text:
    Richard W. Farmer Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8442.
    Promulgated December 23, 1927.

      John E. Hughes, Esg., for the petitioner.

      Thos. M. Wilkins, Esq., for the respondent.
   OPINION.

Love:

The petitioner contends that it sold for $265, in 1920, to one Soltzman, the machinery purchased in 1918 and that the buttonhole machine was returned in 1920, entitling it to a return of the $150, which it failed to get. By reason of these transactions, it alleges that it sustained a loss of $1,120.

We are unable to ascertain from the evidence whether the petitioner intended to claim the alleged loss of $1,120 as a part of the depreciation deduction of $1,688.53. At any rate, the respondent disallowed as depreciation the amount of $1,255.51 and in the absence of any evidence with regard to depreciable items, his determination in regard thereto must be approved.

However, if the petitioner did, in fact, suffer a deductible loss in 1920 by reason of the sale of certain assets as alleged, then, notwithstanding the fact that a deduction on account thereof had not been claimed in its return for that year, such loss may now be allowed as a deduction. We come, therefore, to the question as to whether the petitioner suffered the loss in 1920 as alleged.

The burden of proving the alleged loss is on the petitioner. It is necessary, therefore, that the petitioner establish, by preponderating evidence, that the assets in question were sold in the year 1920 at a price which was less than the depreciated cost thereof.

After reviewing in.detail the evidence adduced, we are not convinced thereby, that the petitioner suffered the alleged loss and, consequently, any deduction on account thereof is not allowable.

Judgment will be entered for the respondent.

Considered by Trussell, Smith, and Littleton.


source: Caselaw Access Project

author: Love:

license: Public Domain

text:
    Spang-Chalfant & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10469.
    Promulgated December 23, 1927.

      Walter W. McVay, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
   OPINION.

Love:

The petitioner’s allegations of error will be discussed in the order in which they are above enumerated.

It is contended by the petitioner that it is entitled to deduct the amount of $25,000 paid to Mathieson in 1918, under the circumstances described in the findings of fact. In support of this contention it is urged that Mathieson was paid additional salary in that amount and that in view of the services rendered by him and of the business transacted by the petitioner, the total amount received by him is reasonable for services rendered and, therefore, deductible.

It may be remarked in passing that we should hesitate to hold that the total amount received by Mathieson in 1918 would be unreasonable compensation to him for that year. We are fully impressed with his great value to the petitioner, and of his business acumen, as disclosed by the record. However, we' feel that we are not called upon in this instance to pass upon the question of reasonableness of a salary.

It seems that the petitioner has attempted to take two positions with respect to the same matter.

In its return for 1918, petitioner did not deduct the amount of $25,000 as additional salary to Mathieson. In fact, it is established by clear and uncontroverted proof that it deliberately refrained from deducting the amount, so that it would be reflected in taxable income, and a tax thereon was paid. It is further shown that this action was taken designedly so that the amount of $25,000 paid pursuant to the resolution of January 15, 1918, would be unmistakably earmarked as a gift. The petitioner intended to make a gift of the amount in question and Mathieson accepted it as a gift. It is clear, therefore, that we can not make that salary which was not in fact salary, without resort to legal legerdemain. The intention of the parties having been clearly and unmistakably expressed with respect to the amount now claimed as a deduction, we must hold that amount not to be deductible.

The second assignment of error is to the effect that the Commissioner erred in determining the depreciation upon petitioner’s equipment account. The evidence shows that the petitioner reported its account as of December 31, 1917-December 31, 1918, to be $1,475,-363.75 and claimed depreciation thereon in the amount of $147,536.39, which amount the Commissioner allowed. It seems, therefore, that the Commissioner allowed that which was claimed by the petitioner and that there was no error on his part, unless he had other figures at hand.

However, it is established that petitioner’s equipment account as of December 31, 1918, was $1,528,558.73, resulting from additions thereto during the year of $53,194.98. It is clear that by using “ straight line ” depreciation on the basis of the opening account, the petitioner is allowed no depreciation on the amount of additions acquired during the taxable year and under the statute it is entitled to a deduction thereon. The rate of depreciation is not in dispute as both parties agree that 10 per cent is proper'. We are of the opinion, therefore, that the equipment account at the beginning and the end of 1918 should be added together and divided by two, thereby creating an average of the account during the year and that the average so obtained should be depreciated at the rate of 10 per cent.

We are aware of the fact that the average of the equipment account thus obtained might not reflect with meticulous accuracy the exact amount of depreciation upon the respective items therein, but we believe that meticulous accuracy in such a case should not deprive the petitioner of the right to a depreciation deduction on assets acquired during the taxable year. The depreciation allowance on the equipment account should, therefore, be recomputed in accordance with the foregoing paragraph.

The third contention of the petitioner is that the Commissioner erred in disallowing the amount of $6,499.27 claimed as depreciation on certain tracks and that he further erred in determining the depreciation on office furniture to be $2,509.56.

There was insufficient evidence introduced to enable the Board to determine the life of the tracks in question and in the absence thereof, we can only approve the Commissioner’s determination. However, as to the depreciation on office furniture it appears that the Commissioner erred.

The furniture account shows the cost thereof to be $28,994.32. The petitioner claimed and the respondent allowed depreciation thereon in the amount of $2,509.56. Upon audit of the return, the rate of depreciation was fixed at 10 per cent but the deduction of $2,509:56 was unchanged. It is obvious therefore that the proper deduction is $2,899.43, a difference of $389.81 and accordingly taxable income should be reduced by that amount.

The fourth assignment of error relates to the action of the Commissioner in reducing invested capital for the year 1918 by deducting therefrom the income and profits taxes for the preceding year, prorated to the date when payable. The issue thus presented has been decided by the Board in Russel Wheel & Foundry Co., 3 B. T. A. 1168, wherein the Commissioner’s action was approved and upon that authority it is approved herein.

The last assignment of error relates to the Commissioner’s refusal to compute petitioner’s tax liability for 1918 under the provisions of section 328 of the Revenue Act of 1918. In the absence of any evidence showing any abnormality with respect either to income or invested capital, the Commissioner’s determination in regard thereto is approved.

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

Considered by Trussell, Smith, and LittletoN.


author: Morris:

text:
    Hudson River Woolen Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8523.
    Promulgated December 27, 1927.

      Wilton H. Wallace, Esq., and B. B. Pettus, Esq., for the petitioner.

      J. L. Deveney, Esq., for the respondent.
   OPINION.

Morris:

The first allegation of error urged by the petitioner relates to the action of the respondent in increasing the depreciation reserve, thereby decreasing invested capital of petitioner for the taxable years in question. The respondent, in making his examination for the years 1917 to 1919, found that inadequate depreciation had been taken by the petitioner in years prior to 1917 and he thereupon recomputed depreciation on machinery and buildings from January 1,1893, which computation resulted in an increase in the depreciation reserve of $20,153.27, which, in computing the petitioner’s invested capital for the year in question, he included in the reserve for depreciation.

Petitioner relies upon the Appeals of Rub-No-More Co., 1 B. T. A. 228; Cleveland Home Brewing Co., 1 B. T. A. 87; and Russell Mill ing Co., 1 B. T. A. 194, in support of its contention. The respondent, on the other hand, contends that the Appeal of City National Bank, 2 B. T. A. 623, is controlling.

On account of the paucity of evidence bearing upon this issue it is impossible for us to determine just what amounts were charged off by the petitioner in the earlier years of its existence. The petitioner’s witness, when asked what, if any, depreciation was charged off in the earlier years, replied:

Negligible amounts; some years I did not charge off anything at all; I do not believe — in one year it exceeded $2,000, but in most of the years it was about $1,500.

In the cases relied upon by the petitioner the Board found that there was sufficient evidence that the taxpayer had charged off depreciation in prior years and that such depreciation was substantially correct, therefore, the depreciation as computed by the taxpayers in those cases was not disturbed. In the Appeal of City National Bank, supra, on the other hand, the Board found that depreciation taken by the taxpayer from 1907 to 1918 was inadequate and, therefore, the respondent was permitted to recompute said depreciation for those years.

It does not appear from the evidence that the petitioner had any settled policy with respect to depreciating its assets prior to the enactment of the income-tax laws, nor does it appear that the amounts charged off in the earlier years of its existence are substantially correct. The respondent’s action in increasing the petitioner’s depreciation reserve by the amount of $20,153.27 is, therefore, approved.

The second allegation of error urged by the petitioner relates to the disallowance by the respondent of the sum of $160,811.16 from invested capital for the years in question. This figure of $160,811.16 was arrived at by taking the appraisal values at March 1, 1913, of buildings and machinery in the total sum of $218,612.56 and deducting therefrom the cost value of buildings and machinery as reflected in the books of account of the petitioner at March 1, 1913, of $57,801.40.

Section 326 (a) of the Revenue Act of 1918 provides:

(a) That as used in tbis title tbe term “invested capital” for any year means (except as provided in subdivisions (b) and (c) of tbis section:
(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment; * * *
(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.

