December 11, 1925.
    Decided April 23, 1926.

      Wm. E. Howe, O. P. A., for the taxpayer.

      J. IS. Halstead, Esq., for the Commissioner.
    Before Smith, James, Littletoh, and Trussell.
    This appeal is from the determination of a deficiency in estate tax in the amount of $8,993.47, of which amount only $5,743.50 is in controversy. The question in issue is whether 250 shares of stock of O’Neill Brothers, Inc., of a value of $81,500, belonged to the decedent at the date of his death.
   FINDINGS OF FACT.

John J. O’Neill, Jr., one of the petitioners, is the son of John O’Neill, who died on March 12, 1922, a citizen and resident of the City of Philadelphia, Pa. In inventorying the property left by the decedent the appraisers inventoried 750 shares of stock of O’Neill Brothers, Inc. These shares of stock were evidenced by two certificates, one for 500 shares standing in the name of the decedent, and the other for 250 shares standing in the name of John J. O’Neill, Jr., which certificate was endorsed in blank by the owner, and found in the safety deposit box of the decedent.

On February 8, 1917, John J. O’Neill, Jr., was an employee of O’Neill Brothers, Inc. His father had promised to make him a gift after he reached his majority. February 8, 1917, was the son’s twenty-first birthday, and on that date the father made the son a present of the 250 shares of stock in question. Prior to that date the father held certificate No. 2 for 750 shares of stock of O’Neill Brothers, Inc. This was turned in to the corporation by the father and two new certificates were issued by the corporation on February 8, 1917, as follows:

Certificate No. 5 oí 500 shares to John O’Neill.
Certificate No. 6 of 250 shares to John J. O’Neill, Jr.

The son kept his certificate until he was called into the military service, and in January, 1918, before he went away, he endorsed it in blank and delivered it to his father. It was the expectation of the son that he would soon go overseas and he desired his father to keep the certificate for him. Before the son left the country, and when he delivered the certificate to his father, he requested his father to vote the shares of stock for him. He also had an agreement with the father that he was to supply him with funds in place of the dividends he would have received on the stock, which agreement was carried out. The son was away for 13% months. When he came back he gave no thought to the certificate of stock. The father bought the son an automobile and said that about squared up the dividend account.

After the son was mustered out of the military service he again went to work for O’Neill Brothers, Inc. His father became ill in. 1921, and no thought was given by the son to the certificate of stock until 1922, when he discovered that it had been inventoried as belonging to the estate of his father. He protested.,

The will of the decedent provided in part as follows:

Foueteenth. All shares of stock of O’Neill Brothers, Incorporated, of which I may be the owner at the time of my decease, shall be divided into as many parts or shares as there shall be sons of mine then living and sons of mine then dead represented by descendants then living, the share falling to each set of descendants being sub-divided amongst them per stirpes, upon the principle of representation. To eacli oí my sons and descendants of dead son who shall then he found entitled, I give and bequeath his or her shares of said stock.

The decedent left two sons (one of whom was a minor at the date of the death of the decedent), three daughters, and his widow. The family decided that it was probably the wish of the father that the younger son should have as many shares of stock as the older son, and, accordingly, the older son, one of the petitioners, gave to his younger brother 125 shares of the stock represented by the certificate standing in his name.

The question as to the ownership of the stock came before the Orphans’ Court of Philadelphia County at the April term, 1923, and the court, in its order dated May 16, 1923, ruled as follows with respect to the shares of stock in question:

The accountants are charged in the inventory and appraisement with 750 shares of O’Neill Brothers, Incorporated; of this stock 250 shares are represented by a certificate issued in the name of John J. O’Neill, Jr., the stock represented by the certificate having been transferred to him by the testator in his lifetime; why these shares were included in the inventory does not appear, but the fact that the stock was duly assigned and transferred on the books of the Company is prima facie evidence of ownership in the persons whose name appears in the certificate, and in the absence of evidence to the contrary, and upon the authority of Robert's Appeal, 85 Pa. 84, the Auditing Judge finds that the stock under discussion is the property of testator’s son, John J. O’Neill, Jr. (or by whatever name he is known) and the accountants are directed to deliver the same to him. It necessarily follows that the claim of the commonwealth to receive a tax on these shares must be dismissed.

Certificate No. 6 for 250 shares of stock of O’Neill Brothers, Inc., standing in the name of John J. O’Neill, Jr., was not a part of the estate of John O’Neill, deceased.

Order of redetermination will he entered on 15 days' notice, under Rule 50.