author: Smith:

text:
    Appeal of National Pneumatic Co.
    Docket No. 3651.
    Decided November 26, 1926.
    The cash value of patents paid in for shares of stock of a corporation determined.

      John F. MoCarron, Esq., George E. Hamilton, Esq., Philip Stein, Esq., and Albert 1. Goe, O. P. A., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits tax as follows:

    The issues presented by this appeal are:
    (1) Valuation of the assets acquired by the petitioner at the time of organization for invested capital purposes.
    (2) Valuation of capital stock of the Prepayment Car Sales Co. as of 1911, the date acquired in exchange for other assets.
    (3) Valuation of the patents as of March 1, 1913, for depreciation purposes.
    (4) The profit realized, if any, in 1911, on the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. This profit, if any, affects the computation of the war-profits credit in 1918.
    (5) A determination of the proper deduction from invested capital on account of inadmissible assets. ,
    (6) Loss sustained on the sale of Prepayment Car Sales Co. stock in 1918.
    (7) Whether the petitioner is entitled to a determination of its profits tax for the year 1918 under the provisions of section 328 of the Revenue Act of 1918.
    Petitioner’s allegation of error with respect to the computation of the allowance for amortization for 1918 was withdrawn at the hearing.

      5 IT. S. BOARD OF TAX APPEALS REPORTS. (637)
    FINDINGS OF FACT.
    Since the questions are numerous and the facts involved are detailed, the facts will be subdivided by appropriate headings to correspond with the questions presented.
    1. Vakbation of assets acquired at date of organization. — The petitioner was incorporated February 2, 1910, with an authorized capital stock of $500,000, divided into 5,000 shares of a par value of $100 each, for the purpose of taking over certain patents owned principally by J. B. Burdett and Harold Rowntree, or by corporations whose stock was principally owned by them, and shares of capital stock of corporations either owned by them or in which they were principally interested. There were five incorporators, each of whom first paid in to the petitioner $100 cash, for which each received one share of stock.
    On April 9, 1910, Burdett and Rowntree entered into an agreement with the petitioner by which they, in full payment for 4,995 shares of petitioner’s capital stock, agreed to cause to be sold, assigned, transferred and set over to the petitioner:
    (1) Eighteen patents, principally on door devices then owned by Burdett-Rowntree Manufacturing Co.
    (2) Twenty-one patents or applications for patents, among which were a number relating to pneumatic door-operating devices.
    (3) Certain contracts as follows: (a) Contract pertaining to door safety devices made between the Burdett-Rowntree Manufacturing Co., and James S. Doyle, dated July, 1909; (b) contract pertaining to an air trap device, made between Burdett-Rowntree Manufacturing Co., and George M. Spencer, dated J une 1, 1909; (c) contract pertaining to door devices made between the Burdett-Rown-tree Manufacturing Co., and H. C. Randall, dated October 8, 1909.
    (4) Four air brake patents owned by Harold Rowntree.
    (5) Two applications for air brake patents owned by Harold Rowntree.
    (6) The entire capital stock then issued and outstanding ($92,-500 par value) of the Pay-Within Car Co., but with the proviso that the then stockholders of that company should have and retain all of the cash on hand, bills and accounts receivable, or devices as the same existed February 1, 1910, and that it should also complete such contracts at its own expense; that they should also discharge all of the bills and accounts payable and obligations of the company as they existed February 1, 1910. It was further provided that the capital stock of .The Pay-Within Car Co., so sold, assigned, transferred and set over to the petitioner should carry: (a) All letters patent owned by said The Pay-Within Car Co.; (b) all agreements relating to patents, or interests therein, or licenses thereunder, of said The Pay-Within Car Co.; (c) all contracts made by said The Pay-Within Car Co. for furnishing or installing machinery or devices on and after February 1, 1910. The letters patent thus referred to were six in number.
    (7) Six hundred and thirty-three shares of the capital stock of the Chicago Welding Co., the entire capital stock of which then issued and outstanding was 1,000 shares of a par value of $100 each. The petitioner further agreed to purchase for $4,000, the remaining 867 shares of the capital stock so that the petitioner should then own the entire capital stock of that company.
    (8) Seventeen thousand, seven hundred and fifty dollars cash.
    The agreement also provided in Article IX, in part, as follows:
    (a) As a part of this transaction the National Pneumatic Company shall pay all expenses of prosecuting the applications for patents, hereinbefore mentioned and described, and of the issue of Letters Patent thereon, incurred from and after February 1, 1910.
    (b) As a part of this transaction the National Pneumatic Company shall enter into a contract with the Burdett-Rowntree Manufacturing Company (which contract we will procure the Burdett-Rowntree Manufacturing Company to execute), providing for the manufacture by said Burdett-Rowntree Manufacturing Company, of all machinery and devices hereafter sold, furnished or installed by said National Pneumatic Company, its agents, sub-contractors or licensees, such .contract to be substantially in the form of contract submitted herewith.
    (c) As a part of this transaction the National Pneumatic Company shall, if required by the Electric Service Supplies Company, enter into a contract with that Company and also enter into contracts J. B. Burdett, Harold Rown-tree, Paris R. Forman, and Frank T. Johnson, respectively (which contracts we will procure to be executed by the individuals above mentioned, respectively), all such contracts to be respectively in substantially the form of contracts submitted herewith.
    (d) As a part of this transaction the National Pneumatic Company, having acquired the entire capital stock of the Chicago Welding Company, as herein-before set forth, shall procure and cause the Chicago Welding Company to sell and deliver to the Burdett-Rowntree Manufacturing Company, and the Bur-dett-Rowntree Manufacturing Company shall purchase from the Chicago Welding Company, (and we will procure the Burdett-Rowntree Manufacturing Company to so purchase) the entire manufacturing plant, including tools, machinery and appliances and the stock of material manufactured and in process of manufacture of said Chicago Welding Company at its present fair cash value, such fair cash value to be fixed and determined by the undersigned J. B. Burdett and W. G. MeCune.
    The cash received by the petitioner for its shares of stock was $18,250, which was duly recorded on its cash book. The remaining assets acquired were set up under a single item “ Sundries,” in the “ Plant Account ” carried on its general ledger.
    The petitioner’s capital stock was placed at $500,000, for the reason that the incorporators thought that was a fair price for the assets to be transferred to the corporation in exchange for its capital
      stock. The incorporators agreed among themselves as to how the stock should be split up among the several owners of the assets to be transferred to the petitioner, and the stock which was issued to Burdett and Rowntree in the first instance was turned back to the corporation by them and certificates of stock were issued in accordance with such agreement. The several assets acquired and carried on the books under the title of “ Sundries ” in the plant account were not segregated until some time in 1917. The segregation then made was as follows:
    Apr. 22, 1910 — Por casia, organizers- $500. 00
    Apr. 22,1910 — For cash, per agreement_ 17, 750.00
    Apr. 22, 1910 — For services under contract, (stock Reid in trust by-taxpayer corporation)- 3,500.00

      In Plant Account.

    Apr. 22,1910 — For patents ol Burdett-Rowntree Mfg. Co_ 240, 000.00
    Apr. 22,1910 — For entire capital stock of Pay-Within Car Co- 160, 750.00
    Apr. 22,1910 — For capital stock of Chicago Welding Co_ 25, 000.00
    Apr. 22, 1910 — For air brake patents_ 12, 750.00
    Mar. 31, 1911 For foreign patents_ 30, 250. 00
    Mar. 31, 1911 For two Pay-Within patents_ 3, 500.00
    Prior to January 1, 1917, the petitioner did no manufacturing of its own; its income consisted of royalties, dividends and profits from subcontracting. On or after January 1, 1917, the corporation purchased machinery, tools and other equipment incidental to the manufacture of street car supplies and started operating as a manufacturing concern, along which lines it has directed its attention up to the present time.
    In its tax returns for 1918 and 1919, the petitioner claimed as the actual value of the assets listed above, subject to the statutory limitations applicable, the amounts set out in the first column of the following tabulation. The amounts allowed by the Commissioner for such assets in his determination of deficiencies for those tax years are shown by the second column.