What evidence have we of the “ actual cash value ” of these assets “ at the time of such payment.” The appraisal made in 1918 as of March 1, 1913, is clearly not proper evidence of value for invested capital purposes, under the decision in La Belle Iron Works v. United States, 256 U. S. 377, and similar decisions, nor do we understand that it was urged as such. The only testimony that we have on the subject is that of Mendelsohn, treasurer of the petitioning company, that although there were no offers to purchase the business at or about the time of incorporation of the petitioner, there was an offer to make a loan of $30,000 on the property that was left after the fire, which loan was never consummated, but Mendelsohn did not testify, nor did anyone else, as to what the parties who were to make this loan considered the cash value of the petitioner’s property to be which was to secure this loan. We do not consider that this evidence is of any value to us in determining “ actual cash value ” of the assets of the petitioner at the time they were taken over in 1892.

With respect to assets acquired and improvements made subsequent to incorporation, we have the testimony of Mendelsohn that between 1893 and 1918, the petitioner made extensive alterations and improvements and that the costs of some of those improvements were charged to profit and loss at the time. It is true that we have been shown by certain plats offered in evidence that these alterations and improvements were made, and that only about $16,000 thereof had been capitalized, but we have not been shown by an analysis of the profit and loss account to which capital items have been erroneously charged just what amount should have been capitalized, nor did the witness have any definite idea how much the items that were not capitalized amounted to.

During the course of the hearing, while Mendelsohn was identifying the additions to the mill account from the books of account of the petitioner, a charge of $4,766.89 was found to have been made in 1895. The testimony with respect to this item was:

Q. What is that §4,700; what does that represent?
A. I think that was part of the cost of the large addition.
Q. Of the large addition to what—
A. To the main building.
Q. To the main building?
A. Yes, sir; that is as far as my recollection goes.
Q. But, the cost of the main building'was greater than $4,700?
A. It was much greater; that covered the brick work and the foundations and the roof, and all the rest of it was done by labor that we employed by the day, by the week and by the year.
Q. That addition to the main building — how much do you think the total cost was?
A. It was possibly more than twice the amount — it was surely more than twice the amount; I could not say what the exact cost was.

The above testimony as to an event occurring 30 years ago, uncorroborated by other testimony, is entirely too general and indefinite in its character for us to find as a fact that the building referred to when originally built cost $9,400 and that $4,700 thereof was charged to profit and loss. It will be noted from the above testimony that the witness does not state that the amount greater than $4,700 was not capitalized, nor that it was charged to profit and loss. He simply says that the amount appearing in the account was $4,766.89 and to the best of his recollection that represented a part of the cost of the main building and furthermore, that the cost of the building was twice as great as the amount shown in the books of account. We do not know, except by inference, whether or not he meant to say that the entire cost had not been capitalized. The original entries covering the erection of this building should have been put in evidence and the witness should have definitely stated as a fact that a portion of the cost thereof had been charged to profit and loss, and that account should have been analyzed to determine the correct amount to be capitalized. We can not, therefore, sustain the contentions of the petitioner with respect to this item on the evidence offered.

The witness, Mendelsohn, testified further that the petitioner constructed a large reservoir to supply it with water gathered from nearby wells and springs, the cost of which construction exceeded $5,000, all of which was charged to profit and loss. Undoubtedly if the petitioner expended $5,000 or more in the construction of this reservoir, it should have been added to its capital account and should not have been charged to profit and loss, but with the meager amount of evidence that we have, we are unable to make any appropriate findings for the taxable year in question with respect to this item. We are not informed of the nature of the construction of this reservoir, we do not know the date when it was completed, nor do we know what would be a proper rate of depreciation to apply in depreciating this asset down to the taxable year and without all this, we are unable to say what amount, if any, should be added to invested capital for the taxable year under consideration.

Considering the clear and unmistakable terms of section 326 of the Revenue Act of 1918 and the decided cases thereunder, we are unable to sustain any additions to the invested capital as computed by the respondent.

With respect to the third allegation of error, counsel in his opening statement said it dealt with improper reduction of invested capital on account of income and profits taxes for prior years, that prior years had not been closed, and pending claims if allowed would have an effect upon the invested capital for the taxable year. No evidence was introduced on .this point, and in the absence thereof, we are unable to make any determination with respect to the error alleged.

As to the fourth allegation of error, the petitioner and respondent entered into a stipulation at the hearing of this case as follows:

That it is agreed that during the taxable year this taxpayer received $545.54, representing interest received during the taxable year upon United States Certificates of Indebtedness, and that interest upon the principal sum of $5,000, namely $225.00 is exempt, leaving the amount taxable $320.00.

The fifth allegation of error with respect to relief under the provisions of sections 327 and 328 of the Revenue Act of 1918 was waived by the petitioner at the hearing.

The sixth allegation of error urged by the petitioner is the failure of the respondent to allow a March 1, 1913, value of $160,811.16 for depreciation purposes. This allegation of error is not entirely clear, but it seems that what the petitioner is contending for is a depreciation allowance upon a value of $61,726.95 in excess of that allowed by the respondent, which is the difference between $160,811.16, the figure hereinabove explained, and $99,084.21, the excess value for depreciation purposes allowed by the respondent over the value shown in the books of account.

Section 214 (a) of the Revenue Act of 1918 provides:

That in computing net income there should be allowed as deductions:
* * * * * * *
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

In order to dispose of this allegation we must determine whether the values found by the appraiser, namely $102,620 for buildings and $115,992.56 for machinery, represent the fair market values of the properties in question at March 1, 1913.

The appraisal in question was made by an expert appraiser in 1918 as of March 1, 1913. The appraisal report was offered in evidence and received as an inventory of the assets of the petitioner as of the time the appraisal was made — the appraiser was then questioned as to whether the figures identified in that report, in his opinion, represented the “ fair market value ” at March 1, 1913, and he stated that they did. The testimony of this appraiser was the sole evidence on the subject of fair market value at March 1, 1913. We must, therefore, determine from his testimony whether the “ reproductive ” costs used by him in reaching his conclusions are the same as “ fair market value ” at March 1, 1913. In considering the question of “market value” in Chicago Railway Equipment Co. v. Blair, Commissioner, 20 Fed. (2d) 10, the Circuit Court of Appeals said:

Market value, speaking very generally, may be said to be the price which one, under no compulsion, is willing to take for property which he has for sale, and which another, under no compulsion, being desirous and able to buy, is willing to pay for the article. But market value is so dependent upon times, places, conditions, and people that that which is a good rule in one case may be no rule under other circumstances. For instance, staple articles of merchandise, sucli as fuel, clothing, or food, aV most times and places have a well-known market value; but the market value of plants used for manufacturing purposes, or buildings equipped for special business or commercial purposes, are affected by many conditions.

While the appraiser testified that the figures in his appraisal represented “ fair market value,” we also have his testimony as to how he arrived at his figures in great detail. Let us see if he has taken into consideration the “ many conditions ” which enter into the determination of market value as applied to manufacturing plants similar to the petitioner. The witness stated that the depreciated value is determined, first, by determining whether the machine had been improved upon, whether there is another machine that does better work more economically; secondly, the present condition is determined, that is, working condition; and, thirdly, the wear and tear that the machine has been subjected to — he then determines the cost of the machine, where that is possible of ascertainment, on the day to be used as a starting point, in this case, March 1, 1913. From the price so determined, depreciation is deducted. In the case of buildings, the building is measured and the number of bricks and the amount of labor entering into the construction are determined, applying the costs of materials and labor at March 1, 1913, the cost to reproduce that building as of that date is determined. If the particular asset has been in use for three years prior to March 1, 1913, he would deduct three years’ depreciation in arriving at reproductive cost at that time.

It must be borne in mind that the market value which we are attempting to determine is not the value of a particular machine or building or of a group of machines or buildings as such — our problem is to determine whether we have before us sufficient evidence to say that the values found by the appraiser in the manner described are the “ fair market values ” of a manufacturing plant actively engaged in the conduct of woolen business. Certain elements affecting fair market value were considered by the appraiser in arriving at his value of the machinery at March 1, 1913, but other factors, which we consider essential, were disregarded.

In the Appeal of Rockford Malleable Iron Works, 2 B. T. A. 817, where the taxpayer sought to prove the March 1, 1913, value of its depreciable assets by the introduction of a retrospective appraisal based upon reproductive costs less depreciation, the Board held that such evidence was insufficient. In that case the Board, after citing with approval the Appeals of Valley Steamship Co., 1 B. T. A. 1107, and Kinsman Transit Co., 1 B. T. A. 552, said:

The value of property on March 1, 1918, is its actual value on that date, and the valuation can not be determined by any sort of theoretical computation, even though that theoretical computation starts with a reproductive value based upon cost of similar property. Value is a real, actual, definite thing, and, in many instances, cost or depreciation, or both, have very little to do'with it. Value is what the property is worth. It is what it would bring in the open market if offered for sale by an owner willing, but not compelled, to sell to a purchaser willing, but not compelled, to buy. Value is frequently affected by things far removed from depreciation or cost. * * * Value results largely from demand or earning power, which may or may not be the same thing. It is commonly affected by periods of prosperity or financial depression.

