text:
    Appeal of CHARLES WEISBECKER, INC.
    Docket No. 2878.
    Submitted July 20, 1925.
    Decided January 8, 1926.
    1. Under sections 239 and 320 of the Revenue Act of 1918, a receiver operating the business of a corporation is required to pay the excess profits tax imposed by section 301 of that Act.
    2. Upon the evidence submitted, held, that the taxpayer is not now entitled to a deduction of $15,000 as rental for each of the years 1919 and 1920, during which time its business was being operated by a receiver.
    3. The denial of a deduction for rent during the time taxpayer’s business was being operated by a receiver does not entitle it, under the evidence, to have its profits tax computed under the provisions of section 328 of the Revenue Act of 1918.

      Benjamin E. Nessler, Esq., for the taxpayer.

      E. O. Lalae, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This is an appeal from the determination of deficiencies in income and profits taxes for the calendar years 1919 and 1920 in the amounts of $5,254.16 and $8,446.37, respectively, against which is offset an overassessment of $753.01 for the year 1917.
    The deficiencies arise by reason of the determination by the Commissioner that the income of the corporation was subject to profits-tax during the years 1919 and 1920, while its business was being operated by a receiver appointed by the United States District Court, and by reason of the refusal of the Commissioner to permit the taxpayer to deduct, as an ordinary and necessary business expense in each of the years 1919 and 1920. the amount of $15,000 as rental for property used by the receiver in carrying on the business of the corporation.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation, with principal offices and place of business at 268 West One hundred and twenty-fifth Street, New York City, engaged in the sale of meats, poultry, provisions, fruits, vegetables, groceries, fish, and dairy products.
    'Charles Weisbecker, an individual, was, at the time of his death, prior to May 20, 1918, the owner of certain land and buildings at 246-248 West One hundred and twenty-fourth Street, and 267-269 West One hundred and twenty-fourth Street. In his last will and testament he named his wife and two of his sons as executors or trustees of his estate. On May 20,1918, the executors and trustees under the will entered into a lease with Charles Weisbecker, a corporation, under the terms of which certain land and buildings, designated as 246-248 West One hundred and twenty-fourth Street and 267-269 West One hundred and twenty-fourth Street, were leased to said corporation for a term of 10 years, at an annual rental, payable in equal semiannual payments, equal to the aggregate amount of the total annual taxes, water rents and meter charges then or thereafter levied, assessed, or charged against said premises, and interest upon any mortgage or mortgages then or thereafter oiitstand-ing on said premises, and premiums then or thereafter paid for fire insurance upon said premises. Said lease also provided that, in the event of insolvency of the corporation, or, in the event that a petition in bankruptcy should be filed by or against said corporation or an application should be made for a receiver for said corporation, the owner of the premises should have the right to cancel the lease. On January 24, 1919, application was made to the United States District Court for the appointment of a receiver for the corporation, whereupon, the receiver being duly appointed, the executors and trustees of the estate of Charles Weisbecker, owner of the property, proceeded to exercise their option and canceled the lease. During the remainder of the year 1919 and during the-year 1920, the business of the taxpayer was carried on by the receiver so appointed; Charles Weisbecker, jr., one of the executors of the estate of Charles Weisbecker, being employed as general manager of the business of the corporation. At the time of the appointment of the receiver, Charles Weisbecker, jr., was president of the corporation, the directors being Mathilda Weisbecker, Charles Weisbecker, jr., Arthur Weisbecker, Walter Weisbecker, and Carl Sieburg, jr., widow, sons, and son-in-law, respectively, of Charles Weisbecker, deceased.

      The receiver continued to occupy the premises formerly held by the corporation under lease from the executors of the estate of Charles Weisbecker, no agreement being entered into by him during the term of the receivership with the executors for the payment of any sum for rent of the premises, and no amount being entered upon the books kept by the receiver, which were upon an accrual basis, as rental for such premises. On January 25, 1919, however, and from time to time thereafter, the executors and their counsel discussed with the receiver the matter of payment of rent by him for the use of the premises occupied by the business of the corporation, and on July 19, 1920, counsel for the estate wrote the following letter to the receiver:
    Mr. George F. Hinrichs,

      Receiver, 268 West 125th Street,

      New Yorh City.

    Dear Sir: On behalf of the Executors and Trustees of the Estate of Charles Weisbecker, deceased, the owners of premises 267-269 West 124th St. and 246-248 West 124th St., this Oity, now occupied by you as Receiver of the corporation of Charles Weisbecker, we hereby demand the payment by you as such Receiver of a proper compensation for the use and occupation of-said premises 267-269 West 124th St., and the top floor, elevator, etc. of 246-248 West 124th St. This the owners consider to be $1,000 a month for the former and $200 a month for the latter.
    You are, of course, aware that the leases upon said premises formerly held by the corporation of Charles Weisbecker were wholly terminated and can-celled upon your appointment as Receiver. While it is the hope of the owners of said premises that this matter can be satisfactorily adjusted, we are instructed to say that, failing such adjustment, they will be compelled to take such proceedings to secure their rights as they may be advised.
    We would greatly appreciate prompt advices from you as to your attitude on this matter.
    In response to the demands of the executors and their counsel, the receiver declined to acknowledge liability for rent and refused to pay any amount as rental for the premises occupied by the corporation at the time of his appointment and used by him in carrying on the business. In the income-tax returns filed by the receiver for each of the years 1919 and 1920, he deducted $30,874.29 and $33,250, respectively, as rent, but deducted no amount as rental for the property belonging to the estate of Charles Weisbecker. The receiver continued to occupy the premises in carrying on the business until his discharge subsequent to January 1, 1921, when the business and property were ordered to be returned to the corporation by the court. During the term of the receivership the executors of the estate of Charles Weisbecker, at least one of whom was a stockholder of the corporation, took no action toward obtaining an order of the court requiring the receiver to pay rent for the premises, although subsequent to the refusal of the receiver to do so they had received an offer from another business to lease the premises for a term of 21 years at an annual rental of $15,000, plus taxes, expenses, ordinary and extraordinary, assessments, water rents, insurance, -maintenance, and all charges accruing out of the occupancy of the premises. The failure of the executors of the estate of Charles Weisbecker to apply to the court for an order fixing the rental and requiring the receiver to pay same was due to the fact that such payment, if ordered, would have postponed termination of the receivership and the return of the business, which was earning large profits, to the corporation. We dp not know who the stockholders of the corporation were, except that Mathilda Weisbecker, widow, and one of the executors of the estate of Charles Weisbecker owned 2,500 shares of stock in the corporation. The return filed by the receiver for the calendar year 1919 showed a net income of $26,005.11, upon which he paid an income tax of $2,400.51. The return filed for the calendar'year 1920 showed a net income of $52,995.75, upon which he paid an income tax of $5,099.58. The receiver paid no profits tax upon th.e return for either of the years.
    Upon audit of the returns, the Commissioner denied the claim of taxpayer that it should be allowed to deduct the amount of $15,000 in each of the years as rental accrued during those years. He also héld that the net income of the receiver operating the business of the corporation was subject to the profits tax and determined an income tax of $2,401.51 and a profits tax of $5,281.31 for the calendar year 1919, and an income tax of $3,248.65 and a profits tax of $10,247.30 for the calendar year 1920.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Littleton:

The issues presented by this appeal are: (1) Whether the taxpayer should be allowed to deduct from gross income the amount of $15,000 for each of the years 1919 and 1920, as accrued rental for premises occupied by the receiver carrying on the business of the corporation during those years; (2) whether the income of a receiver operating the business of a corporation is subject to. the profits tax imposed by section 301 of the Revenue Act of 1918; and (3) should the Board hold that the income of the business while being operated by the receiver is subject to profits tax and that taxpayer is not entitled to deduct the amounts which it claims were incurred by the receiver as rental, whether an abnormal condition affecting income would result entitling it to have the profits tax computed under section 328 of the Revenue Act of 1918.

At his death, prior to May 20, 1918, Charles Weisbecker was the owner of certain lands and buildings located at 246-248 West One hundred and twenty-fourth Street and 267-269 West One hundred and twenty-fourth Street, New York City. In his last will and testament he appointed his wife, Mathilda Weisbecker, and two of his sons, Charles, jr., and Arthur, executors and trustees of his estate. On May 20, 1918, the executors leased to Charles Weisbecker, a corporation, in which the widow owned 2,500 shares of stock, and of which corporation she and her three sons, Charles Weisbecker, jr., Arthur Weisbecker, and Walter Weisbecker, and her son-in-law, Carl Sieburg, were directors, the premises above mentioned.

On January 24, 1919, a receiver for the business and assets of the corporation was applied for and appointed, and, pursuant to the provisions contained therein, the lease held by the corporation was canceled by the executors. The receivership extended over a period from January 24, 1919, through the year 1920, at which time the receiver was discharged and the business and property ordered returned to the corporation by the court. During the period he was in charge of the business of the corporation the receiver declined to acknowledge liability to the estate for rent and refused to pay any amount to the executors for the use of the premises occupied by the corporation at the time of his appointment, which he continued to use in carrying on the business. Other than in conversations with the receiver and by a letter written in July, 1920, in which the receiver was asked to pay $15,000 a year for the premises in question, no action was taken by the executors toward having the court order the payment of rent for the premises. No item for rental of this property was entered upon the books kept by the receiver and no deduction was taken by him in the returns filed for the years here involved. The taxpayer claims that, notwithstanding the refusal of the receiver to acknowledge liability or pay rental for the premises, a deduction of $15,000 for each of the years should be allowed.