    (a) Actual cash value of -patents of Burdett-Rowntree Manufacturing Go. — The Burdett-Rowntree Manufacturing Co. was incor-poratccl April 11, 1894. It acquired certain patents on opening and closing door devices for street cars, and in 1905 secured a contract from the Metropolitan West Side Elevated Railroad Co. in Chicago to equip certain of its cars with such devices. It secured contracts of a similar nature during succeeding years and in 1909 and 1910 was doing a large business along this line. In 1910 it had three distinct businesses; one was manufacturing various street car specialties of which the principal one was a pneumatic door-closing device for street cars; the second was the manufacture of pneumatic air closing devices for elevators or elevator doors; the third was the manufacture of electric dumb-waiters or package elevators. It had patents protecting its business in each line.
    The Burdett-Rowntree Manufacturing Co. had a capital stock of $75,000 during the period 1905 to 1911, inclusive. The patents owned by it were not listed as an asset. Its tangible assets at the beginning of each year, its book income for such year, and the dividends paid during such year are shown by the following tabulation:

    The following is a summary of gross contracts taken each year and the resulting profits therefrom, regardless of the year in which the contract was completed:

      In the business of the Burdett-Rowntree Manufacturing Co., the corporation did the work of manufacturing as well as the work of installing. None of its contracts or tangible assets or patents relating to dumb-waiters were transferred to the petitioner. The value of the Burdett-Rowntree Manufacturing Co. patents acquired by the petitioner in exchange for its shares of stock was based largely upon the earnings attributable thereto.
    The contracts taken by the Burdett-Rowntree Manufacturing Co. under its patents were based on a definite contract price and a predetermined estimate of cost. The cost of each contract was determined in advance from the nature and size of the contract and the known cost of material and shop labor, with a further percentage to cover all overhead charges, which percentage was based on the previous experience of the company. Upon the basis of such computation, the incorporators reached the conclusion that the Bur-dett-Rowntree Manufacturing Co. patents to be transferred to the petitioner had a value of $240,000. The books of account of the Burdett-Rowntree Manufacturing Co. show the sale of those patents at a price of $240,000.
    The average remaining life of these patents at the time of their acquisition by the petitioner was 15 years. The Commissioner made his determination of a value of $162,610.88 for the patents upon the following: Earnings of the predecessor owner for the five-year period preceding the date of organization of the petitioner in excess of a fair return on the tangible assets was $37,356.11; he determined that 58 per cent of the earnings of the predecessor owner was attributable to the patents acquired by the petitioner. The value of the patents acquired was determined by taking the present worth of an annuity of $21,666.54 for 15 years discounted at the rate of 10 per cent, with provision for a 4 per cent sinking fund. By the use of Hoskold’s tables, it was determined that such an annuity had a present worth of $162,610.88, and that figure was accepted as the value of the patents.
    (b) Capital stoch of The Pay-Within Gar Co. — While the Bur-dett-Rowntree Manufacturing Co. was manufacturing its door devices for cars where the passenger entered at the end of the car, a “ Pay-as-you-enter ” car came into use, where fares were collected as the passenger passed by the conductor. Harold Rowntree thought he could make an improvement on that car and he, with a man named Lincoln, in Philadelphia, got out a patent on what they called the “ Pay-Within ” car. This car had doors on the side and these doors were operated by a mechanism which it was contemplated would be made by the Burdett-Rowntree Manufacturing Co. The Pay-Within Car Co. was organized in 1908 and its business increased very rapidly. In 1910 it had an authorized capital stock of $100,000, only $92,500 of which was outstanding. For this capital the owners received $166,150 of the capital stock of the petitioner corporation. The Commissioner has allowed an actual cash value for this stock at the time acquired by the petitioner of $112,980.63. The basis for this determination is that, since 2,400 shares of stock were issued for the patents of the Burdett-Rowntree Manufacturing Co., which patents had a value determined to be $162,610.88, the value of each share was $67.7545; that this value, multiplied by 1,667½ shares issued to the owners of the capital stock of The Pay-Within Car Co., gives a value for the stock of $112,980.63.
    At the time acquired by the petitioner, The Pay-Within Car Co. had but one asset, namely, patents. The previous stockholders were permitted to withdraw all cash, accounts and bills receivable, and contracts for furnishing or installing machinery or devices, as the same existed on February 1, 1910. They also assumed all indebtedness of the company existing on February 1, 1910.
    The accounts of The Pay-Within Car Co. from November 1, 1908, to February 1,1910, show the contracts acquired and completed with the profit derived therefrom, but do not include contracts acquired under the patents and in process of completion which were uncompleted on February 1, 1910. Such net income on work completed alone and tangible assets at the beginning of each year were as follows:

    The dividend record of the company shows as follows:
    September 20, 1909_$4,518. 05
    October 18, 1909_ 5,240.99
    December 31, 1909- 2, 620.49
    January 31, 1910- 2,620.49
    Total_ 15,000.02
    Liquidating dividend Deb. 1, 1910 (balance of surplus)_ 20, 608.14
    35,608.16

      (c) Capital stock of Chicago Welding Co. — The Chicago Welding Co. had been recently started for acetylene welding and cutting, and it was believed that it might be a good thing in the street car business in the repair of castings and in making sheet iron specialties and things of that kind. Some of the stockholders of that company insisted upon receiving cash for their shares. This was the occasion for the provision that the petitioner should issue $25,000 par value of its capital stock for 633 shares of the capital stock of the Chicago Welding Co. and pay $4,000 cash for the balance of the shares. The Commissioner’s determination of a value of $16,938.63 for the 633 shares of stock acquired is the same as that referred to as the basis for the determination of the value of the capital stock of The Pay-Within Car Co.
    (d) Air-brake patents. — Rowntree owned four air-brake appliances upon which patents had been issued or for which applications were pending. The petitioner issued to Rowntree $50,000 par value of its capital stock for these patents. He donated all but $12,500 of this stock back to the corporation. These patents had never been used by Rowntree nor were they used by the petitioner after they had been acquired by it, but the incorporators believed that they had a trading value, inasmuch as the Burdett-Rowntree Manufacturing Co. sold some of its products to manufacturers of air brakes, and the ownership of these patents might be instrumental in retaining such business.
    (e) Rowntree patents — foreign.—The petitioner issued $30,250 par value of its capital stock, donated to it by Rowntree, for foreign patents of Rowntree. The patents were never used by Rowntree and were never used by the petitioner. The Commissioner allowed no invested capital in respect of them.
    (f) Pay-Within car patents. — The petitioner acquired two patents relating to the manufacture of Pay-Within cars, through Bur-dett and Rowntree. These patents were included in the sundries shown in petitioner’s plant account and were set up in the segregation of the plant account at $3,500. The Commissioner found no value for the patents in his computation of invested capital.
    (g) Services under contract. — The agreement made by Burdett and Rowntree with petitioner corporation on April 9, 1910, provided that petitioner corporation should enter into an agreement for the employment of one Hugh L. Adams, of Chicago, and that it should issue to him, in addition to the payment of a regular salary, certain shares of stock. To enable the petitioner to carry out the agreement, Burdett and Rowntree obligated themselves to turn over to the corporation the shares of capital stock necessary to pay Adams. Adams was employed under a contract for a term of 3½ years, with a provision that he should receive, as a bonus for each year of employment, ten shares of capital stock. He resigned from his position before the termination of the contract and only thirty shares of the stock were issued to him.