In this case, the appraisal figures, determined as heretofore explained, form the basis for the witness’ testimony as to “ fair 'market-value ” at March 1,1913, which was all the testimony offered on the subject. The appraisal was made for insurance purposes and not with the intention of establishing the fair market value of a plant actively engaged in the woolen manufacturing business, and is naturally concerned only with what it will cost the company to rebuild and reequip its plant at a given time in the event of destruction, either partially or wholly, by fire. It does not take into consideration the economic conditions with respect to the business itself nor with respect to the industry as a whole — in short, the economic law of supply and demand at March 1, 1913, has had no consideration whatsoever. In 1913 there may have been little or no demand for the business or' the types of machines and buildings owned by the petitioner, in which event, of course, the fair market value at that time would be very low; if, on the other hand, there was a great demand, the inverse of that proposition would be true. The witness was asked during the course of the hearing, “Assume you have the total number' of bricks which enter into this building- — -assume you have the price of labor for the laying of the bricks and all of the other prices that go into the construction of that particular building — assume you are making your appraisal as of March 1, 1913, would you say that the total of those various items — -bricks, labor and lumber and whatever goes into that building, would constitute the fair market value of that building on March 1,1913?” And the witness replied, “ Yes, sir.”

Considering the uncorroborated testimony of the witness and the decisions of the Board on the subject, we are of the opinion that the values contended for by the petitioner have not been properly established by the evidence. Therefore, the respondent’s determination with respect thereto is approved.

Judgment will l>e entered on 15 days’ notice, under Bule 5Q.

Considered by MuRdock and SieekiN.


author: Phillips:

text:
    George E. Turnure, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10045.
    Promulgated December 27, 1927.

      Melvin G. PaTliser, Esq., for the petitioner.

      E. G. Smith, Esq., for the respondent.
   OPINION.

Phillips:

Fifteen per cent of petitioner’s net income for 1922 amounted to $11,388.83. More than this amount was paid to or for the Lenox Brotherhood by petitioner in 1922. Petitioner contends that this sum represents contributions or gifts made for charitable and educational purposes and that said amount .is deductible from his income under the provisions of section 214 (a) (11) of the Revenue Act of 1921, which permits the deduction of:

(11) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the women’s auxiliary units thereof, 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; * * *

While not incorporated, the Lenox Brotherhood operated under a constitution and through officers elected by its members. There would seem to be no question that it is properly to be designated an association and, as such, falls within the definition of a corporation as set out in section 1 of the Act. Nor is it contended that this association had any net earnings which might inure to the benefit of any private stockholder or individual or, indeed, that if there were any such earnings they would so inure. The sole question presented is whether the Brotherhood is “organized and operated exclusively for religious, charitable, scientific, literary or educational purposes.”

“ Charitable ” may be used in either a broad or a narrow sense. In its narrow sense, charity means whatever is bestowed gratuitously on the needy or suffering for their relief. In its widest sense, charity denotes all the good affections which men should bear to each other, and in that sense embraces what ,is generally understood as benevolence, philanthropy, and good will.

A definition of charity used by counsel in the case of Vidal v. Girard, 2 How. 127, and subsequently quoted with approval in many courts, including the Supreme Court (Ould v. Washington Hospital, 95 U. S. 303), is as follows:

Whatever is given from the love of God, or for the love of your neighbor, in the catholic and universal sense, given from these motives and to these ends, free from the stain or taint of every consideration that is personal, private or selfish.

In the last cited case it ,is said:

A charitable use, where neither law nor public policy forbids, may be applied to almost anything that tends to promote the well-doing and well-being of social man.

The purpose of the Lenox Brotherhood was not to dispense charity as the word is used in its narrow sense. Its purpose was not to relieve the suffering of unfortunate individuals or to provide the poor with the necessities of life. It supplemented the churches and the schools by extending to the community opportunities for instruction in many things not taught in the schools or churches, but which lead to a better understanding and enjoyment of life. It was an institution with a broadening influence on the social, intellectual, physical, and, perhaps, moral life of the members of the community. The object of the association as stated in its charter was to draw into closer relationship the members ‘of the community and to promote their intellectual, moral and physical welfare. We have no doubt that contributions made for such a purpose free from the stain or taint of every consideration that is personal, private, or selfish ” and tending “ to promote the well-doing and well-being of social man ” are charitable within the broad understanding of that word which has been adopted and applied by the courts.

We have not overlooked the social aspect of the Brotherhood. It would seem clear that if its main purpose was social, it would not meet the test of the statute. Practically all religious and educational associations and some charitable organizations make use of social or athletic features, but only as a means to an end. Unless the social feature predominates such organizations are none the less exclusively religious, educational, or charitable. The general or predominant purpose is principally to be considered. Chemists' Club v. United States (Ct. of Cls.) 6 Am. Fed. Tax Rep. 6797. The social activities of the Brotherhood were aimed at the accomplishment of its purposes as stated in its charter. These purposes we believe to be charitable and educational within the broad meanings of those terms.

The fact that some persons paid small sums for the use of the privileges of the organization does not prevent it from being charitable or educational. Many well known organizations whose classification as charitable, religious, or educational has never been questioned make charges to those using their facilities. Many persons and organizations used the facilities of the organization without charge. It was never intended that it should be self-sustaining or a profit-making venture.

We are of the opinion that the Lenox Brotherhood was exclusively a charitable and educational institution and that the contributions made to it by the petitioner in 1922 were deductible to the extent of 15 per cent of his net income.

Reviewed by the Board.

Decision will be entered on 10 days' notice, wider Rule 50.

SteRNhageN dissents.


author: Lansdon :

text:
    Norman B. Richardson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9767.
    Promulgated December 27, 1927.

      Walter W. MeVay, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
   OPINION.

Lansdon :

We have repeatedly held that depreciation is a physical fact that must be proved by evidence. In the instant case, we think the evidence proves a useful life of these assets of at least 20 years and we, therefore, approve the determination of the respondent on this point. The petitioner and respondent have stipulated that the equipment accounts were $88,001.69, $88,563.93, and $89,418.93 on the first day of January, 1918, 1919, and 1920, respectively. These amounts were used by respondent in computing depreciation for these several years, and, as to this action, there is no question.

Petitioner’s claim for the loss on account of the obsolescence of good will is disallowed under the decision of the court in Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, and the decisions of the Board in Manhattan Brewing Co., 6 B. T. A. 952; Olt Bros. Brewing Co., 6 B. T. A. 974; and Alfons Wile, 7 B. T. A. 165.

We find no authority in the Act for the deduction claimed by petitioner on account of gifts of alcoholic liquors made to his friends. Our decision on this item is, therefore, for the respondent.

Reviewed by the Board.

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


author: Lansdon:

text:
    Taylor Brothers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9021.
    Promulgated December 27, 1927.

      Clarence 1, Howell, C. P. A., for the petitioner.

      Brice Toole, Esq., for the respondent.
   Lansdon:

On September 16, 1925, the respondent mailed a letter to Taylor Brothers, a partnership, in business at McCool, Miss., which included, among other things, the following statements:

Reference is made to the letter signed by Mr. Olay Taylor and executed under date of August 19, 1925, in regard to the audit of your income tax returns for the years 1918 to 1921 inclusive, as outlined in office letter of June 25, 1925.
The results of the audit of the cases of the individual partners is being made the subject of separate communications addressed to them.

On the same date the respondent mailed deficiency notices, in the usual form, to Frank Taylor and Clay Taylor, both of whom are residents of the State of Mississippi. The notice to Frank Taylor asserted deficiencies in income taxes for the years 1918 to 1921, inclusive, in the total amount of $3,381.60, to which were added penalties for failure to make the income-tax returns required by law in any of the years involved in the total amount of $845.41. On the same day, a similar notice concerning the same years was mailed to Clay Taylor, also a resident of Mississippi, in which deficiencies and penalties, in the respective amounts of $3,309.60 and $827.41, were asserted.

On. November 12, 1925, a paper, which purports to be the petition in the appeal of Taylor Brothers, a partnership, from the determination of the respondent, as above set forth, was filed with the Board of Tax Appeals. Among matters contained therein, such petition sets forth the following:

The above-named taxpayer hereby appeals from the determination of the Commissioner of Internal Revenue set forth in his deficiency letters IT: PA: 1 VMW-104 and IT: PA: 1-60D VMW-104, dated September 16, 1925, and as the basis of its appeal sets forth the following:
(1) The taxpayer is a partnership, consisting of two partners, namely, Frank Taylor and Clay Taylor, with its principal office at McCool, Mississippi.

The petition was verified by the following certificate, signed by the Taylors:

Frank Taylor and Clay Taylor, being duly sworn, say that they are the individuals composing the partnership of Taylor Brothers, the taxpayer named above, and as such do verify the foregoing petition; that they have read the said petition, and are familiar with the statements therein contained, and that the facts therein stated are true, except such facts as are stated to be upon information and belief, and that these facts they believe to be true.

The proceedings were called from the day calendar for hearing at Memphis, Tenn., on March 23, 1927. The respondent, through his attorney, there and then moved dismissal on the ground that such appeal was improperly taken by a partnership from deficiencies determined, as above stated, against individuals; that the respondent had asserted no deficiencies against any corporation, association, or partnership, designated and known as Taylor Brothers; and that a partnership is not a taxable entity under the Federal revenue acts applicable to the years involved. This motion was taken under advisement, and the parties were allowed 30 days in which to file their briefs upon the question of the jurisdiction of the Board to hear and determine the proceedings.

Upon an almost identical state of facts the Board, on its own motion in the first instance, and on the motion of the respondent in the second instance, has heretofore dismissed the appeals of Gerhardt & Co., Docket No. 1094, and Polk Brothers, Docket No. 6088. Compare, also, the Appeals of New York Trust Co., et al., Executors, 3 B. T. A. 583, and Eastman Gardiner Naval Stores Co., 4 B. T. A. 242.