Under the provisions of section 234 (a) of the Revenue Act of 1918, only ordinary and necessary expenses paid or incurred during the taxable year in carrying on the business may be deducted from gross income. There is no evidence before us to show the extent to which the premises here in question, which were occupied by the corporation at the time its business was taken over by the receiver, were necessary in carrying on the business by the receiver, or that their use by him was necessary. The evidence before us shows that no amount whatever was paid or incurred by the receiver as rental for this property during either of the years 1919 or 1920; that the executors, who were all directors of the corporation, took no action upon the refusal of the receiver to pay rent to have the court allow their claim and order the payment of same, and that their failure to apply to the court for an order requiring the receiver to pay rent was due to the fact that such payment would have postponed the termination of the receivership and the return of the property and business to the corporation. It appears, therefore, from such evidence as is before us, that the executors of the estate waived their claim for rental, upon the ground that an early termination of the receivership would sufficiently compensate the owners of the property, who were also officers and directors, at least one of them being a large stockholder of the corporation. Whatever may have been the reason for the denial by the receiver of liability and for his refusal to pay rent for the premises, it has not been shown that any amount was incurred as an ordinary and necessary business expense during either of the years 1919 or 1920.

The second issue relates to the question whether the income of the business of a corporation being operated by a receiver is subject to the profits tax imposed by section 301 of Title III of the Revenue Act of 1918. The receiver in question made an income and profits-tax return on Form 1120 for each of the calendar years 1919 and 1920, showing net income of $26,005.11 and $52,995.75, respectively, and paid the income tax imposed thereon by section 230 of Title II of the Revenue Act of 1918, but paid no profits tax.

Upon audit of the returns, the Commissioner held that income of the business of the corporation while being operated by the receiver was subject to the profits tax- imposed by Title III of the Act in the same manner, and to the same extent, as if the business had been operated by the corporation. The taxpayer contends that section 239 of the Revenue Act of 1918 only required the payment by receivers of the income tax imposed by Title II of that Act, and that there is no provision in the Act which requires receivers to pay the profits tax imposed by section 301 of Title III. We are of the opinion that the Commissioner correctly held that the income of the business of a corporation while being operated by a receiver is subject to the profits tax. Section 239 of Title II of the Revenue Act of 1918 provides:

* * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.

It is admitted that under section 239 the receiver is liable for the payment of the tax imposed by section 230 of Title II. Section 13 (c) of the Revenue Act of 1916, requiring the payment of tax by receivers, provided:

In cases Wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock companies or associations, or insurance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint-stock companies or associations, 'and insurance companies, in the same manner and form as such organizations are hereinbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control.

It will be noted that this section specifically provided that any income tax shown upon the returns filed by the receivers should be collected and paid. Section 212 of the Revenue Act of 1917 made the provisions of section 13 (c) applicable to the tax imposed by that Act. When section 239 was written into the Revenue Act of 1918— which Act imposed upon the net income of every corporation an income and profits tax — the word income was omitted from the provision requiring the making of returns and the payment of the tax by the receivers upon the income of the businesses of which they have custody and control, so that the section provided that any tax due on the basis of such returns made by receivers should be collected in the same manner as if collected from the corporation of whose business or properties they have custody and control. Section 239 does not limit the returns required of receivers to the returns for the purpose of income tax, but clearly requires that they “ shall make returns for such corporations in the same manner and form as corporations are required to make returns.” The income required to be returned for the purpose of the income tax imposed by Title II is the same income upon which the profits tax is imposed by Title III. Section 320 (a) (3) of the Revenue Act of 1918 provides:

That for the purpose of this title the net income of a corporation shall be ascertained and returned—
For the taxable year upon the same basis and in the same manner as provided for income tax purposes in Title II of this Act.

Section 336 provides:

That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by corporations for the purposes of Title II, and all the provisions of that title not inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title.

It appears from these provisions that, for the purpose of the profits tax, the net income of the corporation shall be returned and the tax paid at the same time, in the same manner, and subject to the same conditions as is provided in the case of returns and payment of the tax imposed by Title II. Section 239 of Title II, requiring receivers to make returns for corporations of whose businesses or properties they have custody and control in the same manner and form as such corporations are required to make returns, and to pay any tax due on the basis of such returns, is made applicable by section 336 to returns for the purposes of Title III and to the payment of the tax imposed thereby. Since it appears, therefore, that receivers are required to make returns for the purpose of both income and profits tax, the profits tax imposed by section 303 would be due on the basis of such return and collectible in the same manner as if collected from the corporation the business and property of which he has custody or control.

We are of the opinion, therefore, that the Commissioner correctly held that the income of the business of the taxpayer while being operated by the receiver was subject to the profits tax, and the amount determined by him is approved.

The last issue relates to the question whether the taxpayer is entitled to have its profits tax computed under the provisions of section 328 of the Revenue Act of 1918, due to the disallowance of its claim for a deduction of $15,000 for each of the years 1919 and 1920. Section 327 (d) of the Revenue Act of 1918 provides for the assessment of the profits tax under the provision of section 328 only where exceptional hardship is worked upon the taxpayer by reason of abnormal conditions affecting the capital or income. We do not know upon what theory the taxpayer claims that the refusal of the receiver to recognize liability for the payment of rent for the premises hereinbefore mentioned as an ordinary and necessary expense in carrying on the business by him creates a condition which warrants the application of special relief provisions of the Act. There is no evidence before us showing the extent to which the property was necessary or was used by the receiver in carrying on the business. The evidence submitted does not, in our opinion, warrant the conclusion that the failure of the receiver to pay rent for the premises here in question resulted in an abnormal condition affecting income which would warrant the determination of its profits tax under the provisions of section 328.

Smith dissenting.

On reference to the Board, Green dissents.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of HORR-WARNER CO.
    Docket No. 3246.
    Submitted June 18, 1925.
    Decided January 8, 1926.

      Daniel H. Morgan, Esq., for the taxpayer.

      Lee I. Park, Esq., for the Commissioner.
    Before Gbeen and Moréis.
    This is an appeal from the determination of a deficiency for the fiscal year ended March 31, 1920, in the sum of $7,223.42. The deficiency arises in part from the refusal of the Commissioner to allow a deduction of $20,000, arising from an infection of certain farm land by onion smut.
    FINDINGS OF FACT.
    1. The taxpayer is an Ohio corporation engaged in the business of raising and marketing farm products.
    2. The taxpayer operated a farm, consisting of 1,550 acres of land, of which 400 acres were adaptable to the raising of onions. During the taxable year this land became infected with a disease known as “ onion smut,” .which lessened the productivity of the land for raising onions. Since that time the taxpayer has continued the raising of onions upon the land in question and, through the use of a formaldehyde solution, the cost of which is between $5 and $10 per acre, has been able to maintain production at about 75 per cent of the normal crop. The normal yield was from 400 to 500 bushels per acre, which was reduced to 249 bushels per acre after the land became infected.
    3. The taxpayer deducted $20,000 in its return for the fiscal year 1920, which was arrived at by taking 25 per. cent — the reduction in the productivity of the land — of $320, the alleged value per acre thereof, and multiplying by 250 — the number of acres infected. In its petition the taxpayer alleged that the loss was due to “ depreciation or obsolescence,” but at the hearing urged that “ it was a loss not compensated for by insurance or otherwise,” under the provisions of section 234 (a) (4) of the Revenue Act of 1918.
   DECISION.

The determination of the Commissioner is approved.


author: Lansdon:

text:
    Appeal of MAX M. BARKEN DRUG CO.
    Docket No. 2961.
    Submitted October 5, 1925.
    Decided January 8, 1926.
    Certain amounts charged to personal account of president held to be distribution of profits.

      Leo Barken for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Aiotndell.
    This is an appeal from the determination of a deficiency in income taxes for the year 1920 in the amount of $739.90. The taxpayer alleges that the Commissioner erred in disallowing deductions from gross income for notes paid, $1,300; Leo Barken, personal, $1,994.27; Christmas gifts, $30; and income tax, $89.20; or a total of $3,413.47; but admitted at the hearing that all of such amounts were properly disallowed, except the item of $1,994.27, representing charges against Barken’s personal account, which the Commissioner asserts must be regarded as distribution of profits.
    FINDINGS OF FACT.
    The taxpayer is a corporation engaged in the retail drug business at St. Louis, Mo. Practically all the capital stock is owned by the president, Leo Barken, who was manager and bookkeeper during the year 1920. In June and July its books showed receipts in the amount of $1,994.27 in excess of the cash accounted for during that period. Such excess receipts were charged to Barken’s personal account.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Lansdon:

The issue to be determined in this appeal is whether charging the amount of $1,994.27 to the personal account of Leo Barken during the year in question was in fact a record of actual withdrawals or a mere bookkeeping adjustment without effect on either gross or net income. The taxpayer alleges that it charged Barken’s personal account with the seeming shortages for the sole purpose of balancing its books, asserts that it made no corresponding credit entries on its profit and loss account indicating that such amounts were regarded as distributions of profits, and denies that said sums were withdrawn from the business by its president for his own personal use or for any other purpose.