      2.Valuation of the capital stock of the Prepayment Gar Sales Oo. as of 1911, the date acquired, in exchange for their assets. — On March 1, 1911, the petitioner exchanged 60.03 per cent of the patents acquired from the Burdett-Rowntree Manufacturing Co., and the patents (the only assets) of The Pay-Within Car Co., for 4,000 shares of the capital stock of the Prepayment Car Sales Co. Thereafter, The Pay-Within Car Co., although continuing its corporate existence, had no assets or income and transacted no business whatever. The entire capital stock of this company was $1,000,000, divided into 10,000 shares. The Commissioner determined that the cost to the petitioner of these 4,000 shares of stock was the value at date of acquisition by it of the assets turned over to the Prepayment Car Sales Co. for the shares, since the petitioner had shown no increase in value of such assets from the date acquired to March 1,1911. The Commissioner used as the value of the capital stock of The Pay-Within Car Co. $112,980.63 (computed in the manner outlined above), and computed the cost and value of 60.03 per cent interest in the patents acquired from the Burdett-Rowntree Manufacturing Co. at 60.03 per cent of $162,610.88, the amount fixed by him as the value of the patents acquired from the Burdett-Rowntree Manufacturing Co. The Commissioner used as the March 1,1913, value the cost at March 1, 1911. The cost of the stock at March 1, 1911, and the value at March 1, 1913, was computed as follows:
    Value of capital stock of The Pay-Within Oar Oo_$112,980. 63
    Patents acquired from Burdett-Rowntree Hfg. Oo., given as part consideration (60.03%X$162,610.88)_ 07,615.31
    Value of stock of Prepayment Car Sales Oo., at March 1, 1911, and March 1, 1913- 210,595.94
    3. Valuation of patents as of March 1,1913, for depreciation purposes. — The values of the patents at March 1, 1913, for purposes of determining depreciation deductible during the taxable years, were the values at the date of acquisition, less the exhaustion occasioned by the lapse of time from the date acquired to March 1, 1913. The patents had an average life of 15 years from February 1, 1910.
    4. The profit realized, if any, in 1911, on the sale of certain assets to the Prepayment Oar Sales Go. for stock of that company. — The cost of the 4,000 shares of stock of the Prepayment Car Sales Co. was the sum of (a) The value of the capital stock of The Pay-Within Car Co. at the date acquired by the taxpayer, plus (b) 60.03 per cent of the value of the patents of the Burdett-Rowntree Manufacturing Co. when acquired by the petitioner in February, 1910, less the proportionate exhaustion of the patents of the Burdett-Rowntree Manufacturing Co. from February 1, 1910, to March 1, 1911, on the basis of a fifteen-year life.
    5. Determination of the proper deduction from invested capital on account of inadmissible assets. — The nature of the petitioner’s business is such that certain of its contracts extend over several years. The method employed in keeping its books of account is to charge the incurred costs of its uncompleted contracts to “ Contract Construction Account.” At intervals during the course of completion of contracts, bills are sent to its customers and entries are made charging “Accounts Receivable ” and crediting “ Contracts Private Account.” Upon completion of the contract the “Contracts Construction Account ” and “ Contracts Private Account ” are closed out and the difference credited to surplus. In preparing its balance sheets for the taxable years 1917 to 1920, inclusive, the petitioner showed as a liability the difference between the costs of the contracts and the amounts billed. The amounts billed and the incurred costs, as shown by the “Accounts Receivable ” and “ Contracts Private Account ” at December 31 of each of the years 1917 to 1920, inclusive, were as follows:

    The excess of the amounts billed over the amounts of the incurred costs at the close of each of the years 1917 to 1920, inclusive, is shown on the petitioner’s balance sheets at the close of each year as a liability, with the descriptive title “ Contracts in Process.” Thus, the amount at December 31, 1920, is shown by the petitioner’s balance sheet to have been $108,448.28.
    6. Loss sustained on the sede of Prepayment Gar Sales Go. stock in 1918. — In 1918 the petitioner sold its 4,000 shares of stock in the Prepayment Car Sales Co. for $5,000. The Commissioner determined that the petitioner sustained a loss of $210,595.94 on the sale.
   OPINION.

Smith:

The principal point involved in this appeal is the value of assets acquired by the petitioner in exchange for its capital stock. No question of affiliation of the petitioner with the Burdett-Rowntree Manufacturing Co. is involved. The petitioner apparently never claimed affiliation with that company and no evidence as to the stock ownership of that company or of the petitioner is before us. Since the questions are numerous they will be considered in the same order in which they are stated in the preliminary statement and in the findings of fact.

1. Valuation of assets acquired at date of organization. — (a) Actual cash value of 'patents of Burdett-Rowntree Manufacturing Co. — The Burdett-Rowntree Manufacturing Co. had been in existence since 1894 and was doing a large and profitable business in 1910. Although it was engaged in three lines of business, the largest and most profitable line was that connected with street car work. This work was secured by reason of the ownership of numerous patents. These patents, together with certain other patents and applications for patents, relating to elevator doors, etc., were transferred to the petitioner and eventually the petitioner issued for such assets $240,000 capital stock. Under the agreement of transfer the Burdett-Rowntree Manufacturing Co. was to continue to manufacture under its patents. The provisions of the contract were not introduced in evidence. The books of account of the Burdett-Rowntree Manufacturing Co. showed the sale of these assets for $240,000. The Commissioner determined that the actual cash value of these assets was $162,610.88. The basis of this determination is a capitalization of the earnings of the Burdett-Rowntree Manufacturing Co. attributable to the patents during a five-year period immediately preceding the date of transfer.

The findings of fact show a very large increase in volume of business of the company during the three years preceding 1910. Many of the contracts begun in 1908 and 1909 had not been completed at the date of transfer of the assets to the petitioner, and very large profits were realized by the Burdett-Rowntree Manufacturing Co. from the completion of such contracts. The Commissioner did not take into account these profits in determining the earnings attributable to the patents during the five-year period prior to February 1, 1910.

The petitioner contends that if the value of its patents is to be predicated upon its earnings, the earnings realized during the years 1910, 1911 and 1912, from the contracts in hand but uncompleted at the date of transfer, should be taken into consideration.

We are of the opinion that the contention of the petitioner upon this point is Avell founded. The contracts from which the Burdett-Rowntree Manufacturing Co. had a large income in 1910, 1911 and 1912 were attributable to the patents owned by it prior to February 1, 1910, and assigned to the petitioner in 1910.

No hard and fast rule can be laid down for determining the value of patents paid in for capital stock of a corporation. Appeal of Gamon Meter Co., 1 B. T. A. 1124. The value is a question of fact in any case. Appeal of J. J. Gray, Jr., 2 B. T. A. 672. See also Appeals of Saenger Amusement Co., 1 B. T. A. 96; Dwight & Lloyd Sintering Co., 1 B. T. A. 179; William H. Jackson Co., 2 B. T. A. 411.

In the instant case, the interested parties determined that the value of the assets to be transferred to the petitioner by the Burdett-Rowntree Manufacturing Co. was $240,000. We think that that determination is entitled to serious consideration. We are satisfied that the assets had a greater value than was placed upon them by the Commissioner, and from a consideration of the entire record we are of the opinion that $240,000 was not in excess of the cash value.

(b) Capital stock of The Pay-Within Oajr Go. — For the entire capital stock of The Pay-Within Car Co., the petitioner issued $166,750 of its capital stock. It claims that that was its actual cash value. It is true that The Pay-Within Car Co. had been in existence for only a short period, but its earnings during that period had been very large. There was a prospect that the business would continue to increase in the manner shown by the record of its earnings from November 1, 1908, to February 1, 1910. If those earnings should continue, the patents from which they arose had a very large cash value. We are of the opinion that the actual cash value was at least $166,750.

(c) Capital stock of the Ghicago Welding Go. — The petitioner claims that the actual cash value of 633 shares acquired by it was $25,000, the par value of the shares of stock of the petitioner corporation issued therefor. It appears, however, that the petitioner was to acquire the remaining 367 shares for $4,000 cash. The Commissioner determined the actual cash value of the 633 shares to be $16,938.63. The evidence of record does not warrant a cash value in excess of $16,938.63.