The motion to dismiss is granted.

Reviewed by the Board.

Judgment dismissing the proceedings will he entered.

Smith and Trussell dissent.


author: Siefkin :

text:
    Pantlind Hotel Co., and Pantlind Building Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18436.
    Promulgated December 27, 1927.

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

      John F. Greaney, Esq., for the respondent.
   OPINION.

Siefkin :

It is urged by petitioners that the two so-called “ waivers” were improperly admitted in evidence on the ground that the Commissioner’s signature was not properly identified and also on the ground that it was not shown by whom and when they were signed on the part of the Commissioner, and are thus inoperative as proof that the statute of limitations has been suspended. During the hearing it was stipulated by the parties that such instruments were properly signed by officers of the companies and that the seals were the corporate seals. They were produced from the files of the Commissioner and introduced by counsel representing the Commissioner at the hearing of the case.

It is obvious from the instruments themselves that the Commissioner himself did not sign them since initials appear under the signatures which we assume are the initials of someone signing for him. Nor do the instruments, by themselves, show what date the signatures of “ D. H. Blair ” were placed thereon. Each contains, however, a typewritten date of November 3,1925.

The term “ waiver ” is a misnomer and is misleading. Congress in neither the Revenue Act of 1924 nor 1926 used the word as designating an instrument which extended the time for determination, assessment and collection by the taxing officials, but instead, in section 278 (c) of both Acts, spoke of a case “ where both the Commissioner and the taxpayer have consented in writing.” This language recognized a bilateral agreement. A contract may be unilateral in obligation, but always has at least two operating parties; a waiver “ so far as it is thought to be anything, * * * is unilateral.” Ewart, Waiver Distributed, 150.

These instruments, then, create an obligation contractual in its nature and admitted by petitioners to be signed by their proper officers, regular on their face and produced on behalf of the other party.

Sections 322 and 323 of the Revised Statutes, section 1301 (a) of the Revenue Act of 1918 and section 1 of the Urgent Deficiency Appropriation Act, approved October 6, 1917 (40 Stat. 348), provide for the appointment of deputy commissioners and an assistant to the Commissioner. The statutes referred to provided that the deputy commissioner “ shall act as Commissioner of Internal Revenue in case of the absence of that officer.” Like duties are prescribed for the assistant to the Commissioner. Section 1 of the Act of October 6, 1917, provides in part as follows (40 Stat. 348) :

The Commissioner of Internal Revenue is authorized to assign to Deputy Commissioners such duties as he may prescribe, and the Secretary of the Treasury may designate any one of them to act as Commissioner of Internal Revenue during the Commissioner’s absence.

Nothing appears in the record of this appeal to indicate that the signature or approval of the Commissioner was not made in accordance with the provisions of the statutes referred to.

Furthermore, there is a well recognized rule that, at least in many instances, discretionary acts of executive officers may be performed by subordinates. In Railway Company v. United States, 244 U. S. 351, it appeared that a temporary Forest Reserve had been created by the order of the Commissioner of the General' Land Office. The order was made under the direction of the Secretary of the Interior. The acts under which the order was issued bestowed upon the President of the United States the power to withdraw lands from disposition under'the public land laws. In the course of the opinion (page 357) the court states that “the act of the Secretary of the Interior m directing the latter (the withdrawal) was in legal contemplation the act of the President.” See also Wilcox v. Jackson, 13 Pet. 498, 513.

Also the mere fact that the words “ D. H. Blair, Commissioner,” appearing on the waivers submitted in evidence was not in the personal handwriting of D. H. Blair does not constitute evidence tending to prove that the signature did not represent his personal discretionary act. In Bartlett v. Drake, 100 Mass. 174; 97 Am. Dec. 92, it was held that a person who appears before a magistrate and duly acknowledges the execution of a deed to which his name was subscribed by another in his absence, thereby recognizes and adopts the signature as his own. See also 22 L. R. A. 297; and 8 R. C. L., p. 938. There is nothing to show that the signature appearing on the waivers introduced in evidence was not written at the personal direction of D. H. Blair or that it was not adopted by him as his own after having been written by another. In Commonwealth v. Slifer, 25 Pa. St. 23; 64 Am. Dec. 680, 683, it was stated that the acts of public officers should be construed with liberality. “ There is always a presumption that they (acts of public officers) are in accordance with the law. The presumption can be repelled only by clear evidence of illegality.”

In Hartwell v. Root, 19 Johns. (N. Y.) 345, it appeared that a deputy sheriff had an execution returnable in February. In March the debtor sold certain horses which he owned on the return day. Afterwards the deputy sheriff sold the horses under the execution. Held in the absence of proof, that it would be presumed that the property was levied upon before the return day. See also section 579 of Mechem on Public Officers.

It would appear that the approval or consent of the Commissioner to the waivers involved in this appeal is clearly not within the rule of such cases as Lyons v. Alley, 130 U. S. 177; Clark v. Corporation, 12 Wheat 40; and Lord v. City (Wis.) 2 N. W. 785, where it was held that specific acts of municipal officers could not be delegated under the statutes governing the matter. Under the circumstances, we have no hesitation in holding that petitioner is bound by the terms of such instruments and that the deficiencies in question, having been asserted within the time as agreed upon, are not barred. Trustees for Ohio & Big Sandy Coal Co., et al., 9 B. T. A. 617.

As to the question of affiliation, the hotel company owned at least 98 per cent of the common stock of the building company during the taxable year and were such ownership the sole criterion there would be no doubt of the affirmative application of the Revenue Act for a consolidated return. However, in addition to the common stock there was outstanding during the year preferred stock of the building company and this preferred stock was possessed of voting rights due to the provision of the law of the State of Michigan that preferred stock was entitled to full voting rights where, as here, the issuing corporation was in arrears more than 60 days in the payment of dividends on the preferred stock. There were outstanding 3,989 shares of common stock and 4,453 shares of preferred stock of the building company, or an aggregate of 8,442 shares, all of which had full voting rights during 1921. Accordingly, it becomes necessary to analyze the holdings of the preferred stock. Set out in the findings of fact is an analysis of the holdings of the voting stock of both companies as at the beginning and at the end of the year. In grouping the holdings of stockholders common to both companies, minor variations in comparative percentages owned in each company are disregarded, in accordance with the Appeal of Rowe Transfer & Coal Co., 1 B. T. A. 593. The combined holdings of the hotel company and of the stockholders common to both companies amounted in the aggregate to about 83 per cent of the total outstanding voting stock of the building company at the beginning of the year, and about 85 per cent thereof at the end of the year. The record is silent as to the identities and the extent of the separate holdings of most of the stockholders included in the statement in the group designated “ all others,” leaving it open to conjecture whether the shares thus designated represented in their aggregate the true measure of the minority interest. We do know, however, that such minority was about 1 † per cent of the outstanding stock at the beginning of the year and 15 per cent at the end of the year. As pointed out in Appeal of Isse Koch & Co., 1 B. T. A. 624, the word “ control ” as used in the statute means “to exercise a direct, a restraining or directing influence over; to dominate; hence to hold from action; to curb; subject; overpower.” And the question is one of actual or practical control as contrasted with ownership or legal control. In Benjamin Electric Manufacturing Co., 6 B. T. A. 1204, 1210, we said:

Affiliation, if it exists, must be based on ownership or control of substantially all the stock. Appeal of Tunnel Railroad of St. Louis, 4 B. T. A. 596. The control required by the statute is control of the voting stock, and this control must be shown to be genuine, and must be actually exercised. Appeal of Isse Koch & Co., 1 B. T. A. 624. Control of the business with a quiescent minority is not sufficient, nor is the fact that there is unity of purpose and harmonious cooperation sufficient to satisfy the statutory requisites for affiliation. Rishell Phonograph Co., 2 B. T. A. 229. Tunnel Railroad of St. Louis, supra. We Lave also said, in the Appeal of Cleveland & Mahoning Valley Railway Co., 4 B. T. A. 1040, that it will be noted that the words “ controls ” and “controlled” as used in section 240 (b) of the Revenue Act of 1918 are not in any manner limited or qualified. In the absence of any qualification these words must be taken to mean full and complete control.

In that case we denied affiliation although the minority stockholders worked with the principal stockholders “ toward a harmonious end ” and although the two corporations “ worked together as a business unit,” basing such denial upon our view that control of the business is not control of the stock. In this case, however, ownership of about 54 per cent of the voting stock of the building company by the hotel company is to be considered in connection with the owm ership of an additional 29 to 31 per cent of the building company by stockholders of the hotel company.

Upon a careful consideration of all the evidence, including the evidence as to intercompany transactions set forth in our findings, we are of the opinion that substantially all of the voting stock of petitioners was controlled by the same interests and the taxes should be determined upon the basis of a consolidated return.

Reviewed by the Board.

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


author: Ahundell :

text:
    C. L. Starr, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12739.
    Promulgated December 27, 1927.

      I. F. Phipps, Esg., for the petitioner.

      Warren F. Wattles, Esg., for the respondent.
   OPINION.

Ahundell :

The property in question cost $24,166.30; the sales price under the contract was $60,000 and the initial payment was $23,000, of which latter amount it was understood between the parties $11,700 would be used to pay off certain outstanding obligations against the land sold.