No convincing evidence was adduced to prove whether the apparent shortages resulted from errors in accounting or from actual withdrawals by Barken that were not ticketed and taken into the accounts as such when made. Barken testified that he believed that most of the seeming shortage was caused by erroneously treating amounts paid in on charge accounts as cash receipts and by subsequent errors in making adjusting entries which had the effect of showing that certain amounts were taken into receipts both as cash for merchandise sold and 'as payments on customers’ charge accounts. On the record the Board must approve the determination of the Commissioner.


text:
    Appeal of FAIRVIEW ROUND MOUNTAIN MINES CO.
    Docket No. 41.
    Submitted June 18, 1925.
    Decided January 12, 1926.

      O. M. Dawson, G. P. A., for the taxpayer.

      A. Colder Mackay, Esq., for the Commissioner.
    Before GRaupneR, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1918 in an amount less than $10,000. The taxpayer alleges error' on the part of the Commissioner in the computation of its invested capital.
    FINDINGS OP FACT.
    1. The taxpayer is a Nevada corporation with its principal office at San Francisco, Calif.
    2. It was incorporated June 25, 1906, with an authorized capital stock of 1,000,000 shares, the par value of each share being $1. All of its authorized capital stock was issued in exchange for mining property, and thereafter, on or about July 30, 1906, 300,000 shares were transferred back to the taxpayer as treasury stock.
    3. At a meeting of the board of directors held on December 17, 1906, it was resolved that the sales of treasury stock, issued by the secretary, be approved and adopted as the act of the taxpayer', and that 75,000 shares of its treasury stock be placed on the market for sale at “ figures to net at least 40 cents per share.” Pursuant to this resolution 52,741 shares of treasury stock were disposed of.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of M. S. and C. C. CARTER.
    Docket No. 1671.
    Submitted October 30, 1925.
    Decided January 12, 1926.

      Bernard Greensfelder, Esq., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Artindell.
    This appeal is from proposed assessments of additional income taxes for the year 1920 against M. S. Carter and C. C. Carter', in the amounts, respectively, of $766.35 and $742.47. The deficiencies arise out of the disallowance by the Commissioner of the deduction of certain alleged bad debts.
    FINDINGS OF FACT.
    The taxpayers, during the year in question, were engaged at Cairo, Ill., in the business of manufacturing and selling lumber, under the firm name of the Vehicle Supply Co. They had been associated in business for many year's, and were so associated in the year 1907. During that year C. C. Carter, acting in behalf of himself and his brother, M. S. Carter, entered into a contract with Edward H. Taylor to. saw into lumber certain logs at a mill, owned by Taylor, located in Louisiana. After the logs had been delivered by the taxpayers to the mill, but before they were cut, .it developed that there was a mortgage on the mill which the holder threatened to foreclose if it was not immediately paid. In order to prevent such -action being taken and to assure the sawing of the logs already delivered, the taxpayers purchased the mortgage notes from the holder thereof and made an arrangement with Taylor, whereby the latter was to pay off the mortgage notes with the money he would make in performing his contract with the taxpayers. The notes were 12 in number and bore date in 1905, one note being due each year for a period of 12 years. Upon default of any one of the notes, all of the remainder became due and payable. The notes were in default at the time of their purchase by the taxpayers. The only security for the payment of the notes was a chattel mortgage on Taylor’s mill. The face value of the notes was $12,000, and this, plus accrued interest, the taxpayers paid for them. The mill operated about one year after the contract was entered into, during which time Taylor paid $2,000 on his indebtedness. The mill was destroyed about the.year 1908. No insurance was carried on it and Taylor was thereafter left without any assets and insolvent.
    Some time later the taxpayers entered into a further contract with Taylor, whereby the latter was to log and cut certain timber of the taxpayers at a portable mill that was furnished for that purpose by the Carters, which mill was located at Woodside, La. During the continuance of this venture Taylor paid $2,000 further on his indebtedness. This latter amount was paid not later than in the year 1912. Nothing was paid thereafter on the indebtedness until 1919, when $250 worth of lumber was sent to the taxpayers by Taylor, which amount was credited against the indebtedness.
    In 1911, M. S. Carter loaned to M. M.- Mills over $2,000, which was to be used by the latter in opening a grocery store in Oakton, Ky. Mills repaid about $800 of the amount borrowed by him, leaving a balance due of about $1,200 in the form of a promissory note, which has never been paid. Nothing has been paid on the note since the year 1911, except that, in the year 1917 or 1918, the son of M. M. Mills gave to M. S. Carter $25 to be applied on account • of the indebtedness. Mills failed in business within one or two years after he opened his store and was insolvent at that time and has been insolvent ever since. When at work he has been employed as a common laborer. He had no assets after the failure of his business in 1912 or 1913.
    In 1911, the Vehicle Supply Co. sold to J. A. Holderman a secondhand sawmill for about $600. All the notes were eventually paid, except the last note of about $50. This note became due in 1913, at which time demand for payment was made. The note was put in the hands of II. G. Dun & Co. for collection in 1917. Dun & Co, made several reports to the effect that they could not collect the note and in 1919 made a final report to that same effect.
    In 1911, about $2,000 was loaned to A. A. Peck by M. S. Carter with which to purchase a gasoline boat. A balance of $823 remained unpaid on this loan when the boat was sunk in 1915 or 1916. Peck also had a sawmill from which he furnished a small amount of lumber to the taxpayers, the lumber received being credited on his indebtedness. M. S. Carter started foreclosure proceedings against the mill in 1918, and then concluded that he would not proceed with it. The amount that could have been recovered on foreclosure of the mill would not have been sufficient to satisfy the indebtedness. The mill was destroyed in 1919 or 1920. After the destruction of the mill Peck had no assets whatever, other than a team with which he occasionally did a little hauling.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of WALTER CRAVENS.
    Docket No. 3381.
    Submitted November 9, 1925.
    Decided January 12, 1926.

      Walter Cravens pro se.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Steünhagen, LaNSdoN, and AeuNdell.
    The taxpayer appeals from the determination of a deficiency of $85.80 in income tax for the calendar year 1921, which results from the Commissioner’s addition to the gross income included by the taxpayer in his return of an amount of $1,250, shown upon the information return of the Security Sayings & Loan Association to have been paid to the taxpayer during the year.
    FINDINGS OF FACT.
    The taxpayer, during the taxable year and for approximately 15 years prior thereto, was the president or other officer of the Security Savings & Loan Association, doing business at Salina, Kans. During all this time there was an agreement between him and the corporation, whereby he was to receive a commission upon each loan made by the corporation. For many years, until about 1919, all loans made by the association bore interest at 9 per cent. From that time forth some loans were made at less than 9 per cent. In 1921 a dispute arose under the contract as to the commissions due the taxpayer upon loans bearing interest at less than 9 per cent. For the taxable year this disputed amount was $1,250. The total amount of commissions received during this year, including the amount of $1,250 in dispute, was $3,050. In making his return for 1921, the taxpayer included only $1,800 and omitted the $1,250. The corporation on its information return of amounts paid showed that the taxpayer had received from it $3,050 as commissions. The taxpayer, as president of the corporation, had the power to take from the corporation in the first instance such monies without securing the specific approval of any of the other officers of the corporation. Upon the basis of the corporation information return, the Commissioner included the additional $1,250 in the taxpayer’s taxable income and determined the deficiency here in question. Early in 1922, when the taxpayer quit the corporation, he acquiesced in its demand and repaid the amount of $1,250, together with additional amounts arising out of the years 1919 and 1920. There is no question as to the bona fides of the transaction or as to the propriety of the taxpayer’s action.
   DECISION.

The deficiency determined by the Commissioner is disallowed.


text:
    Appeal of HENRY LICHT.
    Docket No. 4793.
    Submitted October 20, 1925.
    Decided January 12, 1926.

      Henry Licht pro se.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    This is an appeal from the determination of a deficiency in income tax for the year 1924 in the amount of $41.27. The controversy results from the Commissioner’s disallowance of the following items as deductions from the taxpayer’s gross income for 1924: Taxes, $200; one-half depreciation on automobile alleged to have been used for business and pleasure, $416.66; and one-half upkeep on same, $425; automobile license, $17; personal-property tax, $12; amusement tax and club dues, $97.41; State income tax, $18.59; war tax on jewelry purchased during 1924, $55; or a total of $1,241.66. At the hearing the taxpayer testified to the depreciation and upkeep expense of his automobile and to the payment of other amounts claimed, but furnished no convincing proof of any of the deductions claimed.
    FINDINGS OP PACT.
    The taxpayer resides in St. Louis, Mo., where he is engaged in the wholesale hosiery business as a member of the firm of Licht Brothers & Co. During the year in question he owned and used an automobile, which he had bought new two years before at a cost of more than $2,600.
    It was his custom to drive this car to and from his place of business and to use it during the day in the entertainment of his customers and during the evening as a pleasure car for his family. Early in 1925 it was traded in, as part of the purchase price of a new car, at a valuation of $800.
   DECISION.