(d) Air-brake patents. — The Commissioner determined the actual £ash value of the air-brake patents to have been $8,469.31. In our opinion the evidence does not warrant a greater cash value.

(e) Burdett-Bowntree patents — Foreign.—Although these patents were placed upon the petitioner’s books of account at a value of $30,250, the evidence shows that the patents were never used by the Burdett-Rowntree Manufacturing Co. and were never used by the petitioner. No evidence has been adduced which would warrant a finding that the patents had a cash value.

(f) Pay-Within car patents. — There is no evidence of record that would warrant any finding of fact that these patents had an actual cash value at the date of acquisition. In the absence of evidence the Commissioner’s determination of no value must be approved.

(g) Services under contract. — The evidence shows that $3,000 par value of capital stock of petitioner was issued to Hugh L. Adams as compensation for services. All of his services were performed prior to the tax years under consideration. The services were worth the par value of the capital stock issued therefor and the Board is of the opinion that the petitioner is entitled to invested capital in the amount of $3,000 in respect of such services paid for by capital stock.

2. Valuation of the capital stock of the Prepayment Gar Pales Go. as of 1911, the date acquired in exchange for their assets. — At the hearing of this case it was stipulated as follows:

On Marca 1, 1911, the taxpayer acquired 4,000 shares of the capital stools: of the Prepayment Car Sales Company, par value $100 per share. The consideration given for this stock was the patents of The Pay-Within Car Company and 60.03 per cent of the patents acquired by the taxpayer from the Burdett-Rowntree Manufacturing Company in February, 1910.
It is further stipulated that the Board may find that the cost of the 4,000 shares of stock of the Prepayment Car gales Company was the sum of (a) the value fixed by the Board as the value of the capital stock of The Pay-Within Car Company at the date acquired by the taxpayer, plus (b) 60.03 per cent of the value fixed by the Board as the value of the patents of the Burdett-Rowntree Manufacturing Company when acquired by the taxpayer in February, 1910, less the proportionate exhaustion on the patents of the Burdett-Rowntree Maufacturing Company to March 1, 1911, on the basis of a fifteen-year life.
It is further stipulated that the value so fixed shall be accepted both as the cost and the March 1. 1913, value of the said 4,000 shares of capital stock of the Prepayment Car Bales Company.

In accordance with the stipulation, it is found that 60.03 per cent of the value of the patents acquired from the Burdett-Rowntree Manufacturing Co. was $144,072; that the exhaustion of the interest in the patents to March 1, 1911, amounted to $10,405.20, and that the cost and the March 1, 1913, value of the 4,000 shares of capital stock of the Prepayment Car Sales Co. was $300,416.80.

3. Valuation of patents as of March 1,1913, for depreciation purposes. — It was stipulated by and between counsel for the petitioner and co'unsel for the Commissioner that the values of the patents that were determined by the Board might be accepted as the March 1, 1913, values, less the exhaustion occasioned by the lapse of time from the date acquired to March 1, 1913.

4. The profit, if any, realized in 1911 on the sale of certain assets to the Prepayment Oar Sales Go. for stock of that company. — It was originally the contention of the petitioner that it realized a profit in 1911 upon the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. This contention was withdrawn at the hearing and is covered by the stipulation referred to above under “Valuation of the capital stock of the Prepayment Car Sales Co. as of 1911 * *

5. Determination of the proper deduction from invested capital on account of inadmissible assets. — Section 326 (c) of the Revenue Act of 1918 provides:

There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year.

In making up its balance sheets the petitioner showed as a liability the difference between the amount billed on uncompleted contracts and the incurred costs on such contracts. It is the contention of the petitioner that this was in error, and that in place thereof the petitioner should have shown as an asset the entire amount billed on uncompleted contracts, and, as a liability, the incurred costs.

With respect to this contention it should be noted that the entire amounts billed on uncompleted contracts appear in the balance sheets as assets either as “ accounts receivable ” or as “ cash ” or some other asset. The petitioner seeks to pad its balance sheet by adding to the asset side a certain amount representing the incurred costs, and to add a like amount to the liability side. It is the contention of the Commissioner that, if such an addition is made, the petitioner is in fact duplicating its admissible assets and that under the statute there is no provision for such deduction.

In our opinion the contention of the Commissioner upon this point is entirely correct. The original balance sheets were properly made out. Every asset of the company was listed on the asset side of the balance sheet. We see no warrant of law for increasing those assets in any particular.

6. Loss sustained on the sale of Prepayment Car Sales Co. stock in 1918. — As a result of litigation in 1915, the patents owned by the Prepayment Car Sales Co. were adjudged invalid. The market price of the stock of the company declined very rapidly. In 1918 the petitioner sold its 4,000 shares of the stock of that company, which had a cost and a fair market value on March 1, 1913, of $300,416.80, for $5,000. The Commissioner allowed the petitioner the deduction of a loss of $210,595.94. It is the contention of the petitioner that the loss sustained was $433,807.49.

We have found that the cost and the March 1, 1913, value of the stock was $300,416.80. The loss sustained upon the sale in 1918 was, therefore, that amount less $5,000, or $295,616.80.

7. Whether the petitioner is entitled to a determination of its profits taxes for the year 1918 under the provisions of section 328 of the Revenue Act of 1918. — The petitioner advanced no arguments in favor of its claim that its tax for the year 1918 should be determined under the provisions of section 328. We are of the opinion, in view of the findings made herein, that there are no features of abnormality of income or invested capital which warrant such consideration.

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


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    C. J. W. Ottolander, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4494.
    Decided November 26, 1926.
    Petitioner was employed by a partnership at a salary of $200 per month and a cash bonus of one-sixth of the cash profits. He was not a member of the partnership, and had no capital investment therein. Eelct, that he is not chargeable with any income accrued to the partnership other than his salary of $200 per month, and one-sixth of the partnership’s cash income.

      G. J. W. Ottolander pro se.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner asserts a deficiency in income tax for the year 1920 in the amount of $184.25. The only issue is whether the petitioner was a partner in a certain partnership during the taxable year.
    FINDINGS OF FACT.
    The petitioner was employed by the F and F Nurseries, a partnership, with its main offices at Springfield, N. J., during the taxable year. His contract for compensation provided for a stated salary of $200 per month and a cash bonus of one-sixth of the cash profits. He had no capital investment in the F and F Nurseries. In his income-tax return for 1920, under Schedule B — Income from Salaries, Wages, Commissions, Bormses, Director’s Fees, and Pensions, the petitioner listed two items of income, viz, F F and G Nurseries, Springfield, N. J., $2,400 on the first line and, on the line below, share of profits, $5,798.48. He listed no income under Schedule G— Income from Partnerships, Personal Service Corporations and Fiduciaries.

    Upon audit of the accounts and income-tax returns of the F and F Nurseries for the year 1920, the Commissioner increased the income of such partnership in an amount in excess of $10,000, held that the petitioner’s share of such increase was $1,674.96, and determined the deficiency here in controversy.
   OPINION.

Lansdon:

The contract of employment between the petitioner and the F and F Nurseries was oral and was to the effect that the petitioner should receive for his services as office and sales manager a stated salary of $200 a month and, in addition thereto, a bonus or extra compensation equal to one-sixth of the cash profits of the employer.

We are convinced that the petitioner was not a member of the partnership operating the F and F Nurseries and was not entitled to receive any part of the distributive net earnings of such partnership. The petitioner testified that neither in the taxable year nor at any subsequent time did he receive any payment on account of the additional profits which the Commissioner has determined were earned by the partnership in 1920. From this evidence, which was not rebutted in any way, we conclude that the additional income upon which this deficiency is based was neither received nor accrued by the petitioner in the taxable year.