The Commissioner has determined a profit by the simple process of deducting from the sales price set' forth in the contract of sale entered into by petitioner with the Multnomah Lumber & Box Co. the cost of the land. The remainder so obtained is said to constitute cash income on which a tax must be paid. This is, of course, true if the contract obligation, unevidenced as it is even by promissory notes, is the equivalent of cash. John B. Atkins et dl. v. Commissioner, 9 B. T. A. 140. However, efforts made to sell the contract were unsuccessful and efforts to hypothecate it for a loan were equally futile. The doubtful status of the obligee, the fact that the property was sold originally at a higher price than its intrinsic value, because of its strategic situation, and the hazards of fire in that particular locality all tended to make the contract obligation unmarketable. It is too much to say under such circumstances that petitioner at the date of entering into the contract was in receipt of cash income. We believe that petitioner is entitled to recover his capital before it may be said that he is in receipt of taxable income and we so hold. Anton M. Meyer, 3 B. T. A. 1329.

The parties presented and argued this case on the theory that the transaction between petitioner and the Multnomah Lumber & Box Co. served to effect a sale of the property and the foregoing opinion is based on that hypothesis. In view of the fact that both title and possession are reserved by petitioner until final payment, the question may well arise whether or not the contract is not one to sell rather than a contract of sale. In view of the fact that our conclusion would be no different if such were the case, we pass the matter with no more than this comment.

In view of the conclusion reached it becomes unnecessary to determine whether or not petitioner may resort to the installment sales method of reporting income.

Reviewed by the Board.

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


text:
    Wilford C. Saeger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7562.
    Promulgated December 27, 1927.

      I. W. Sharp, Esq., and E. T. Quigley, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Morris:

Petitioner alleges that the respondent erred in refusing to allow him to deduct the full amount of his original investment of $48,890.47 in capital stock of the Refrigerator Company and the Refrigeration Company in the computation of his net income for 1920. Respondent, on the other hand, contends that when the Refrigeration Company liquidated in 1916, the petitioner sustained a loss at that time equal to his original investment minus the par value of the stock of the Machine Company received by him in 1918. Petitioner contends that the capital stock of the Machine Company which he received in 1916 had no ascertainable market value, and that there could be no basis for computing a gain or loss realized at that time, therefore, the stock of the Machine Company merely took the place of the stock in the Refrigeration Company, and when the stock of the Machine Company was found to be worthless in 1920, the amount of his loss was the total amount of his original investment in the Refrigeration Company.

As no question is raised as to the worthlessness of the stock in 1920, the sole question for our determination is the amount of the loss sustained at that time. If the transaction in 1916 under which the petitioner acquired the stock was one that gave rise to gain or loss for tax purposes, a new basis was established, that must be used in determining the amount of the loss sustained in 1920. Under the Revenue Act of 1918, (section 202(b)), provision was made that property received in exchange for other property shall for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value if any, and the later acts provide that income arises out of an exchange only when the property received has a readily realizable market value. Clearly under those acts, before gain or loss arises, that which is received must be equivalent of cash, or readily convertible into cash. No such specific provisions appear however in the Revenue Act of 1916 and the principle embodied in the later acts is inapplicable unless it is inherent in the theory of income taxation, and therefore included in the more general terms of the 1916 Act. In Eisner v. Macomber, 252 U. S. 189, the Supreme Court, after defining income, stated:

Here we Rave the essential matter; not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property.

In Safe Deposit & Trust Co. v. Miles, 273 Fed. 822; affirmed 259 U. S. 247, arising under the 1916 statute, the court said, “nevertheless, by and large, the statute means what it says, and that is that the tax is to be levied on nothing else except gains, profits, and income, and upon them only when actually realized in money or in money’s worth.” See also Bourn v. McLaughlin, 19 Fed. (2d) 148; 6 Am. Fed. Tax Rep. 6681. From these decisions it is clear that under the 1916 Act there must be a realization before gain arises and the principle is equally applicable before a loss can be sustained.

It follows, therefore, that if the petitioner had received cash, or property which could have readily been converted into cash in 1916, gain or loss could have been definitely determined. It is equally obvious that if the property received by the petitioner had no fair market value or fair value, or any value other than that which it had to him, there is no basis upon which to predicate a gain or loss within the spirit and intent of the taxing statutes and that, therefore, any gain or loss that he sustained must be determined when the transaction has been completed by the sale of the property for cash or other property which has some fair market value.

The respondent has used, in determining what he alleges to be a loss in 1916, the par value of the shares received by petitioner in exchange for his original investment in the Eefrigeration Company. In this we can see no justification. Par value of stock is no evidence of the value of property. Appeal of William, Ziegler, Jr., 1 B. T. A. 186.

The testimony clearly shows that the principal asset of the Machine Company was its patent on the refrigerator machine it was manufacturing and that the success or failure of the company depended upon that patent — if the company’s machine proved to be commercially successful for domestic use then of course its patent and likewise its capital stock would be of inestimable value, but on the other hand, if, as it later developed, the machine could not be perfected, then the patent and likewise the stock of that company would be practically worthless. The Machine Company had certainly not abandoned hope in 1916, since, as the testimony shows, in 1915 and 1916 the company was reorganized and readjusting itself to carry on the work that had been conducted by the Eefrigeration Company and at all times it appeared to the stockholders that success was “just around the corner.”

There were no sales of the common stock of the Machine Company during the years 1915, 1916, and 1911 and no transfers of stock were made. In fact the stock of the company was closely held by a small group of individuals. Petitioner testified that so far as he could ascertain, no bids or offers had ever been made for the stock of the Machine Company. In our opinion, the stock received by the petitioner in 1916 had no exchangeable value or fair market value, and he did not at that time therefore sustain a loss of a part of his investment. When the stock became worthless in 1920 his total investment was gone, as a result of which he may deduct the amount thereof, or $48,890.47, in his income-tax return for that year.

Eeviewed by the Board.

Judgment will Toe entered for the petitioner on 10 days’ notice, under Bule 50.


author: MuRdock:

text:
    Israel T. Deyo, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10288.
    Promulgated December 27, 1927.

      Israel T. Deyo, Esq., pro se.

      Chas. H. Curl, Esq., for the respondent.
   OPINION.

MuRdock:

It is difficult to understand from the pleadings, testimony and argument of the petitioner just what the real situation is. We hesitate to discuss one of the arguments advanced by the petitioner to the exclusion of the others lest it appear that we have based our decision upon the failure of the one line of reasoning, and yet to discuss all of the petitioner’s arguments would lead us fruitlessly into abstract theorization. The decision of the case is not difficult, and does not justify an extensive discussion. The petitioner has not advanced and we can not think of any sound argument, supported by sufficient facts in evidence, which would justify a change in the Commissioner’s determination.

Bearing in mind the facts in this case which show that the securities which were taken belonged not to the petitioner, but to his clients, and that the petitioner’s loss was not sustained at the time of the wrongdoing, but only at the time when he was required to pay out money, and that he reported his income on the cash receipts and disbursements basis, we see no reason to disturb the Commissioner’s determination inasmuch as it appears that any money which the petitioner paid out in the year 1920 as the result of his partner’s peculations would not exceed the amount of money which he received in 1920 from the settlement of his claims against others, arising from his partner’s wrongdoing. The money which he received from the settlement of these claims does not seem to have been included in his income for the year. We are led to this conclusion after consideration of the petitioner’s testimony and the Commissioner’s deficiency notice. Therefore, if we were to allow any loss deduction, it would be necessary to add at least a like amount to income and the deficiency would not be reduced.

Reviewed by the Board.

Judgment will be entered for the respondent.

Marquette, Sternhagen, Trussell, Green, Phillips, Van Fos-san, and Milliken dissent.


author: Milliken :

text:
    Oswego & Syracuse Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8157.
    Promulgated December 27, 1927.

      Walter A. Staub, G. P. A., J. Marvin Haynes, Esq., and Douglas Swift, Esq., for the petitioner.

      Paul I. Payton, Esq., and M. N. Fisher, Esq., for the respondent.
   OPINION.

Milliken :

The facts were stipulated and our findings are in accord with the stipulations.

Petitioner contends that interest paid by it on money which was used for constructing additions and betterments was, to the extent of interest paid during the period of construction, a part of the cost of such improvements. It makes the same contention with reference to the discount incurred by it in the issue and sale of its bonds. The deductibility of interest and discount incurred is not involved, but only the question of the exclusion of same from invested capital.

Petitioner’s contention is in conflict with the decisions of the Board in Columbia Theater Co., 3 B. T. A. 622; Ottawa Park Realty Co., 5 B. T. A. 474; Spring Valley Water Co., 5 B. T. A. 660; Eastern Rolling Mill Co., 5 B. T. A. 663; and Arthur C. Fraser, 6 B. T. A. 346. The citation of and reliance upon our decided cases would suffice for the decision of this question, but the exhaustive brief filed by counsel for petitioner inclines us to a discussion of the authorities cited and relied on.

In view of the conclusions we have reached, it is not necessary to decide whether the discount incurred stands on the same basis as interest paid insofar as invested capital is concerned.