The determination of the Commissioner is approved.


author: Steenhagen

text:
    Appeal of THE INTERNATIONAL BOILER WORKS CO.
    Docket No. 2322.
    Submitted July 16, 1925.
    Decided January 12, 1926.
    1. Taxpayer’s factory was destroyed by fire in July, 1919. In addition to specific insurance on its property, it had a policy of use- and-occupancy insurance, under which the insurer was liable “ for the actual loss sustained of net profits on the business which is thereby prevented,” measured by a fixed amount per day for the number of days of suspension of business. Taxpayer’s fiscal year ended September 30, when business was still suspended. Subsequently, on November 13, parties agreed on amount of use-and-occupancy insurance, which was paid on November 26. Heló,, Commissioner correctly treated such proceeds as accrued income of 1919 to extent of amount known at end of year. United States v. Supplee-BidiMe Hardware Go., 265 U. S. 189, distinguished.
    2. Proceeds of use-and-occupancy insurance held not proceeds of an involuntary conversion of property, within section 234 (a) (14) .Revenue Act of 1921.
    3. Where separate properties are separately insured, taxpayer may treat the gain under one policy as subject to section 234 (a) (14) and the loss under another as a deduction.
    4. Invested capital is properly reduced where an amortization deduction is made under section 234 (a) (8).

      William D. Harris, Esq., and H. S. Waters, G. P. A., for the taxpayer.

      Ellis W. Marmmg, Esq., for the Commissioner.
    Before Stjernhagen, Lansdon, and Love.
    The Commissioner determined a deficiency of $21,192.25 for the fiscal year ended September 30, 1919, from which the taxpayer appeals as to an amount between $8,000 and $9,000. Six errors are assigned and eight propositions of law are set forth to sustain them. No testimony was given at the hearing, the parties having agreed upon the facts and embodied them in a written statement filed. The facts are therefore found verbatim as agreed.
    FINDINGS OF FACT.
    1. The International Boiler Works Co. is engaged in the manufacture of steel boilers, tanks, stacks, and general plate work. Prior to July 2, 1919, this business was carried on in two factories of wood construction, located in East Stroudsburg, about a mile apart, known as the Analomink and the Minnisink shops. On that date the Analo-mink plant was destroyed by fire and the company thereafter erected a new fireproof factory approximately equal in size to both old ones combined and, when it was completed and put in operation, the Min-nisink factory was abandoned.
    2. The tax returns of the company are rendered and its books of account kept on the basis of the fiscal year ending September 30. The accrual method of accounting is employed.
    3. As compensation for the loss of the Analomink factory, the company received insurance aggregating $81,972.95, of which $66,-973.01 was for loss of buildings, machinery, and equipment, and $14,999.94 was use-and-occupancy insurance. Settlement of the in surance on material, buildings, and machinery was made and received prior to the close of the fiscal year ended September 30, 1919. The amount insured under the use-and-occupancy policies, which the company carried on the Analomink plant, was $25,000. The terms of the policies pertaining to this class of insurance are stated on page 15 of the appeal petition of the taxpayer (hereinafter set forth), where a copy of the use-and-occupancy insurance form is shown. This form attached to a standard fire insurance policy of the State of Pennsylvania comprised the insurance contract. The aggregate per diem liability under the policies in case of a total suspension of business (referred to in the fourth paragraph of the form, where the words “ see list ” are inserted) was $83.33 per day. The loss paid, $14,999.94, represented the total per diem liability for a period of 180 days, agreed upon between the insurers and the company as the time which would be required to replace the de- ■ stroyed factory. The agreement concerning the period of replacement was reached at a conference on November 13, 1919, between the representatives of the insurers and of the company, and the loss was paid on November 26, 1919.
    4. Work incident 'to the construction of the new factory of the company was commenced immediately after the fire, and the building was completed on or about April 1, 1921, and put in operation on or about September 30, 1921. The cost of the new plant complete was $423,162.80, of which the sum of $364,664.36 is the cost of the building, $34,428.96 the cost of new machinery, and $24,-069.48 the cost of the machinery in the Minnisink factory, depreciated to the date of removal, which was transferred to the new plant. The business carried on and the class of articles produced in the new factory are the same as those of the two old shops.
    o. The sum of $66,973.01, fire insurance proceeds, mentioned in paragraph 3 above, comprised $10,156.25 paid for loss of materials; $15,915.25 for loss of buildings; and $40,901.51 for loss of machinery. The policies under which these sums were paid covered or insured the building, machinery, and contents separately and for different amounts, and the losses under the policies were adjusted separately for each class of property. The cost of the destroyed buildings, depreciated to the date of the fire, was $20,974.41, and the cost of the destroyed machinery, likewise depreciated, was $24,029.61. The company did not maintain a system of costs to show the value of the destroyed materials, and the insurance received for this class of property was included in its books and in its taxable income for the fiscal year 1919 as a reduction in the cost of materials used.
    8. The plans for the new shop contemplated a manufacturing capacity approximately equivalent to that of the Analomink and the Minnisink plants combined. The working floor space of the destroyed Analomink shop was 19,200 square feet, and the Minni-sink factory contained 45,500 square feet, of which 12,800 feet was the area of an addition erected in 1918 for war purposes and abandoned after the Armistice in November, 1918. This addition was refitted after the fire and used until the new plant was occupied. The working space in the new factory comprises a main building of 50,000 square feet and two wings of 8,000 feet each. It was known to the company that the Minnisink shop would be abandoned when the new factory should be occupied. The materials and design of the shop make it useless for any other purpose, and it has no salvage value. The cost of the building (and its March 1, 1913, value) depreciated to the date of the fire, was $24,974.17. The period required to erect the new factory was orally agreed upon with the contractors as six months, and the plans contemplated occupancy by the company by September 30, 1920. The new factory was to be erected on the site of the Analomink shop, the area of which had been extended by purchases of adjoining parcels in 1916 and September, 1919. Plans for the new shop had been drawn, bids secured, the contract, for the building let, and the contractor had his erecting equipment on the site by September 30, 1919. Between that date and October 15, 1919, the company learned that the property could not be used because title to a 20-foot strip across it belonged to the owner of an adjacent piece of land, who came forward and asserted his rights. Negotiations with him extended to December 8, 1919, v?hen the company purchased his property.' The newly acquired land was more suitable for the requirements of the company, and the factory was erected there with slightly altered plans and under a substituted contract with the same builder. The building was completed and occupied, as stated in paragraph 4 above.
    7. A loss of $22,586.03 was sustained by the company on account of amortization due to the abandonment of certain facilities acquired for the production of articles contributing to the prosecution of the war. The facilities comprised an addition to the Minnisink factory erected in July, 1918, and a 200-ton flanging press installed on or about November 1,1918, in the extension of the factory. These properties were of no use after they were acquired and were abandoned immediately after the Armistice in November, 1918. Later, as stated in paragraph 6 above, the addition to the Minnisink shop became of temporary service and the flanging press also was subsequently employed in manufacturing, but consideration has been given to these uses in determining the amount of amortization. The amortization period, determined under article 185 of Regulations 62, and agreed to by the parties, is the period from January 1, 1918, to and including December 31,1918.

      Tbe material terms of tbe use-and-occupancy policy, as shown on page 15 of the appeal petition, referred to in paragraph 3 of the agreed statement, are as follows:
    80% Bldg. & Cts. Rate Rate Page 52-16
    ,89+10%=.98
    The International Boiler Works Company.
    East Stroudsburg, Pa. “ Analomink Plant.”
    BUSINESS INTERRUPTION INDEMNITY.
    USE AND OCCUPANCY INSURANCE.
    $- On tbe use and occupancy of tlie Main Building, Machinery, Equipment & Stock situated Map — Page 20 — King St., Town of East Stroudsburg, State of Pennsylvania and occupied for tbe manufacture of boilers and other purposes not more hazardous, known as “Analomink Plant.”
    Tbe word “ business ” wherever used in this contract shall be considered and held to have the following meaning according to the class of property insured:
    (a) In a manufacturing property: “The production of goods.”
    (b) In a mercantile property: “The sale of goods.”
    (e) In other glasses of property: “The carrying on of the business operations usual to the class.”
    The word “ day,” however modified, wherever used in this contract shall be held to cover a period of twenty-four (24) hours.
    If the said building, or machinery or equipment or stock contained therein be destroyed or damaged by fire occurring during the life of this policy so as to necessitate a total or partial suspension of business, this Company shall be liable under this policy for the actual loss sustained of net profits on the business which is thereby prevented, and for such fixed charges and expenses as must necessarily continue during a total or partial suspension of business, for not exceeding such length of time as shall be required with the exercise of due diligence and dispatch to rebuild, repair or replace such part of said building and machinery and equipment and stock as may he destroyed or damaged, commencing with the date of the fire and not limited by the date of expiration of this policy, under the following terms and conditions, to wit:
    During the time of a total suspension of business, liability under this policy shall not exceed (see list) per day for each business day of such suspension.
    During the time of a partial suspension of business the per diem liability under this policy shall not exceed the same proportion of the per diem liability which would have been incurred by a total suspension of business, as the proportion by which the daily business at the time of the fire, is decreased.
    Liability hereunder shall not exceed the amount of insurance by this policy nor a greater proportion of any loss than the insurance hereunder shall bear to all insurance, whether valid or not, covering in any manner the loss insured against by this policy.
    It is a condition of this insurance that the assured shall not be entitled to compensation on account of delay which may be occasioned by any ordinance or law regulating construction or repair of buildings, or by the suspension, lapse or cancellation of any license, or for any other consequential damage.