Judgment will be entered for the petitioner.

Giseen and Sternhagen not participating.


author: Arundell:

text:
    Appeal of Yost Furniture Co.
    Docket No. 1567.
    Decided November 26, 1926.
    In a case where the Commissioner has declined to accept amended returns of a taxpayer seeking to return his income on the installment basis, the Board can not disturb the Commissioner’s determination where the taxpayer has produced no evidence as to the amount of income for the year in question, the proportion of the installment payments actually received, the total profit realized when the payment is completed, and the total contract price.

      E. H. Whiteombe, Esq., for the petitioner.

      A. E. Fast, Esq., for the Commissioner.
    The Commissioner has determined a deficiency in income and profits taxes for the calendar year 1920 in the amount of $736.87. The petitioner alleges that the Commissioner erred in refusing to accept amended returns for the calendar year 1920 on the installment basis.
    BINDINGS OF FACT.
    Petitioner was incorporated under the laws of Missouri with its principal place of business at Kansas City. During the taxable year in question it was engaged in the business of selling at retail furniture and household equipment. The greater percentage of the business in 1920 was conducted on the installment basis. The books of petitioner were kept on the accrual basis and during 1920 and prior years it made its income-tax returns on that basis. It adjusted its accounts for the year 1920 so as to place them on an installment basis rather than on the accrual basis, and thereafter filed with the Commissioner an amended return for the year 1920. The Commissioner declined to permit the filing of this amended return and found a deficiency in the sum of $736.87.
   OPINION.

Arundell:

The petitioner reported its income for the calendar year 1920 on the accrual basis, which was in accordance with the manner in which its books were kept. Upon being advised that the Commissioner permitted returns on the installment basis, the petitioner employed accountants to adjust its books to that basis and thereafter filed an amended return for the year 1920, which return purported to set forth its income in accordance with the plan laid down by article 42 of Regulations 45. The Commissioner refused to accept the amended return.

The petitioner has fallen short of establishing facts upon which the Board may determine what, if any, deficiency is due. No evidence was introduced as to the income for the year 1920, the proportion of the installment payments actually received, the total profit realized when the payment is completed, or the total contract price. The books were not presented and only copies of certain data were offered in evidence. On objection by counsel for the Commissioner, they were rejected. The original and amended returns were received in evidence over the objection of Commissioner’s counsel, but we can not accept the statements therein contained as establishing their correctness. So far as the returns are concerned, we can only find that such returns were in fact filed.

The petitioner has failed to prove its case, though it may be assumed that it had available in the city where the hearing was held the required records by which it could have given the Board the needed information. The burden is on the taxpayer to establish its case and, having failed to do so, no course is open to us but to affirm the Commissioner.

Petitioner also asks that it be given the benefit of the relief provisions of sections 327 and 328 of the Revenue Act of 1918. In support thereof one witness testified that a large amount of borrowed money was used in the conduct of the business. No evidence as to the amount borrowed, the nature of the borrowings, or other relevant information was offered. Such a general statement, standing alone, is wholly insufficient to establish the right of petitioner to assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918.

Judgment will be entered for the Commissioner.


author: Trammell:

text:
    Roden Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7915.
    Decided November 27, 1926.
    Houses erected or acquired by a coal mining company for its employees, under tbe facts of this case, are facilities erected or acquired for the production of articles contributing to the prosecution of the war, and as such are subject to the amortization deduction.

      William, jS. Pritchard, Esq., for the petitioner.

      J. Arthur Adartns, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1918 in the amount of $30,773.83.
    The petitioner admits a deficiency of $5,000, leaving the amount in controversy $25,773.33. The questions involved are:
    (1) The amount of amortization deduction, if any, allowable in 1918.
    (2) Whether the petitioner is entitled to deduct the cost of certain items of equipment and plant during the taxable year, or whether such items are properly chargeable to capital account.
    (3) Whether the petitioner is entitled to a deduction on account of the exhaustion, wear and tear of assets used in its business in an amount greater than that allowed by the Commissioner.
    FINDINGS OP PACT.
    The petitioner is a corporation, which was organized under the laws of Alabama in 1907, having its principal place of business at Marvel. It was organized for the purpose of mining coal. Marvel is in a remote, rugged section of the Alabama coal fields, about forty miles south of Birmingham. There is no town or village within a radius of approximately ten miles, except certain camps of competitive mining companies. It was necessary for carpenters and laborers who were employed at the beginning of the mining operations to live in tents until houses could be erected.
    The first coal was shipped from the mines during the fall of 1908. The following is a statement showing the production of the mine in tons for each of the years from 1908 through 1924:

      The maximum production was reached in 1913.
    In 1907 the petitioner’s original plan provided for 100 tenant dwelling houses of the customary three and four-room type. Seventy of these houses were built and occupied by the petitioner’s employees in 1908. The remaining 30 of the first 1Ó0 houses originally planned were completed and occupied during the latter part of 1909 and. the first part of 1910. This group of 100 houses is designated as group 1.
    Another group of houses, 97 in number, was built and occupied during the early part of 1913. The third group of houses, 60 in number, was purchased by the petitioner corporation during 1913 from the Alabama Fuel & Iron Co. for the sum of $10,000 in cash.
    During the first part of 1918 large quantities of coal were ordered by the United States Government, through the United States Fuel Administration, to be furnished to the Southern Railway Co. and the Louisville & Nashville Railroad System. Also during that time further orders were placed with the petitioner, through the War Department, for coal to be furnished to the United States military cantonments and camps at Camp McClellan, Ala., Montgomery, Ala., Hattiesburg, Miss., the United States Naval Air Station at Pensacola, Fla., and other places, for the use of the Government.
    From January 1, 1918, until the signing of the Armistice on November 11, 1918, from 75 to 85 per cent of the petitioner’s entire output was furnished, either to the United States or to railroad and steamship companies, under orders of the United States Fuel Administration, or to corporations or individuals, in accordance with orders and directions from the United States Fuel Administration. This coal was sold by the ton and no coal was furnished to the Government or to any other purchaser on a cost-plus basis.
    During 1918 most of the unmarried employees of the petitioner were called into military service. In order to produce the coal and furnish it to fill the orders and carry out directions of the United States Fuel Administration, it was necessary for the petitioner to employ married men. Buildings which had been erected by the petitioner as bachelor apartments became vacant. Married men refused to work for the petitioner in this remote section unless it would furnish tenant dwelling houses for their families. In order to meet the exigencies of the situation, the petitioner erected, between June 1 and November 11, 1918, 52 buildings of the four and six-room tenant dwelling house type, suitable to be occupied by families. The petitioner planned to erect 60 of such houses. On November 11,1918, 52 of that number had been completed. Of those completed only 32 were occupied on November 11, 1918. The remaining 20 had not been occupied.