In support of its contention, counsel for petitioner cites the following cases: Brunswick & T. Water District v. Maine Water Co., 99 Me. 371; 59 Atl. 537; Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71; 62 Atl. 474; Pioneer Telephone & Telegraph Co. v. Westenhaver, 29 Okla. 429; 118 Pacific 354; and Shepard v. Northern Pacific Ry., 184 Fed. 765. It also refers to certain decisions by state railway commissions and rules prescribed by the Interstate Commerce Commission. All these decisions and rules relate to valuations of public utilities for rate-making purposes. In all such proceedings, the controlling issue is present value and the owner is entitled to any increase in value that may have accrued since acquisition. Cf. McCardle v. Indianapolis Water Co., 272 U. S. 400. Precisely the reverse is true in this respect as to invested capital. See LaBelle Iron Works v. United States, 256 U. S. 377; 3 Am. Fed. Tax Rep. 3113. This difference in viewpoint is so vital that little help can be derived from rate-making decisions in ascertaining what should be included in invested capital. The cases cited hold that interest paid during the construction period should be taken into consideration in computing the cost of a public utility, especially when computing the cost of reproduction. But they further hold that there should be included in such cost, not only the interest actually paid, but also a fair rate of interest on the capital that was not earning income during such period. This latter conception is wholly foreign to the theory of income taxes. Thus, it was said in Walsh v. Brewster, 255 U. S. 536; 3 Am. Fed. Tax Rep. 3108:

• The second transaction involved the purchase in 1902 and 1903 of bonds of the International Mercantile Marine Oompany for $231,300, which were sold in 1916 for $276,150. This purchase was made through an underwriting agreement such that the purchaser did not receive any interest upon the amount paid prior to the allotment to him of the bonds in 1906, and he claimed that interest upon the investment for the time which so elapsed should be added as a part of the cost to him of the bonds. But this claim was properly rejected by the trial court under authority of Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 38 Sup. Ct. 470, 62 L. Ed. 1061.

Under the above theory, a corporation whose paid in capital was idle during the period of construction, could build up an earned surplus of theoretically earned and received income. Such a theoretically earned surplus has no place in the statutory concept of invested capital. Cf. LaBelle Iron Works v. United States, supra.

The rule which includes interest actually paid during the construction period is based on the same reason that includes in such cases interest on idle capital. In both cases, the dominating thought in all rate cases, to wit, value, has crept in. The reason for the rule is thus stated in Pioneer Telephone & Telegraph Co. v. Westenhaver, supra.

It is a matter within the observation and knowledge of all that a plant, the cost of whose physical units put together into a completed plant approximates $100,000, cannot be constructed instantly. It requires time to assemble the physical properties, and still a greater length of time to put those units into place, where they may be used to render service. During this period, the capital invested must of necessity be idle, and no income can be derived therefrom. When the construction of the plant is completed, no willing seller, who is not forced to sell, would take for his plant the cost of the physical units and the cost of the labor in the construction, because the plant has cost him, in addition thereto, the use of the capital, or a certain part thereof, invested in the capital, or a certain part thereof, invested in the physical properties during the time of construction. A willing buyer could afford to pay, and would pay, more than the actual cost of labor and material, assuming that the plant has been economically constructed, because such cost would not represent the total expenditures the purchaser would have to make in order to construct the plant himself. In addition to such expenditures, he would have to expend the earnings of his capital during the period of construction. No case has been cited and in our investigation we have found no case, involving this question where a reasonable amount has not been considered and allowed for loss of interest during construction as part of the cost of construction.

The controlling thought in the above decision is that since a willing buyer could afford to pay more for the constructed plant than its actual cost, therefore interest on idle capital should be taken into consideration as an element of cost. It is thus apparent that the court has confused the term value with the term cost. This is not surprising since what the court was endeavoring to arrive at was value and not cost. The same theory, if applied in Walsh v. Brewster, supra, would have resulted in adding to cost interest from the time of the purchase of the bonds until their delivery, at which time they first began to bear interest. The Supreme Court, however, held that such interest could not be added to cost.

The interest paid by petitioner during the period of construction was not paid for construction but for the use of the money borrowed. The cost of the improvements was one thing and the cost of the money was another. From a tax standpoint, we can see no difference between interest paid during the period of construction and interest paid on the same debt thereafter. The fact that during such period no income was being earned by the improvements did not change a deductible expense into a capital item in this case any more than in Walsh v. Brewster, supra.

Invested capital is a statutory concept. The meaning of that term is set forth specifically in section 326 of the Revenue Act of 1918. It seems clear that the sum sought to be included in invested capital does not represent (1) actual cash bona fide paid in for stock or shares — no sum was paid in for such purpose; (2) actual cash value of tangible property, other than cash, bona fide paid in for stock or shares — there was no tangible property bona fide paid in for stock or shares; (3) paid-in or earned surplus and undivided profits — the sum paid, now sought to be included in invested capital, in fact represents a diminution of earned surplus and undivided profits; (4) intangible property bona fide paid in for stock or shares prior to March 3, 1917 — certainly no intangible property was paid in for stock or shares; or (5) intangible property bona fide paid in for stock or shares on or after March 3, 1917.

We adhere to the conclusions reached in the previous decisions of the Board. Respondent did not err in refusing to permit the inclusion in invested capital of interest paid during the period of construction and the discount on petitioner’s bonds applicable to the same period.

Petitioner’s second contention involves the construction of section 201 of the Revenue Act of 1918. The pertinent parts of that section read:

(a) That the term “dividend” when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.
(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the case of a personal service corporation, from the most recently accumulated earnings or profits; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.
* * * * # # *
(e) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings, or profits, the earnings and profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.

It is apparent, from the facts as found, that the dividends paid on February 20 of the years 1918, 1919, and 1920, could have been paid from only two sources — either they were paid out of earnings and profits accumulated prior to March 1,1913, or they were paid out of the earnings and profits accumulated subsequent thereto.

Under the provisions of section 201(e) the dividend in question is deemed to have been made from earnings and profits accumulated during the preceding taxable years. Under section 201(b) a corporation could not distribute tax-free its earnings and profits accumulated prior to March 1,1913, until it had distributed all earnings and profits accumulated subsequent thereto. We entertain no doubt that the presumption set forth in 201(e) is a conclusive one. However, we must determine the extent to which it is to be applied. We do not believe that it means that a distribution made during the first 60 days was made from earnings or profits accumulated during preceding taxable years quite regardless of whether or not there were in fact any such earnings or profits. The statute certainly imposes no conclusive presumption that something was done that could not, under the stated facts in this case, have been done. Section 201(e) simply creates a conclusive presumption that a distribution made during the first 60 days was made from earnings and profits of prior taxable years only if and to the extent that such earnings or profits actually existed. This view harmonizes with other provisions of the section. A simple illustration may clarify the situation; The “A ” corporation had, on January 1,1918, earnings and profits all accumulated prior to March 1, 1913, amounting to $1,000, and on February 1, 1918, without having made any additional earnings and profits, it declared a dividend of $1,000. By reason of the provisions of section 201(b) such a dividend would be treated as paid out of earnings and profits accumulated prior to March 1,1913, and would be exempt from tax. But respondent would impose the presumption contained in section 201(e). It is, of course, true that if on February 1, 1918, the corporation had earnings or profits made after January 1, 1918, to the amount of $1,000, the dividend would be deemed to have been paid out of such earnings or profits rather than earnings or profits accumulated prior to March 1,1913, for otherwise, we would be going contrary to the provisions of section 201 (b). Cf. Mason v. Routzahn, 275 U. S. 175.

We are, accordingly, of the opinion that in each of the years in question the dividend was paid out of earnings and profits of the preceding taxable years to the extent that the earnings and profits of such years were available and the remainder was paid out of the earnings and profits of the current year to the extent they were available. The parties have stipulated that of the total surplus at January 1, 1918, $43,627.46 constituted earnings and profits of a prior taxable year, and in accordance with such stipulation we find that to such extent the dividend of $59,418, of February 20, 1918, was paid out of earnings and profits of a prior taxable year and the remaining amount thereof was paid out of the earnings and profits of the current year to the extent there were earnings available. Invested capital should be adjusted in accordance with the foregoing.

Reviewed by the Board.

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


author: MoRRis:

text:
    W. J. Rucker, Petitioner, v. Commissioner of Internal Revenue, Respondent. B. J. Rucker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3508, 3509.
    Promulgated December 27, 1927.

      J. B. Fogarty, Esq., W. P. Bell, Esq., and Herbert E. Smith, G. P. A., for the petitioners.

      Granville 8. Borden, Esq., for the respondent.
   OPINION.

MoRRis:

All of the issues raised by the petition of W. J. Kucher, Docket No. 3508, and eight of the issues raised by the petition of B. J. Rucker, Docket No. 3509, have been agreed upon and evidenced by written stipulation between the parties set forth herein in the findings of fact and will be settled in accordance therewith.

The sole question remaining for determination is whether the respondent correctly held that the entire distributive share of the income of B. J. Rucker in the partnership of Rucker Brothers was separate property or whether said distributive share was community income under the laws of the State of Washington.

Sections 6890, 6891, and 6892, respectively, of Remington’s Compiled Statutes of Washington, 1922, are as follows:

Property and pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber or devise by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried.
The property and pecuniary rights of every married woman at the time of her marriage, or afterward acquired by gift, devise, or inheritance, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of her husband, and she may manage, lease, sell, convey, encumber or devise by will such property, to the same extent and in the same manner that her husband can, property belonging to him.
Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of his separate personal property, except he shall not devise by will more than one half thereof.