      It is a condition of this insurance that if covering on replacement of stock in a manufacturing property no liability is assumed on account of damage to the finished product or for the time required to reproduce any finished product which may be damaged.
    It is a condition of this insurance that as soon as practicable after any loss, the assured shall resume complete or partial operation of the property herein described and shall make use of other property, if obtainable, if by so doing the amount of loss hereunder will be reduced, and in the event of the assured continuing business, in whole or in part, at some other location or using other property during the time occupied in repairing or reconstructing the building named herein, the net profits so earned shall be deducted from the amount that under the terms of this policy would otherwise be recoverable by the assured.
    Surplus machinery or duplicate parts thereof, equipment or supplies, and. if this policy covers on stock, surplus or reserve stock, which may be owned, controlled or used by the assured shall, in the event of loss, be used in placing the property in condition for the resumption of business.
    In case the assured and this Company are unable to agree as to any question affecting the amount of loss under this policy, the same shall be determined by appraisers in the maimer provided by the policy to which this form is attached, the provisions of which policy shall govern in all matters pertaining to this insurance, except as herein otherwise provided.
    Other concurrent insurance permitted.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be made on 15 days’ notice, under Eule 50.
   OPINION.

Steenhagen

: The first dispute arises out of the taxpayer’s policy of so-called use-and-occupancy insurance from which, in 1920, it received proceeds amounting to $14,999.94. Of this amount the Commissioner regarded $7,500.02 as income accrued to the taxpayer in the fiscal year 1919. The taxpayer contends that no part of this amount accrued to it in the taxable year, and, secondarily, that if it be held that there was an accrual of any part of this amount in the taxable year, such accrual was not income because the proceeds of such insurance are in their nature not income.

The policy was in effect when the fire occurred on July 2, 1919. It is not disputed that the fire was the occasion for an immediate obligation of the insurance company to the taxpayer under the insurance contract. The contract provided that the corporation would be liable “ for the actual loss sustained of net profits on the business which is thereby prevented, and for such fixed charges and expenses as must necessarily continue during a total or partial suspension of business, for not exceeding such length of time as shall be required with the exercise of due diligence and dispatch to rebuild, repair, or replace,” etc. The liability was limited to $83.33 per day for each business day during the time of total suspension of business. The assured was required to do everything practicable, including the use of other property, to reduce the loss, any net profits earned being deducted from the amount of the insurer’s liability. In the event of disagreement upon any question affecting the amount of loss, reference to appraisers was provided for. Such a reference to appraisers was the same as in the standard policy •covering property insurance.

From the facts it appears that the taxpayer and the insurance company did not agree until November 13 as to the number of days which were to be taken as the measure of time required to rebuild and to be used as the multiplier of $83.33 to determine the total amount for which the insurance company was liable. The taxpayer therefore contends that there was, prior to September 30, 1919, no accrued liability of the insurer which could be regarded as an accrual to the taxpayer. The Commissioner avoids the question as to the date of accrual of the full amount of the insurance company’s liability and treats as an accrual only so much as represents the product of multiplying $83.33 by the number of days within the fiscal year in question. This is all we are called upon to consider, and it is our opinion that the Commissioner was warranted in treating the amount as accrued to this extent. During the fiscal year in question the taxpayer was unquestionably entitled under its contract to that amount. Upon the last day of that fiscal year it had an enforceable right to at least an amount representing the total per diem liability for the number of days of suspension then known to have taken place as the result of the fire. Whether the measure of its right was greater than this we need not consider, since it is not in issue.

Having decided that the amount of $7,500.02 was properly accrued during the taxable year, we must consider whether this accrual is taxable income. The taxpayer urges that it is merely a replacement of a property right, being the right to earn income, and hence that it is in effect a return of capital. It is also urged that the situation is fundamentally similar to that passed upon by the Supreme Court in United States v. Supplee-Biddle Hardware Co., 265 U. S. 189. Both the facts and the question in that case are so substantially different from those before us here that we can not regard that decision in point. The court, having before it the question whether the proceeds of a life-insurance policy received by a corporation upon the death of its president were taxable income, decided that the express exclusion from gross income contained in section 213 (a) (1) of the Bevenue Act of 1918 applied to corporations as well as individuals, and this made it unnecessary to decide whether the amount so received was income which would otherwise be taxable.

It may be seriously doubted in any event whether the proceeds of use-and-occupancy insurance, such as that now before us, would be subject to the same considerations as those applicable to life insurance. The insurance is expressly stated in the policy to be against the loss of net profits on business prevented. Such profits, had they not been lost, unquestionably would have been gross income, and there is no reason why an amount received in substitution for net profits should be any more excluded from tax than if received directly in the conduct of the business. But the taxpayer presents the argument that the right to earn profits is a property right, and that the insurance proceeds were only the pecuniary conversion of this property right, which, like other property, is not taxable except as it comes in from capital or labor or both combined. The argument is too attenuated to merit lengthy discussion. All that is responsible for earnings, such, for example, as the hand and brain of man, is not capital under the statute. We therefore hold that the amount of $7,500.02 was correctly treated by the Commissioner as. gross income within the taxable year.

The taxpayer asserts further that the entire amount accrued under this policy for use-and-occupancy was the proceeds of an involuntary conversion of property expended in replacement, and that,, under section 234 (a) (14) of the Revenue Act of 1921, made expressly applicable to prior years, it is entitled to deduct the amount so received. This argument, like the argument of the foregoing contention, takes the postulate that the proceeds of use-and-occupancy insurance is the conversion of property into cash. Since we have held above that this is not true, it follows that section 234 (a) (14) is not applicable and that hence there is no provision for the deduction claimed.

Under its general policy for fire insurance upon its properties the taxpayer, as shown by the agreed statement of facts, was separately insured against loss of materials, loss of buildings, and loss of machinery, and the liability for each of these losses was separately adjusted. The liability under the policies was measured by the value at the time of destruction, and thus it happened that there was a, gain to the taxpayer in the proceeds of the policies upon materials and machinery. As to the buildings, however, the taxpayer suffered a loss of $5,059.16, representing the difference between the proceeds of insurance and the cost less depreciation. This loss the taxpayer claims the right to deduct, while at the same time it applies section 234 (a) (14), swpra, so as to deduct proportionately the gain realized upon the machinery. The gain upon the materials is not in issue, because the taxpayer has applied this to the cost of goods sold. The Commissioner urges that, if section 234 (a) (14) is to be applied, the taxpayer must treat all of the amounts received as insurance for the destruction of its property as a single sum, and that it may not segregate the amounts received under different policies for different properties and select those which it desires to subject to the general gain of loss provisions and those to which it desires to apply the provision as to involuntary conversion.

We see nothing in the statute to require treatment of the proceeds as a unit. If a taxpayer, for example, has two separate plants, on each of which it receives a specified amount upon destruction or condemnation, there is no reason why it may not apply the one specific amount to the reconstruction of the one plant, claiming under section 234 (a) (14), and determine its gain or loss upon the other without reconstruction. The provisions of section 234 (a) (14) are relief provisions by which a taxpayer may postpone the taxation of so much of the gain derived from an involuntary conversion as it uses in replacement. It may not be permitted to postpone the taxation of the gain derived from the conversion of one piece of property merely because it elects to use the proceeds in replacing another piece of property. On the other hand, the Commissioner may not deny it the deduction of a loss in the one case if the taxpayer elects to keep the two funds separate. Of course, in the present appeal, the taxpayer may not use the proceeds of the machinery insurance for the purpose of replacing the buildings and at the same time claim its loss on the building proceeds. It is only by using the proceeds for the replacement of the specific property covered thereby that section 234 (a) (14) may be made applicable. We hold, therefore, that the taxpayer may properly deduct the $5,059.16 from gross income, irrespective of the provisions of section 234 (a) (14).

The taxpayer assigned as error the Commissioner’s disallowance of obsolescence of certain property, claiming that the period of obsolescence is 15 months instead of 27 months. The Commissioner concedes his error. The Commissioner also concedes that he erred in excluding from invested capital the amount of $11,812.74, received as insurance proceeds and used in replacement under section 234 (a) (14). Appeal of National Grocer Co., 1 B. T. A. 688.