      Upon the signing of the Armistice the United States canceled all contracts which it had placed with the petitioner for fuel. Immediately upon notice of such cancellation the petitioner stopped construction of the houses which had not been completed. Of the 20 houses which were never occupied, 19 were four-room houses which had cost the petitioner $896.43 each. One was a six-room house which had cost $1,200. The total cost to the petitioner of the said 20 houses which were never occupied was $18,232.11. This does not take into consideration any cost of the land upon which the houses were situated.
    All of the said 20 houses which were never occupied were discarded and abandoned and have remained vacant at all times. They have, for all practical purposes, become demolished because of the fact that they were never occupied and received no care or attention whatever. The residual value of the houses is $50 each, or $1,000 for the 20 houses.
    The total cost to the petitioner of the 52 houses which were built during 1918 was $44,400. Thirty-two of the 52 houses were occupied, although other houses which the petitioner had built became vacant because there was no need for such increased number over the ordinary post-war use of the petitioner. These 32 houses had cost the petitioner $26,161.83. Their estimated cost of reproduction under post-war conditions was $24,838.80. Approximately 100 houses of the petitioner have remained vacant since 1919.
    During 1918 the petitioner acquired items of equipment and parts in accordance with the following statement:
    Pipe Mine No. 3_$3,134.78
    Waterworks- 1, 016.49
    Steel sharpener and scale_ 660.90
    Pumping plant- 1, 522. 00
    Mine cars_ 3,110. 00
    Rails and fasteners_ 2,400. 00
    Repairs, mine pumping plant_ 878.16
    Repairs, hoisting and haulage_ -1,466. 98
    Repairs, electric air drills_ 1, 847.28
    Repairs, Mine Entry No. 3_ 1,730. 65
    Total_ 17, 767. 24

      Pipe Mine No. 3, $3,134-78. — This item represents 6-inch pipe purchased by petitioner to be placed in its mine entry No. 3 to take the place of 4-inch pipe formerly in use. This pipe was used for the purpose of pumping w.ater from the bottom of the mine to the surface for the purpose of keeping the mine dry. Mine entry No. 3 had reached its maximum production while the 4-inch pipe was in use and prior to the purchase of the 6-inch pipe. The 6-inch pipe was made necessary by the increased depth of petitioner’s workings and consequent increased volume of water. The 6-inch pipe did not increase the output of the mine, but was placed there for the purpose of maintaining the normal production.

      "Waterworks, $1,016.49. — This item represents pipe purchased for the purpose of conveying water from the petitioner’s waterworks reservoir to the steam boilers at mine entry No. 3. The pipe-line in use was not large enough to supply sufficient water to aiford adequate steam made necessary on account of the fact that the mine had become deeper and longer. The old pipe was 2-inch and the new pipe was 4-inch. The new pipe did not increase, and was not intended to increase, the normal output of the mine. The maximum development of the mine had been reached before the 4-inch pipe was put in.

      /Steel sharpener and scale, $660.90. — This represents a small tool used by the petitioner in its general machine shop for the purpose of sharpening drills. It took the place of a hand sharpener formerly in use for this purpose. The machine is about 9 inches wide and 18 inches long. It is mounted upon a tripod or pedestal which raises the machine a sufficient height from the floor for convenient operation. This item, like the two preceding items, was acquired by the petitioner after the mine had reached its maximum production.

      Pumping plamt, $1,6££. — This item represents a pump used in mine entry No. 1 as pump No. 1. It is a replacement item. The original pump No. 1 was moved down to No. 2 and thereafter used as pump No. 2. Water in this entry is raised to the surface in five successive stages by five successive sets of pumps. The pump lifts the water up to the next pump, and as the mine goes deeper into the earth it is necessary to move them all down and put in new ones from time to time. Purchase of this pump was made necessary on account of the deepening of the mine. The normal production of the mine was not increased by this pump and the maximum production had been reached before it was put in.

      Mine cars, $3,110. — This item does not represent mine cars but represents wheels for small one-ton mine cars. The wheels were required for repairing cars in use. They were to be used as repair parts only as it became necessary to replace wheels on cars from time to time.

      Bails and fasteners, $£,4-00. — This item represents light weight second-hand rails purchased by the petitioner to be used under the ground in its slopes and headings.

      Repairs, mine pumping plant, $878.16. — This item represents an electric motor purchased to drive pump No. 1 in entry No. 1 mentioned above. This electric motor was placed with and affixed to the pump 2,000 feet under ground.

      Repairs, hoisting and haulage, $1,4-66.98. — This item represents a small hoist for handling one one-ton car at a time, used by the petitioner in developing the man-way.

      Repairs, eZect/i-ie air drills, $1,8$38. — This item represents a small portable compressor that took the place of a compressor which had to be scrapped for lack of capacity to drive the petitioner’s drills.

      Repairs, Mine Entry No. 3, $1,730.65. — This item represents fittings used for the purpose of connecting two water-storage reservoirs under the ground.
    All of the above items of equipment and parts had a life in excess of one year. The item under the head of “ Mine cars,” which represented wheels purchased to repair mine cars, represented a supply of wheels which the petitioner kept on hand. All of the items, however, were purchased after the petitioner corporation had reached its maximum development and did not increase the production.
   OPINION.

Trammell:

The facts relating only to two issues are set out in the findings of fact. The petitioner, however, in its petition claimed that it was entitled to a deduction on account of the exhaustion, wear and tear of assets in excess of the deduction allowed by the Commissioner. Considerable testimony was introduced as to what the depreciation on certain assets allowed by the Commissioner was, but there is no evidence of record upon which we could find what is a reasonable deduction to be allowed the petitioner on account of the exhaustion, wear and tear of its assets, and for that reason we are unable to make a finding of fact upon that question. The determination of the Commissioner, therefore, with respect to the amount of depreciation, is approved.

On the question of the amortization deduction claimed by the petitioner, the question arises as to whether the petitioner acquired the buildings in question as facilities for the production of articles contributing to the prosecution of the war.

It is argued that the removal of coal from the ground is not the production of coal and that the petitioner did not produce articles contributing to the prosecution of the war. We believe, however, that the bringing of coal from the ground and making it fit for use by mining operations is the production of an article. While in the ground it is useless. Mining it and thereby making it commercially useful is, in the economic sense, production. This is also the common understanding of the meaning of the word when applied to natural resources.

The question then is whether coal furnished to railroads and others under the orders and directions of the United States Fuel Administration as well as coal fu.mish.ed to manufacturers, may be said to have been an article which contributed to the prosecution of the war. From 75 to 85 per cent of the output of the petitioner’s mine was furnished either to the Government for use in camps and cantonments, or to railroads or others under compulsion of an agency of the United States Government. It seems to us that it can not be questioned that coal furnished to the Government for the use of its Army camps and cantonments was an article which contributed to the prosecution of the war. We think also that coal furnished to railroads and steamship companies clearly contributed to the prosecution of the war. An adequate supply of coal, not only for such purposes but for private manufacturing concerns, was considered so important by the Government that the United States Fuel Administration was created for the purpose of supervising the distribution of coal and to make adequate provision for fuel to be supplied to industries in the United States and to railroads.

The amortization section does not provide that the articles produced must be absolutely necessary or essential to the prosecution of the war, but only that they contribute thereto. Efficient operation of the railroad systems and the carrying on of manufacturing operations, especially by those plants which the Fuel Administrator considered were entitled to receive coal, in our opinion, were instru-mentalities which contributed to the prosecution of the war, and we believe that coal used for the purpose for which the petitioner’s output was used was an article which contributed to the prosecution of the war.

The houses which the petitioner was required to build on account of war conditions, and the fact that it could not otherwise secure laborers or employees in order to produce the coal, are, in every substantial sense of the word, facilities acquired for the production of an article contributing to the prosecution of the war. The petitioner’s mine was located in an isolated community. It had no labor supply upon which it could draw. It was necessary to bring in employees. Unmarried men who had been employed by the petitioner had gone to war and it was necessary to have married men carry on the work. Married men would not accept employment unless adequate housing facilities were provided.

These houses were built by the petitioner during 1918 at a cost of $44,400. Twenty of them were never used or occupied and were abandoned and became useless, except for such residual value as they may have had. The testimony is that the residual value of each house abandoned was $50. The cost of the houses was $896.42 each, except two, which had cost $1,200 each. One of the $1,200 houses was among those abandoned. This makes a total of 19 houses at $896.42 each, and one at $1,200, which were abandoned. The residual value of these 20 houses was $1,000.

The deduction with respect to the houses erected in 1918 and entirely abandoned is the difference between their cost and their residual value.

The other 32 houses erected in 1918 were used and occupied, but by using them the petitioner abandoned an equal number of other houses which it would have used if it had not erected them, and in addition thereto the petitioner had other houses which were not used and were not useful in its post-war business. There was a surplus of at least one house for each one. occupied. The usefulness of these houses in the business would thus be 50 per cent. In our opinion, a reasonable allowance on account of amortization with respect to these 32 houses should be determined by taking these facts into consideration.