Thus it will be seen that under the law of the State of Washington governing the question in controversy the “ property and pecuniary ” rights of the husband and wife are definitely settled and that “ property ” owned by them at the time of marriage together “ with the rents, issues, and profits thereof” shall be their separate property, and that the property not so owned, but acquired subsequently to marriage, with the designated exceptions, is “ community property.”

The testimony reveals that Rucker was a member of the partnership of Rucker Brothers prior to 1904 and that he continued to be a partner up to and during the period in question; that he was married in December, 1904, and has continuously lived with his wife; that all of his income has been derived from salaries of the partnership and partnership distributions.

In the Appeal of Julius and Rebecca B. Shafer, 2 B. T. A. 640, we held that the decisions of the Supreme Court of Washington lay down the rule that where business income was produced in part by separate property and in part by the efforts of the community, and each of these two factors was substantial, the court will attempt to allocate such earnings, but if it appears that the income is to be attributed primarily to one element, the other element may be disregarded. The Supreme Court of the State of Washington, in the case of Brown's Estate, 214 Pac. 10, has summarized some of the more important rules of the courts of that State for determining the status of community or separate property:

1. The presumption is that property acquired during coverture is community property, and the burden is upon the person claiming it to be separate property to establish that as its character.
2. The status of property is to be determined as of the date of acquisition. This rule is equally true with regard to personal property as with real property.
3. If property is once shown to have been separate property, the presumption continues that it is separate until overcome by evidence. Separate property continues to be separate through all its changes and transitions, so long as it can be clearly traced and identified.
4. The rents, issues, and profits of separate property remain separate property and profits resulting from money borrowed on separate credit are separate property.
5. Separate property may lose its identity as such by being consolidated with community property.

The argument of petitioner’s counsel that the distributive share of Rucker in the partnership is from services rather than from property is considerably weakened by the fact that he received a salary of $9,000 for the taxable year, which amount it is reasonable to assume, was the value placed upon his services by the partnership. Of course personal services must necessarily play an important part in the conduct of any business, but where the parties have themselves appraised the value of those services, we could not with the meager amount of evidence before us say that his services were worth any greater amount.

Applying the principles announced in the case of In re Brown's Estate, supra, to the instant facts we are lead to the conclusion that the income is to be attributed primarily to separate property. There is no question that the interest owned by Rucker in the partnership at the time of his marriage Avas separate property under the above quoted provisions of the Washington statute. The partnership interest being separate property, “the presumption continues that it is separate until overcome by evidence ” and it “ continues to be separate through all its changes and transitions, so long as it can be clearly traced and identified.” There is no doubt that the property in question can be clearly traced and identified.

The evidence introduced affecting that presumption was that the only assets owned by the partnership at the time of Rucker’s marriage consisted of lands and town lots and some shares of Sucker Bank stock, and that such lands and town lots were nonproductive, and were a liability rather than an asset. We are not told anything, at all about the value of the bank stock, which for all we know may have been considerable. 'About 1907 or 1908 the partnership engaged in the sawmill and lumbering business and borrowed the money to establish and carry on that business and continued to borrow money to be used in their operations. In 1917 a large tract of timber was purchased, only $5,000 in cash being paid therefor, the balance of the purchase price being evidenced by promissory notes. These notes were signed by W. J. and B. J. Rucker for and in the name of Rucker Brothers. Other notes were executed by one or both of them for' funds borrowed for the use of the partnership. The profits from these transactions resulted from money borrowed on separate credit and are therefore separate property. In re Brown's Estate, supra. In the Appeal of Julius and Rebecca B. Shafer, supra, in which case the income was derived from the sale of merchandise purchased with the separate property of Shafer or on the credit of the partnership, the services rendered being incidental to the profits, we held:

Upon this basis there can be no presumption that the profits are to be attributed entirely to the services rendered by the community; that presumption has been overcome by the evidence, and if there is now any presumption it would be that this appeal fell within the decision In re Brown’s Estate, supra, that it was the separate property which was the primary source of the profits.

We are therefore of the opinion that the primary source of the profits in the instant case was Rucker’s separate property, and that he is taxable on his distributive share of the partnership income.

Reviewed by the Board.

Judgment will be entered on 16 days’ notice, under Rule 60.


author: MokRis :

text:
    B. J. Rucker, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. J. Rucker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2928, 2929.
    Promulgated December 27, 1927.

      J. B. Fogarty, Esg., ’William, P. Bell, Esg., and Herbert E. Smith, G. P. A., for the petitioners.

      Grarwille 8. Borden, Esg., for the respondent.
   OPINION.

MokRis :

The first allegation of error is that the respondent added to the income of the partnership the sum of $24,231.97 “ timber sold Everett Logging Co.” and the respondent has admitted the fact of such addition.

Certain timber was originally purchased by Miley in the spring of 1912, which he sold to the Tulalip Company, and that company in turn sold it to the Everett Logging Co. in 1916 for the total sum. of $24,231.77. The purchase price to the Everett Logging Co. was paid $5,000 in 1916, $18,675.35 in 1917, and $556.40 in 1918. All of the foregoing amounts were paid to Tulalip Company and Miley endorsed the checks received subsequently to the initial cash payment of $5,000 in 1916 and made use of the proceeds to liquidate an indebtedness that he had incurred in the company.

While Rucker Brothers owned 50 per cent of the stock of the Tulalip Company and possibly there was some intermingling of accounts, the testimony is perfectly clear that the timber in question was owned by the Tulalip Company, sold by it, and, further, that the sale price was paid to it. We can see no justification for holding that the sum in question is taxable directly to the members of the firm of Rucker Brothers. Furthermore, even if we were to assume that the .income was in fact taxable to the members of the firm of Rucker Brothers, we do not understand upon what theory in law it would be taxable to them in 1918, because it is clear that the transaction was consummated in 1916, and that all but a very small portion of the total sale price was received prior to December 31, 1917. We are of the opinion that the respondent erred in adding the sum in question to the income of the partnership of Rucker Brothers in 1918, and we therefore sustain the contention of the petitioner.

The second allegation of error is urged by the petitioner B. J. Rucker, only, and it relates to the question of whether his distributive share of the profits of the partnership of which he is a member, constitutes community income or whether it constitutes separate income and hence taxable to himself. The facts and circumstances with respect to this issue are the same as those existing in B. J. Rucker, 9 B. T. A. 915, wherein we held that the income in question was derived from his separate property and was taxable to him, and we are therefore bound by our decision in that case with respect to the issue in the instant case.

Reviewed by the Boakd.

Judgment will be entered on IS days’ notice, wider Bule 50.


author: Aeundell:

text:
    Richard G. Wagner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4265.
    Promulgated December 27, 1927.

      Ben A. Matthews, Esq., for the petitioner.

      S. Duffield Mitchell, Esq., for the respondent.
   OPINION.

Aeundell:

The parties to this proceeding have filed a stipulation reading as follows:

If such seizure resulted in a loss to the taxpayer, such loss was in excess of the income received by the taxpayer during that year, and if deductible under the law the taxpayer received no net income during that year which would subject him to tax.

The Commissioner’s position is that a seizure by the Alien Property Custodian under the facts set forth in the findings is not such a taking as would entail-passage of the general title to the property and consequently title remained vested in petitioner until he assigned his interest to Jensen in 1921 and no determinable loss was sustained until that time. If the question as framed by the Commissioner is determinative, we feel that his position would have to be sustained, for while the powers granted to the Alien Property Custodian were exceedingly broad under the Trading with the Enemy Act, we do not feel that they were sufficiently broad to vest in him the absolute title to the property seized. In the case of In re Gregg's Estate, 266 Pa. 189; 109 Atl. 777 (certiorari denied, 252 U. S. 588), it is said:

The Trading with the Enemy Act is not for confiscation of property. It is rather for its conservation. While if the President so direct, the money or property of an alien enemy may be taken by the government for its own purposes, the owner does not part absolutely with it. Eor after the end of the war his claim to it “shall be settled as Congress shall direct * *

In the case of the United States v. Chemical Foundation (Dist. Ct.), 294 Fed. 300 (affd. C. C. A., 5 Fed. (2d) 191, and 272 U. S. 1), it is said:

Yet it is of course true that neither the President nor the custodian is the owner of enemy property. “As though he were the absolute owner ” was inserted in the Act merely to state the extent and scope of the grant of additional power — not to confer upon the President or custodian personally the beneficial interest in the property. Hence, in the sale of enemy property all officers act in an official or fiduciary capacity.

The above cases, it will be noted, involve property where the claimant’s recovery was required by the terms of the act to be postponed until “ after the end of the war ” (Sections 10 and 12 of the Trading with the Enemy Act). One “not an enemy or ally of the enemy,” however, was in a much more favorable situation. Under section 9 of the Trading with the Enemy Act he could immediately upon the seizure of his property, file a claim with the Alien Property Custodian to establish his interest therein, or at will bring suit in equity to establish his right thereto, and should he prevail in either proceeding, provision was made for the issuance of an order requiring the Custodian to deliver to him the seized property to the extent of his interest. That section 9 supra served to safeguard petitioner’s rights is apparent from the Supreme Court’s decision in Stoehr v. Wallace, 255 U. S. 239, 245, wherein it is said:

The present act commits the determination oí that question [enemy ownership] to the President, or the representative through whom he acts, but it does not make his action final. On the contrary, it distinctly reserves to any claimant who is neither an enemy nor an ally of an enemy a right to assert and establish his claim by a suit in equity unembarrassed by the precedent executive determination. Not only so, but pending the suit, which the claimant may bring as promptly after the seizure as he chooses, the property is to be retained by the Custodian to abide the result and, if the claimant prevails, is to be forthwith returned to him. Thus there is provision for the return of property mistakenly sequestered; and we have no hesitation in pronouncing it adequate, for it enables the claimant, as of right, to obtain a full hearing on his claim in a court having power to enforce it if found meritorious.