We find no error in the Commissioner’s reduction of invested capital at the beginning of the fiscal year by a proportionate amount of the deduction allowed as amortization of war facilities during the calendar year 1918. The taxpayer’s contention, in effect, is to say that, although‘it may offset 1918 income by an amortization deduction, yet it may nevertheless regard such a deduction as fictitious and not in fact reflecting a disappearance of capital. The purpose of the amortization allowance is to give a taxpayer immediate relief from an investment for war purposes which gave him no peace-time utility. Appeal of Moore Investment Co., 2 B. T. A. 579; Appeal of Walcott Lathe Co., 2 B. T. A. 1231. Claiming this successfully, he may not at the same time be heard to say that the investment is still worth its cost for invested capital purposes.


author: Tiiammell

text:
    Appeal of FIDELITY TRUST CO.
    Docket No. 1730.
    Submitted September 10, 1925.
    Decided January 12, 1926.
    Valuation of good will, furniture and fixtures, and rate of depreciation determined.

      F'ranlc G. Neal, Esq., for the taxpayer.

      John D. Foley, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency of $25,-380.98 in income and profits taxes for 1919. The taxpayer contends that, in determining that a profit was realized on the sale of its good will and furniture, fixtures and equipment in 1919, the Commissioner did not correctly determine the March 1, 1913, value thereof, and that the rate of depreciation applied to furniture and fixtures sold was too high.
    FINDINGS OP PACT.
    The taxpayer is a corporation organized under the laws of the State of Washington, with its principal place of business at Tacoma. In 1889 it established a bank in Tacoma, which operated continuously and successfully until January, 1919, when it sold its banking assets, less certain unsatisfactory accounts, to the Bank of California, National Association, hereinafter called the bank. The sale contract dated January 14, 1919, after setting forth the basis of the sale of the taxpayer’s resources, provided for the payment by the bank “(3) in addition thereto $25,000 in cash for the banking fixtures, furniture, adding machines, typewriters, safes and other equipment, used in connection with the business of the Trust Company, and (4) $100,000 for the good-will, including deposits and business of the said Trust Company.”
    On January 18, 1919, a lease ivas executed by and between the taxpayer as lessor and the bank as lessee, whereby the taxpayer leased to the bank for a stipulated consideration “ the banking offices and premises, including vaults, now occupied by the lessor, on the second floor or Broadway floor of the Fidelity Building,”- and other premises not here involved. The lease contained the customary provisions whereby the lessee agreed to “ keep the leased premises in such repair, order and condition as the same are now or may be put in,” and upon the termination of the lease to “ surrender and deliver up to the lessor the leased premises in the condition aforesaid, reasonable wear excepted.”
    A similar lease was executed on the same date whereby the taxpayer leased to the bank the premises, furniture and fixtures, and the business and good will of the Tacoma Safe Deposit Co., a subsidiary of the taxpayer.
    On November 12, 1906, the taxpayer entered into a contract with Weary & Alford Co. for labor and materials for enlarging and remodeling its banking quarters. The consideration .stated was $28,850. The items making up this amount are set forth in a schedule attached to the contract, as follows:
    1. Cabinet work_ $6, 958. 60
    2. Marble_1_ 3, 975. 40
    3. Bronze_ 4,119.16
    4. Movable furniture__ 1,940. 86
    5. Tile and mosaic_ 1, 848. 00
    6. Cage inclosure and equipment_ 1, 642.25
    7. Hardware_ 43. 75
    8. Glass-:-280. 00
    Electric fixtures-1,147. 30
    10. Plastering and- stucco cornices-1, 355. 70
    11. Painting and decorating_ 1, 596. 00
    12. Steel framing for marble_ 160.10
    13. Deal plates_ 89. 90
    14. Draperies_ 42. 00
    15. Miscellaneous items from Weary & Alford stock, consisting of special hardware, wicket bars, inkwells, calendar cards, and appliances, etc_ 120. 00
    16. Freight and installation exp'ense_ 3, 530. 98
    28, 850.00
    This contract was authorized by a resolution of the board of trustees of the same date as that of the contract. Certain extra labor and materials were later found necessary, which were supplied by Weary & Alford at the price of $5,967.28, making a total sum of $34,817.28.
    Other expenses were incurred, such as the removal of the old coin vault and construction of a new one, and the purchase of safes and filing cabinets, which, added to the amount paid Weary & Alford, made the total cost of enlarging and remodeling $60,690.88.

      At a special meeting held on December 13, 1906, the board of trustees authorized $20,000 charged to the undivided profits account and set aside to apply on the payment of furniture and fixtures for the enlarged banking room. The profit and loss account of the taxpayer for 1907 shows the following debit entries :
    Jan. 1, to furniture and fixtures account_$20, 000
    July 12, to furniture and fixtures account_ 10, 000
    Sept. 14, to furniture and fixtures account_ 10, 000
    The changes in the taxpayer’s building were not completed until 1908, and in that year it entered as a debit in its building account the amount of $20,690.88. This amount was subsequently carried into its profit and loss account for the year.
    Prior to 1902 the taxpayer had carried its furniture and fixtures as an asset. At or about that time that account was written off. Thereafter nothing was carried in that account.
    The taxpayer company had successfully operated since 1889, and on March 1, 1913, was in excellent standing in the community and one of the four principal banks in Tacoma. Its net earnings from 1909 to 1912, inclusive, were as follows:
    1909_$80,867.80
    1910_ 88, 493. 08
    1911_ 69, 595. 94
    1912_ 76, 223. 76
    On March 1,1913, the taxpayer had total deposits of $3,864,089.28, and its capital and surplus, including all reserves, was approximately $950,000. Its good will had a fair market value on March 1, 1913, of at least $100,000.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be entered on 15 days’ notice, in accordance with Rule 50.
   OPINION.

Tiiammell

: We will first dispose of the question of the gain or loss on the sale of taxpayer’s good will. In determining the deficiency from which the taxpayer appeals, the Commissioner held the good will to have had a March 1, 1913, value of $40,000, and on that basis determined that a taxable profit of $60,000 had been realized on the sale in 1919.

The valuation of the good will set forth in the findings of fact was shown by the testimony of several bankers of many years’ experience in the larger banks of the Northwest, who were familiar with the methods of valuing good will of banks in the territory in which the taxpayer was located. These men testified to a value of good will of the taxpayer in excess of $100,000. From all the testimony, we are of the opinion that the good will of the taxpayer had a value of $100,000, or more, on March 1, 1918. No taxable gain, therefore, was realized on the sale thereof for $100,000. Under the decision of the Supreme Court in United States v. Flannery, 268 U. S. 98, no deductible loss was sustained.

With respect to the furniture and fixtures, the taxpayer contends that the Commissioner used too high a rate of depreciation and failed to restore to the furniture and fixtures account certain items which had been charged oil, which resulted in the finding of the Commissioner of a profit of $9,073.07, whereas it is contended that there was a loss of $34,762.49.

It appears that during 1907 and 1908 taxpayer enlarged its banking quarters, installed the usual banking fixtures, consisting of counters, desks, partitions, wainscoting, cages, etc., the counters and wainscoting being of marble, the counter tops, desks, and movable furniture being mahogany, and the cages of bronze grille work. At the same time there were slight alterations and renovation of the banking room and the installation of a coin vault of reinforced concrete and steel construction. The total cost of these alterations, fixtures, furniture, and repairs was $60,690.88. Of this amount $40,000 was charged directly to profit and loss for 1907, and $20,690.88 was charged in 1908 against the income of the building, being in effect a write-off of this amount against the profits of 1908.

In the audit upon which the determination of the deficiency is based, approximately $30,000 of this amount is restored to taxpayer’s books as of 1907 and 1908 as “ equipment,” and depreciated from that date at the rate of 10 per cent per annum, thus totally eliminating such items prior to the sale in 1919. The remaining $30,000 has not been restored. A portion of this cost is properly chargeable to building account and another portion to banking fixtures and furniture which passed under the sale in 1919. The precise amount chargeable to each account can not be determined at this time, but from the testimony of the witnesses and the photographs of the banking quarters, taken shortly after the changes were completed, we are convinced that 10 per cent annual depreciation on these assets was too high, that 4 per cent is adequate, and that the cost to the taxpayer of a substantial portion of the assets sold was omitted in computing the profit from the sale. While it is impossible from the evidence to determine what loss was sustained on the sale of the banking equipment, furniture, and fixtures, there is ample testimony that no profit was realized on such sale. Accordingly, the determination that a profit of $9,073.07 was realized was erroneous.


author: Teammell

text:
    Appeal of ESTATE OF VALENTINE JANSON.
    Docket No. 4777.
    Submitted October 28, 1925.
    Decided January 12, 1926.
    Charitable bequests made within 30 days of the death of the decedent and, for that reason, void by statutory provision of the State of decedent’s domicile, are not deductible in determining the net estate subject to the éstate tax.