With respect to these houses (which we have held to have been useful in the business to the extent of 50 per cent), in view of all the evidence in the case, in our opinion a reasonable allowance on account of amortization is $12,500.

The amortization deduction should be allowed in 1918. Appeal of Walcott Lathe Co. 2 B. T. A. 1231; Appeal of John Polachek, 3 B. T. A. 1051.

On the question of the deductibility as expense of the articles of equipment and parts which were purchased by the petitioner during 1918 which did not increase production and were not acquired for that purpose, we do not consider that the petitioner is entitled to the deduction claimed. The articles were capital items. Appeal of Union Collieries Co., 3 B. T. A. 540; Appeal of Kirk Coal Co., 3 B. T. A. 755.

Judgment will be entered after 15 days’ notice, under Bule 50.


text:
    Spring Valley Water Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3727.

      Decided November 27, 1926.
    Interest paid by a water corporation on borrowed funds used in tbe construction of a dam may not be included in tbe cost of tbe dam in determining tbe amount deductible as a loss upon its destruction.

      F. F. Thomas, Jr., Esq., and Henry D. Gostigam, Esq., for the petitioner.

      A. Gadder Machay, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1918 in the amount of $8,562.28, of which $4,586.94 is in controversy, the balance being admitted by the petitioner to be correct. The question in issue is whether interest paid on funds borrowed for construction of a dam and deducted from income for the years in which paid may, upon destruction of the dam, be included as a part of the cost and deducted as a part of the loss sustained.
    BINDINGS 03? PACT.
    The petitioner during the years 1913 to 1918, both inclusive, was, and now is, a California public utility corporation engaged in the business of supplying water to the City and County of San Francisco and to the inhabitants thereof. It is privately owned.
    As a part of, and for use in, its business the petitioner engaged during the years 1913 to 1918, inclusive, in the construction of a dam on Calaveras Creek, in Alameda County, California.
    During the years 1913, 1914 and 1915, the petitioner had outstanding obligations in the form of interest-bearing notes in the amount of $1,075,000, and other interest-bearing indebtedness, amounting to approximately $359,000. The funds covered by these obligations had been borrowed by the petitioner for general corporate purposes and a part of them was used for the construction of the Calaveras Dam.
    At the end of each month the petitioner computed interest at the current rate then paid on its notes on the amount theretofore expended in the construction of the Calaveras Dam and charged the amounts thus determined to the Calaveras Dam construction account. The interest so computed amounted to $38,224.51 for the years 1913, 1914 and 1915. The interest paid during those years, totaling an amount which includes the item of $38,224.51, was deducted by the petitioner from gross income in the returns filed, as interest paid for the respective years, and allowed as such deductions by the Commissioner.
    On March 24, 1918, a slide occurred at the dam whereby a considerable part of it was destroyed and lost to the petitioner, who was not compensated for the loss. In its income-tax return for. the year 1918 the petitioner deducted from its gross income the sum of $460,000, representing the amount of its alleged loss sustained through the destruction of the dam. The Commissioner, in auditing the return filed, increased the net income reported by the sum of $38,224.51, by disallowing the inclusion of that amount in the claimed loss of $460,000.
   OPINION.

Arundell:

The sole question for decision is whether the petitioner may include as a part of the loss sustained by the destruction of a dam the interest paid on the borrowed funds used in its construction, the interest having been claimed and allowed as deductions from gross income in prior years as interest paid.

The petitioner argues that the item of $38,224.51, representing interest during construction of the dam, is a part of the cost of the dam, and, as the basis for deduction of a loss under section 234(a) (4) of the Revenue Act of 1918 is cost, this item is an allowable deduction. The propriety of including so-called carrying charges (taxes and interest) in capital investment in computing gain or loss is concidered and decided in Westerfield v. Rafferty, 4 Fed. (2d) 590; 5 Am. Fed. Tax Rep. 5342. The taxpayer in that case claimed the right to deduct interest and taxes paid from the sales price of property. The substance of the decision is that these items do not form a part of the cost for the purpose of determining gain or loss, the court saying, in part:

This leads us to consider what these taxes were and what this interest was.
To be sure, they are often called “ carrying charges,” and it goes without question that, in fixing a selling price, most business men include these charges and many other expenditures. * * * Yet taxes and interest, when properly defined, do not really represent anything paid into the capital investment * * *.

The principle announced in that case has been followed by this Board in Appeal of Columbia Theatre Co., 3 B. T. A. 622, 628.

The petitioner says that the Westerfield and Columbia Theatre cases are not in point, as in neither of them was the taxpayer required by law to capitalize interest as was the taxpayer in the present case. The laws of California (Act of Dec. 23, 1911, c. 14, sec. 48, Stats. 1911, Ex. Sess., p. 18; Act of Apr. 23, 1915, c. 91, sec. 48, Stats. 1915, p. 115) empower the Railroad Commission of the State “* * * to establish a system of accounts to be kept by the public utilities subject to its jurisdiction, or to classify said public utilities and to establish a system of accounts for each class, and to prescribe the manner in which such accounts shall be kept. It may also in its discretion prescribe the forms of accounts, records and memoranda to be kept by such public utilities * *

Water corporations, under the California statutes, are included in the classification of public utilities. Pursuant to the authority conferred by the above statute, the Railroad Commission promulgated a “ Uniform Classification of Accounts for Water Corporations,” which became effective January 1, 1913. In this classification it is provided as a subheading under the general head of “ Tangible Capital ” as follows:

0-20. Interest During Construction:
Charge to this account the interest accrued upon all moneys (and credits available upon demand) acquired for use in connection with the construction and equipment of the property from the time of such acquisition until the construction is ready for use.

The reason for the classification of accounts as prescribed by the Railroad Commission is not shown, nor is it any concern of ours to determine the reason, but obviously it was not for the purpose of determining income within the meaning of the Federal Revenue Acts.

It is also contended that good accounting practice requires the inclusion of interest in determining the cost of property. This contention overlooks that portion of the decision in Westerfiéld v. Rafferty, supra, holding that interest does not represent anything paid into the capital investment.

Judgment will he entered for the Commissioner.


author: Phillips:

text:
    Appeal of The Eastern Rolling Mill Co.
    Docket No. 5451.
    Decided November 27, 1926.
    Interest paid upon money used during tbe erection of a building held not to be an item wbicli can be properly capitalized for tbe purpose of computing invested capital.