We thus find that not only was the Alien Property Custodian not the owner of the seized property, but that an adequate opportunity' was given by law to the petitioner to establish his ownership, and during the pendency of such proceedings the property was required to be held in the hands of the Custodian.

But we do not think that this is decisive of the question. It is not always necessary that title be lost before a deduction is allowable. For instance, the revenue statutes specifically recognize losses by theft and yet the owner does not lose title to stolen goods. While ordinarily the rule may be sound that a loss to be allowable under the statute must be evidenced by a closed and completed transaction, we have as authority the Supreme Court that one need not be an incorrigible optimist in order to secure a loss under the Revenue Acts. United States v. White Dental Manufacturing Co., 270 U. S. 398. Petitioner cites, in support of the position that a loss of possession is sufficient to warrant the allowance of a loss under the Revenue Acts, the case of Rhinelander v. Pennsylvania Insurance Co., 4 Cranch, 28, and a number of cases in which that decision has been followed. The Rhinelander case involved the question of whether a loss for the purpose of recovering insurance had been sustained where a neutral vessel was captured by a belligerent cruiser and the captured vessel abandoned by the owners to the insurers. The opinion of the court reads in part as follows:

It is, therefore, the unanimous opinion of the court that where, as in this case, there is a complete taking at sea by a belligerent who has taken full possession of the vessel as a prize and continues that possession to the time of the abandonment, there exists in point of law a total loss. * * *

Concerning captures at sea, Mr. Justice Story in the case of The Star, 3 Wheat. 78, 85, said:

It is admitted on all sides by public jurists that in cases of capture, a firm possession changes the title to the property; and although there has been in former times much vexed discussion as to the time at which this change of property takes place * * * it is universally allowed that at all events a sentence of condemnation completely extinguishes the title of the original property and transfers a rightful title to the captors or their sovereign.

The case books are replete with decisions relating to war-time seizures of vessels, but as they treat largely of admiralty law and international law as applied to seizures, most of them are beside the mark. Here we are concerned only with two pieces of statutory law — the Trading with the Enemy Act and the Revenue Act of 1918 — and if (as stipulated by the parties) the seizure under the former gives rise to a loss recognized by the latter, we have an end to our problem.

We do not care to go, however, so far as to hold that in all cases an illegal seizure by the Alien Property Custodian of a citizen’s 'property would, as a matter of law, give rise to a deductible loss under the revenue statutes. The temporary sequestration of property, followed by its return intact (even though the return be in a later year), may well indicate that in fact no loss was suffered.

The situation present in the instant case is extraordinary. Ordinarily, in determining whether income is realized or deductions are allowable we view the facts as they exist during the taxable year. It has been said that such a course is impelled by administrative necessity. But in the extraordinary case we feel that a broader view may be necessary. In the case of Bowers v. Kerbaugh Empire Co., 271 U. S. 170; 46 Supreme Court Reporter 449, the Supreme Court viewed the entire transaction through a series of years and found that a loss had been sustained rather than taxable income realized. In the case of Forstmann v. Ferguson, 17 Fed. (2d) 659; 6 Am. Fed. Tax Rep. 6530, the Commissioner sought to compel the return as income in one year of the entire amount of dividends, impounded over a series of years as the result of suits by the Alien Property Custodian, and released to the taxpayer within the year, but under such facts the court held that the income should be returned as and for the years in which the taxpayer would have received it but for the interposition of the Government.

So here, we feel warranted in viewing all the facts. Within the year the petitioner has been illegally dispossessed by the Government of his property, including the income now sought to be taxed. The Government at the time charged that both the principal and the income were enemy owned and that the income now sought to be taxed was not the income of petitioner, but of an alien enemy. Along with his property the Government seized his records. Under such circumstances he made no return, but awaited the outcome of the proceedings. Property of a value of $5,000,000 when seized had shrunk in value by the year 1921 to $1,500,000 and what is left is turned over to a creditor in payment of the balance due on the purchase price of the property seized. Petitioner has lost $3,500,000 in the transaction. To hold that petitioner is in receipt of income under such circumstances offends both reason and morals. Considering the transaction as a whole, as under the facts here we must, petitioner had no net taxable income for the year 1918.

Reviewed by the Board.

Judgment will be entered for the 'petitioner.

Trammell and Phillips dissent.

       The pertinent parts of the Trading with the Enemy Act are as follows:
      Section 6 (40 Stat. 415). That the President is authorized to appoint, prescribe the duties of * * * an official to be known as the Alien, Property Custodian who shall be empowered to receive all money and property in the United States due or belonging to an enemy or ally of enemy which may be paid, conveyed, transferred, assigned or delivered to said custodian under the provisions of this Act; and to hold, administer, and account for the same under the general direction of the President and as provided in this Act. * * *
      Section 7 (c). If the President shall so require, any money or other properly owing or belonging to or held for, by, on account of, or on behalf of. or for the benefit of an enemy or ally of enemy, * * * shall be conveyed, transferred, assigned, delivered, or paid over to the Alien Property Custodian.
      Section 0. That any person, not an enemy, or ally of enemy, claiming any interest, right, or title in any money or other property which may have been conveyed, transferred, assigned, delivered, or paid to ihe Alien Property Custodian hereunder, and held by him or by the Treasurer of the United States, * * * may file with the said Custodian a notice of his claim; * * * and the I’residcnt, if application is made therefor by the claimant, may, * * * order the payment, conveyance, transfer, assignment or delivery to said claimant of the money or other property so held by the Alien Property Custodian or by the Treasurer of the United States or of the interest therein to which the President shall determine said claimant is entitled. * * * If the President shall not so order within sixty days after the flling of such application, or if the claimant shall have filed the notice as above required and shall have made no application to the President, said claimant may * * * institute a suit in equity in the district court of the United States * * * (to which suit the Alien Property Custodian or the Treasurer of the United States, as the case may be, shall be made a party defendant), to establish the interest, right, title, or debt so claimed, and if suit shall be so instituted then the money or other property of the enemy, or ally of enemy, against whom such interest, right or title is asserted, or _dcbt claimed, shall be retained in the custody of the Alien Property Custodian, or in the Treasurer of the United States, as provided in this Act, and until any final judgment or decree which shall be entered in favor of the claimant shall be fully satisfied by payment or conveyance, transfer, assignment, or delivery by the defendant or by the Alien Property Custodian or Treasurer of the United States on order of the court, or until final judgment or decree shall be entered against the claimant, or suit otherwise terminated.
      Section 12. (As amended by 40 Stat. eh. 26, p. 460) That all moneys * * * paid to or received by the Alien Property Custodian pursuant to this Act shall be deposited forthwith in the Treasury of the United Slates * * *.
      All other property of an enemy or ally of enemy conveyed, transferred, assigned, delivered or paid to the alien property custodian hereunder shall be safely held and administered by him, except as hereinafter provided * * *.
      The Alien Property Custodian shall be vested with all of the powers of a common-law trustee in respect of all property, other than money, which has been or shall be * * * required to be conveyed, transferred, assigned, delivered, or paid over to him in pursuance of the provisions of this Act, and, in addition thereto, acting under the supervision and direction of the President, and under such rules and regulations as the President shall prescribe, shall have power to manage such property and do any act or things in respect thereof or make any disposition thereof or of any part thereof, by sale or otherwise, and exercise any rights or powers which may be or become appurtenant thereto or to the ownership in like manner as though he were the absolute owner thereof * * *.


text:
    H. K. L. Castle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8963.
    Promulgated December 28, 1927.

      Morris D. Kopple, Esq., for the petitioner.
    A. O. Mitchell, Esq., for the respondent.
   Phillips:

This appeal is from a determination by the Commissioner of a deficiency in income taxes for the year 1921 in the amount of $12,963.66. The Commissioner determined that petitioner purchased a tract of land in 1921 from a corporation in which petitioner was a stockholder for $40,814.15 less than its real value and that this amount constituted a payment to the petitioner in the nature of a dividend. Petitioner alleges that the property was only worth the amount he paid for it.

FINDINGS OF FACT.

Petitioner is an individual residing in Honolulu, T. H. On or about April 29, 1921, a corporation named the Kanoehe Ranch Co., Ltd., conveyed to petitioner two certain tracts of land and received therefor from petitioner $50,000 par value of the 4y2 per cent bonds of the Territory of Hawaii, having a market value of $43,250. The Commissioner determined that on the date when they were so conveyed said lands had a value of $84,064.15 and that the difference between the value of said lands and the bonds transferred to the corporation constituted income to the petitioner in the nature of a dividend by the corporation. He determined the deficiency accordingly.

Said corporation had 600 shares of capital stock outstanding. Petitioner owned 297 shares and the balance were owned by his mother.

On April 29,1921, said lands had a value of $84,064.15.

Eeviewed by the Board.

Decision will be entered for the respondent.