      K. L. Shirk, Esq., for the taxpayer.

      John F. Greaney, Esq., for the Commissioner.
    Before Phillips and TRAmmell.
    This is an appeal from the determination of a deficiency in estate tax in the amount of $845.17 for 1923.
    FINDINGS OF FACT.
    Valentine Janson, a resident of Pennsylvania, made his last will and testament on March 23, 1923, in which, after providing- for specific legacies, he made certain bequests for charitable and public purposes.
    Section 8312 of the Pennsylvania statutes provides as follows:
    No estate, real or personal, shall hereafter be bequeathed, devised or conveyed to any body politic, or to any person, in trust for religious or charitable uses, except the same be done by deed or will, attested by two credible, and, at the time, disinterested witnesses, at least thirty days before the decease of the testator, and all dispositions of property contrary thereto, shall be void and go to the residuary legatee or devisee, heirs or next of kin, according to law.
    Valentine Janson died within 30 days after making his will. Immediately upon the reading of the will after the burial of the decedent, his heirs and next of kin joined in a release of the resid-uai*y estate to the charities of any and all interest which they acquired in the fund by virtue of the operation of the statutes of Pennsylvania with respect to charitable bequests made by will within 30 days of the death of the decedent.
    The fund bequeathed to the charities was actually received by such charities after execution of the release signed by the heirs and next of kin of the decedent. The order executed by the Orphans’ Court of Lancaster County, Pa., in so far as it is pertinent, is as follows:
    Valentine Janson died testate on the thirtieth day of March, 1923. A printed copy of his will is hereto attached and should now be read.
    As he died less than thirty days after the execution of his will, charitable bequests therein provided for are void. The following are his heirs and next of kin:

      1. Joseph Janson, a brother.
    2. The children of Katherine Janson Kasel, a deceased sister.
    a. Frank V. Kasel.
    b. Edmund J. Kasel.
    c. William C. Kasel.
    d. Gertrude M. Kasel.
    e. Katherine A. Kasel.
    f. Mary Weisser.
    8. The children of Martha Janson Becker, a deceased sister.
    a. Martha Becker.
    b. -Mary Becker.
    c. Serena B. Nikolaus.
    By an instrument dated April 13, 1923, these heirs and next of kin have assigned their inherited interests in the estate of the testator, as follows: To the Columbia Hospital, $2000.00; to St. Joseph’s Hospital, $1000.00; To the Holy Trinity Catholic Church of Columbia, Pa., for the building fund, $20,000.00; to be used as an offering for Masses for the repose of the souls of testator and testator’s brother, Frank Janson, $1000.00; to St. Peter’s Catholic Church of Columbia, Pa., $1000.00 and the balance to the Lancaster Trust Company, of Lancaster, Pennsylvania, trustee, in conformity with the* trusts and uses intended to be created by the testator.
    This disposition was in accordance with the terms of decedent’s will.
    The Commissioner refused to allow such charitable contributions as a deduction from the gross estate of the decedent and from that action this appeal is taken.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Teammell

: The question involved in this appeal is whether the charitable bequests provided for in the will of the decedent are to be deducted in determining the value of the net estate subject to the estate tax under section 403 of the Revenue Act of 1921, which is as follows:

Seo. 403. That for the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
⅜ ⅝ ⅝ ⅜ ⅜ ⅝ ⅜
(3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money’s worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent’s death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including tlie encouragement of art and 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, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in ease of the estates of all decedents who have died since December 31, 1917.

At the hearing it was admitted by counsel for the taxpayer that the courts of Pennsylvania had always interpreted section 8312 of the Pennsylvania statutes, which is quoted in the findings of fact, h> mean that charitable bequests made by will within 30 days of the death of the decedent were void. This admission of counsel for taxpayer is supported by a decision of the Supreme Court of Pennsylvania in In re Arnold's Estate, 249 Pa. 348; 94 Atl. 1076, where the court said:

From the earliest interpretation of the statute to the present time, we have uniformly held, as the act declares, that estates devised or bequeathed contrary ^to its provisions are void. See Price v. Maxwell, 28 Pa. 23, 39; Luffberry's App., 125 Pa. 513, 515, 17 Atl. 447; Gray's Est., 147 Pa. 67, 23 Atl. 205; Gregg’s Est., 213 Pa. 260, 264, 62 Atl. 856; Carson’s Est., 241 Pa. 117, 88 Atl. 311; Hegarty’s App., 75 Pa. 503, 516.

From the foregoing it appears that the charitable bequests were null and void and that the charities therein named did not, in fact, receive anything from the decedent. The bequests being void, the heirs and next of kin received that which the charities would have received if the bequests had not been void. The heirs and next of kin received the bequests and it was through them, and not through the decedent, that the charities named in the will of the decedent received anything. Since the charitable bequests were null and void, they can not be recognized for the purpose of the deduction provided in section 403 (a) (3). The fact is that the decedent did not, under the laws of Pennsylvania, bequeath anything to the charities named in the will. His effort to do so proved futile by virtue of the statute. The fact that his heirs conveyed to the charities does not entitle the estate to the deduction.


text:
    Appeal of LANCASTER TRUST CO., Executor of Estate of FRANK JANSON.
    Docket No. 4525.
    Submitted October 28, 1925.
    Decided January 12, 1926.

      K. L. Shirk, Esq., for the taxpayer.

      •/ohn F. Greaney, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from the determination of a deficiency in estate tax in the amount of $1,627.49 for 1923.

      FINDINGS OF FACT.
    Frank Janson, a resident of Pennsylvania, made his last will and testament on February 6, 1923, in which, after providing for specific legacies, he made certain bequests for charitable and public purposes.
    Section 8312 of the Pennsylvania statutes provides as follows:
    No estate, real or personal, shall hereafter be bequeathed, devised or conveyed to any body politic, or to any person, in trust for religious or charitable uses, except the same be done by deed or will, attested by two credible, and, at the time, disinterested witnesses, at least thirty days before the decease of the testator, and all dispositions of property contrary thereto, shall be void and go to the residuary legatee or devisee, heirs or next of kin, according to law.
    . Janson died of influenza within 30 days after making his will. Immediately upon the reading of the will after the burial of the decedent, his heirs and next of kin joined in a release of the residuary estate to the charities of any and all interest which they acquired in the fund by virtue of the operation of the statutes of Pennsylvania with respect to charitable bequests made by will within 30 days of the death of the decedent.
    The fund bequeathed to the charities was actually received by such charities after execution of the release signed by the heirs and next of kin of the decedent. The order executed by the Orphans’ Court of Lancaster County, Pa., in so far as it is pertinent, is as follows:
    Frank Janson died testate on the eighteenth day of February, 1923. A printed copy of his will is hereto attached and should now be read.
    As he died less than thirty days after the execution of his will, charitable bequests therein provided for are void. The following are his heirs and next of kin:
    1. Joseph Janson, a brother.
    2. The children of Katherine Janson Kasel, a deceased sister.
    a. Frank V. Kasel.
    b. Edmund J. Kasel.
    c. William O. Kasel.
    d. Gertrude M. Kasel.
    e. Katherine A. Kasel.
    f. Mary Weisser.
    3. The children of Martha Janson Becker, a deceased sister.
    a. Martha Becker.
    b. Mary Becker.
    c. Serena B. Nikolaus.
    By an instrument dated March 19, 1923, these heirs and next of kin have assigned their inherited interest in the estate of the testator to The Lancaster Trust Company of Lancaster, Pennsylvania, trustee, in conformity with the trusts and uses intended to be created by the testator.
    In addition to the heirs and next of kin named, a brother, Valentine Janson, survived the testator and died testate March 30, 1923.
   DECISION.

The determination of the Commissioner is approved. Appeal of Estate of Valentine Janson, 3 B. T. A. 296.


author: Trammell

text:
    Appeal of HAROLD MORTENSON.
    Docket No. 506.
    Submitted June 8, 1925.
    Decided January 14, 1926.
    Expense of premiums on an insurance policy taken out by a stockholder on a vessel, practically the sole asset of the corporation, in order to protect his investment, is an ordinary and necessary expense.

      Herbert E. Hall, Esq., and A. Pooler .Robinson, G. P. A., for the taxpayer.
    • W. Franlc Gibbs, Esq., for the Commissioner.
    Before Ghaupnek, Teammell, and Phillips.
    This appeal involves the determination of a deficiency in income tax for 1920 in the amount of $144. The deficiency arises from the action of the Commissioner in disallowing a deduction for that year of an amount paid out by the taxpayer for marine insurance on a steamship which was owned by the Redwood Steamship Co., a corporation of which the taxpayer was a stockholder.
    FINDINGS OF FACT.
    The facts were stipulated as follows:
    The taxpayer in 1920 owned 224 shares, or 28 per cent, of the outstanding capital stock of the Redwood Steamship Co., a corporation organized and existing under the laws of California.
    In 1920 the Redwood Steamship Co. owned the steamship Katherine and had no other capital assets. The cost of the steamship, as evidenced by the books of the corporation, was $86,715.02. The corporation in 1920 carried no marine insurance on the said vessel. During that year the taxpayer received from the said steamship company dividends in the amount of $6,944, which were properly included in his income-tax return for that year.
    During 1920 the taxpayer personally carried $15,000 marine insurance on the said steamship to protect whatever interest he had therein, as evidenced by his 28 per cent ownership of the capital stock of the Re'dwood Steamship Co., and during that year paid premiums on the said insurance amounting to $900. The taxpayer deducted this amount in determining his net income for 1920. It was disallowed by the Commissioner.

      DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Trammell

: The question involved in this appeal is whether a taxpayer may deduct as an ordinary and necessary expense a premium on a policy of insurance taken out by him on a vessel owned by a corporation of which he is a stockholder. While it is well settled that a stockholder in a corporation is not the owner of the property of the corporation, he does have an interest in the protection of the corporation’s property and would sustain a loss if the property were destroyed. To the extent that he would sustain a loss by the destruction of the corporation’s property, he has an insurable interest in the property. Aetna Insurance Co. v. Kennedy, 161 Ala. 600; 50 So. 73. In the case of Riggs v. Commercial Mutual Insurance Co., 125 N. Y. 7; 25 N. E. 1058, the question was directly presented to the Court of Appeals of New York as to whether a stockholder in a steamship company had an insurable interest in its steamers. The court, after careful consideration of the authorities, held that he had such an interest.

The corporation in this case, having failed to insure its steamer, left the interest of the taxpayer unprotected, and the expense incurred by him in protecting his interest and investment was an ordinary and necessary expense.

On reference to the Board, Green, Lansdon, Love, Littleton, Moeeis, and Smith dissent.


author: Littleton:

text:
    Appeal of HARRY C. MOORES.
    Docket No. 4209.
    Submitted September 24, 1925.
    Decided January 14, 1926.
    The proceeds from the sale of stock of which the taxpayer had made an absolute and hona tide gift does not constitute income to him.

      John A. Kratz and E. M. Huggins, Esqs., for the taxpayer.

      A. Oalder MacJcay and Win. Lauder, Esqs., for the Commissioner'.
    Before James, Littleton, Smith, and Trussell.
    This appeal is from the determination of a deficiency in income tax in the amount of $10,065.11 for the calendar year 1920, arising from the inclusion by the Commissioner, as income to the taxpayer, of the difference between the selling price and the cost, or March 1, 1913, value, of 160 shares of common stock of the Moores & Ross Milk Co., of which the taxpayer alleged he had made an absolute gift to his wife and two daughters three weeks before the sale was made.
    FINDINGS OF FACT
    The Moores & Eoss Milk Co. commenced business in June, 1908, as a partnership, composed of Harry C. Moores and one Eoss, the capital of the partnership being about $700. They had in their employ Boss’s sister, Miss Hester E. Eoss, who married Harry C. Moores in December, 1903. After the marriage she continued to work for the partnership for about five months, and occasionally thereafter, for a period of five years, took the place of other employees when they were absent, working also considerably at nights without compensation. The partners were at that time leaving all of the earnings in the partnership, except a bare living in the business.
    The business prospered, and in 1910 they incorporated under the name of the Moores & Eoss Milk Co. ' A majority of the stock was owned by Moores and Eoss, the remainder being held by employees and two persons not employed by the corporation. Both Moores and Eoss devoted their entire time to the business, Moores having charge of the outside work, machinery, buildings, building operations, delivery, etc., and Eoss of the office finances, bookkeeping, etc.
    The business of the corporation grew rapidly, and the number of shares of stock was increased from time to time until 1920, when 1,250 shares of common and 620 shares of preferred stock were outstanding.
    The secretary and third largest stockholder of the company, Frank A. Benua, a capitalist living in Columbus, Ohio, some time in January, 1920, read in one of the local papers that the Dollings Co., a corporation, was going into business in Columbus on a large scale. He forthwith telephoned to one Harrison, a representative of that company, and, upon receiving from him a verification of the statement in the newspaper, suggested that possibly the Pollings Co. might be interested in purchasing the Moores & Eoss Milk Co. Benua and Harrison continued their conversations in this matter for some time, during which Benua mentioned it to Eoss, but not to Moores. Benua furnished Harrison with a recent appraisement of the plant of the Moores & Eoss Milk Co. and finally, at Harrison’s request, called Moores and Eoss into conference in the latter part of March, 1920. At this conference the three tentatively agreed among themselves that $461 per share was a fair price for the common stock of the Moores & Eoss Milk Co. Benua thereupon wired this price to Harrison, who had left Columbus, but received no reply from him. Nothing further was heard from Harrison, and Benua made no further effort to communicate with him. On or about April 17 or 18, he met Harrison on the street in Columbus. Harrison then told him that the price which he had mentioned was too high and that he could not consider it, suggesting, however, that Benua come to his office to discuss the matter further. On the night of April 18, 1920, Benua, Boss, and Moores met at Harrison’s office, and, after some hours of negotiation, they agreed upon a price of $375 per share for the common stock and $105 per share for the preferred stock, provided that all of the outstanding ■stock of the Moores & Boss Milk Co. could be delivered. The matter was then referred to the individual stockholders, and on May 5, 1920, the sale of the stock was closed on the basis of $375 and $105 per share, respectively.
    The taxpayer and his wife had discussed for several years the matter of his giving Mrs. Moores an interest in the business and of buying a residence. Each was in favor of both propositions, but they were unable to find a satisfactory residence at what they deemed a fair price. Taxpayer therefore delayed making the transfer of any of his stock to her. In January, 1920, the matter became active in his mind, and he definitely informed his wife and children of the fact that he would soon have transferred to them certain stock which he owned, and about the 1st of April,. 1920, he directed the secretary of the company to cancel 160 shares of his common stock and issue certificates for 100 shares to his wife and 30 shares to each of his two children, aged 14 and 7 years, respectively. On April 14, 1920, the certificates were duly issued and delivered to the three donees.
    The taxpayer made the transfers to his wife in recognition of her valuable services in helping to build up the business, and to his children for the purpose of providing a separate estate for them. and of interesting them in business affairs, as well as to provide for them against any eventuality that might occur in the future. He also had in mind that if the business should be sold he would save a considerable amount which he would be required to pay as incomo tax in the event of a sale of the stock at a profit. Each individual’s share of stock and the proceeds of the sale thereof have at all' times been kept separate from each other and from all others, •except that after the sale of the stock on May 5, 1920, the taxpayer and his wife purchased a lot and erected thereon a residence at a cost of some $44,000, which they hold as tenants in common and have occupied as their home since its completion in 1920, after paying practically one-half of the total cost. The taxpayer has managed all transactions for his wife and children, but has taken no action without first having obtained the consent of his wife. She has signed all checks for the payment from her funds and each of the donees has kept her funds in a separate bank account.

      DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Littleton:

The Commissioner field tfiat, inasmuch as the taxpayer transferred the stock to his wife and children shortly before and in anticipation of its sale at a profit for the purpose of avoiding tax on the profit realized, it resulted not in a gift to.them of the stock but of the proceeds of the sale only. From the evidence submitted the Board is of the opinion that the taxpayer made a valid and bona -¡idle gift of the stock, and not of the proceeds of the sale thereof, to his wife and two children. There is evidence that the taxpayer had in mind the fact that he would have to pay income tax on the increased value of his stock, as shown by the difference between the sales price and the cost or the fair market value on March 1, 1913. There is also evidence that he would not 'have consented to the sale of the stock at the price obtained had he thought that income tax would be payable on the amount received for the stock of which he had made a gift to his wife and children. In our opinion, however, the motives that impelled him to make the gift are immaterial. The gifts were absolute and were made prior to any agreement for the sale of the stock.

The certificates denoting the transfers were duly executed and handed to the assignees, and the shares of stock which were so transferred thereafter became their property. It is essential to the validity of a gift that there be a distinct delivery of property so as to show that the donor has relinquished all dominion over it. The donor went as far in this case as he could have gone, unless he had secured the appointment of a guardian or trustee to manage the property of his daughters. Naturally, he deemed such appointment unnecessary. He was their natural guardian, and his success in business might well have’led him to believe that no other was necessary or desirable from any point of view. The appointment of a guardian or trustee would, to some extent at least, have deprived the children of the opportunity to learn how to transact business and to conserve the property. It would have been expensive and an unnecessary impoverishment of their property. The taxpayer’s wife was an invalid and therefore prevented to a considerable degree from managing for the children. She and her husband, however, discussed investment and other disposition of their funds.

In the case of Rote v. Warner, 17 Oh. C. C. 360, the owner of two railroad bonds indorsed on each a statement in pencil that he gave them to his daughter M., with the date. M. was then 3 years old. The bonds were placed in the custody of her mother, the donor’s wife, until his death five years later. The delivery was held sufficient to establish a complete gift. On appeal the decision was affirmed. 57 Oh. St. 633. See also Mook v. Sewings & Loan Co., 87 Oh. St. 273; and Walston v. McCabe, 11 Oh. N. P. 26.

Under the evidence in this appeal, the Board is of the opinion that the Commissioner erred in holding that the gift by taxpayer to his wife and daughters was of the proceeds from the sale of stock and not of the stock. The gift took effect, at the latest, on April 14,1920, at which time there had not been a sale of the stock, nor was it definitely known by this taxpayer, or anyone else, that the stock would be sold.

On reference to the Board, Korner, James, and Teammell dissent.