      0. N. Hutchinson, C. P. A., for the petitioner.

      T. P. Dudley, Jr., Esq., for the Commissioner.
    The petitioner appeals from the determination of deficiencies in income and profits taxes of $788.79 for 1919 and $10,129.31 for 1920.
    FINDINGS OF FACT.
    The petitioner is a Maryland corporation with its principal office and plant located in Baltimore.
    In June, 1919, the petitioner, through its bankers, offered for sale to the public its original issues of preferred and common capital stock. In accordance with the subscription agreement, subscribers for such stock made payments of 25 per cent as of July 1, 1919, 25 per cent as of September 15, 1919, and the remaining 50 per cent as of December 31, 1919. The subscription agreement provided that until final payment was made interest would be paid by the petitioner on the subscriber’s advance installment payments at the rate of 6 per cent per annum. Such interest amounted to $35,330.70 as of December 31, 1919, and payment thereof was made by the petitioner on January 23, 1920. In the deficiency letter from which the appeal is taken the Commissioner concedes that such interest is an allowable deduction from the income for the year 1919, but in computing the amount of the deficiency no deduction was allowed for such interest. Invested capital for 1920 was reduced by such amount, prorated from January 23, 1920.
    The subscription agreement further provided that from the date of final payment, as of which date the stock would be issued, dividends on the preferred capital stock would accrue and be cumulative at the rate of 8 per cent per annum. Such dividend payments have been made by the company as agreed.
    The petitioner was incorporated in June, 1919, and immediately started construction of its plant. The plant was not ready for operation until May 17, 1920, on which date operations began. During the construction period of approximately eleven months, no operations of any kind were carried on. All funds necessary for the erection and equipment of the plant were obtained from the payments upon the capital stock. The payments so received amounted to $2,790,000. The amount of stock issued and the dates on which the advance installment payments were. collected were fixed after consideration of the expected construction requirements. Interest received during the construction period amounted to $28,376.51, which amount was considered by the petitioner as an offset to interest paid, which amounted to $35,330.70 for the period of construction. The difference of $6,954.19 was treated by the petitioner upon its books as a part of the cost to it of its plant. In computing the deficiencies the Commissioner has treated the amount of $28,376.51 as taxable income, and in arriving at the invested capital has refused to include the amount of $6,954.19 as part of the cost of the building and a capital expenditure.
    During the period from July 3 to December 31,1919, the petitioner had certain money on deposit with its bankers on which it received interest at the rate of 4 per cent per annum computed quarterly. As of December 31, 1919, the petitioner’s account was credited by its bankers with interest on deposits amounting to $2,020.16. This amount was not entered upon the petitioner’s books until January, 1920, when it received a statement of such interest. In computing the deficiency the Commissioner included such amount of $2,020.16 as income for 1920. The petitioner’s accounts were kept on an accrual basis.
   opinion.

Phillips:

The principal question for consideration is whether the difference between the interest paid and the interest received by petitioner during the period it was constructing its plant may properly be treated as a capital expenditure for the purpose of computing the petitioner’s surplus for invested capital. That question has been decided adversely to the contention of the petitioner by the Board in Appeal of Columbia Theatre Co., 3 B. T. A. 622; Appeal of Ottawa Park Realty Co., 5 B. T. A. 474; and Spring Valley Water Co. v. Commissioner, 5 B. T. A. 660.

At the hearing it was conceded by the Commissioner that the amount of $2,020.16 of interest credited to the petitioner’s account by its bankers as of December 31, 1919, was properly income for 1919 and was not income for 1920. At the same time it was conceded by the Commissioner that interest of $35,330.70, paid by petitioner upon advance installment payments of the purchase price of its capital stock were properly deductible in computing the income for 1919 and should not have been used to decrease invested capital for 1920, except as it may reduce any earned surplus.

Decision redetermining deficiency will be entered on 15 days’ notice, under Rule 50.


text:
    Charles W. Nass, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2447.
    Decided November 27, 1926.
    Deduction of losses alleged to Rave been sustained from sale of stock in tbe taxable year disallowed in tbe absence of proof of cost of stock sold.

      Zach Lamar Cobb, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $2,277.96. The petitioner contends that the Commissioner erred in disallowing an alleged loss which he sustained in the taxable year upon the sale of certain stock acquired on March 1, 1915. The controversy arises from diverse valuations by the parties of such stock at date of its acquisition by the petitioner.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Los Angeles, Calif. Prior to March 1,1915, he resided at Providence, R. I., and was one of the stockholders and president and treasurer of the Nass Baking Co. On March 1, 1915, he disposed of his stock in such company, and received therefor preferred stock of the Dillman Bakeries, Inc., of the par value of $30,000. Sometime in the year 1919 he sold such preferred stock for $12,000.
    In his income-tax return for the year 1919, the petitioner deducted from his gross income the amount of $18,000 as a loss- sustained during the year resulting from the sale of preferred stock of the Dill-man Bakeries, Inc., of the par value of $30,000. Upon audit of such return the Commissioner disallowed such deduction on the ground that the cost of the stock sold was not established.
    In his answer to the petitioner’s petition the Commissioner avers that the tax in controversy was assessed in September, 1923, and that, on February 16, 1925, he notified the petitioner of the rejection of a claim for abatement of such assessment, which had been theretofore filed, and denies that, since the enactment of the Revenue Act of 1924, he has determined that any assessment should be made in respect of any income tax imposed by the Revenue Act of 1918 against this petitioner for the year 1919. On this contention the Commissioner moves that the appeal be dismissed.
   OPINION.

Lansdon:

In conformity with section 283 of the Revenue Act of 1926, the motion of the Commissioner praying that this appeal be dismissed is denied.

The petitioner contends that he acquired certain stock in 1915 at a cost of $30,000. He sold the same in 1919 for $12,000, and thereby sustained a loss in the amount of $18,000, which, he avers, he is entitled to deduct from his gross income for such year. Since the stock in question was acquired subsequent to March 1, 1913, he must prove its cost at date of acquisition. He has proven simply the par value of the stock at the time of its acquisition. This obviously does not necessarily represent cost, and we are therefore without any basis for the determination of gain or loss upon subsequent sale in the taxable year.

Judgment will he entered for the Commissioner.


text:
    Louis Rothenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6582.
    Decided November 27, 1926.

      Victor Aaron, C. P. A., for the petitioner.

      George G. Witter, Esq., for the respondent.
    The Commissioner has determined deficiencies in income tax for the years 1918 to 1922, inclusive, in the amount of $7,580.71. Only the deficiency asserted for the year 1920 is in controversy. It arises from the addition by the Commissioner to the petitioner’s gross income for 1920 of the amount of $5,000 received for that year in connection with the lease or rental of certain business premises.

      FINDINGS OF FACT.
    The petitioner is an individual residing in San Francisco, Calif. During the year 1920 he received the amount of $5,000 from the lessee of certain business premises owned by himself. This $5,000 was received in conformity with the terms of a lease, the pertinent provisions of which are as follows:
    The said sum of Five Thousand ($5,000.00) Dollars, paid by the Lessee to the Lessors, shall not ho deemed to he any part of the rental provided herem for the said premises, hut is a flat consideration and compensation paid to the Lessors for entering into this lease, but the Lessors hereby agree with the Lessee that if the Lessee well and truly performs all of the terms, covenants and conditions herein provided to be performed by him, then, and in that event, but not otherwise, the Lessee shall pay as rent for the fifty-second to sixtieth months, both inclusive, of the term herein created, the sum of Twenty ($20.00) Dollars on the first,of each and every month beginning on the fifty-second month of said term, and to and including the sixtieth month of said term; otherwise, said Lessee shall pay for said months the sum of Five Hundred and Seventy-five ($575.00) Dollars per month on the first day of each and every month.
    It is further agreed by and between the parties hereto that in the event that the herein demised premises are totally destroyed, as that term is used hereinafter, by fire or the elements, or other cause, without the negligence of the Lessee, before the fifty-second month of the term herein created, then and in that event the said Lessors agree to return to the said Lessee the consideration for this lease, to-wit, the sum of Five thousand ($5,000.00) Dollars;
    That for and in consideration of the sum of Five Thousand ($5,000.00) Dollars, lawful money of the United States of America, in hand paid by the Lessee to the Lessors, the receipt whereof by the Lessors is hereby acknowledged, and in consideration of the rents, covenants and agreements hereinafter mentioned and contained, to be paid, kept and performed by the Lessee, and subject to the payment of said rents and the performance of said covenants and agreements by the Lessee and on condition that said rent shall be paid and that each and all of the said covenants and agreements shall be duly and fully performed by the Lessee as hereinafter provided, the Lessors have leased, demised and let * * *.
    The petitioner reported no part of the $5,000 payment received in 1920 in conformity with the terms of the lease in question in his income-tax return for that year. Upon audit of such return the Commissioner added $5,000 to the petitioner’s income for the year.
   OPINION.

Lansdon:

The amount of $5,000 received on account of the lease of business premises was income to the petitioner for the year 1920. Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Boston American League Baseball Club, 3 B. T. A. 149.

Judgment will be entered after W days' notice, under Rule 50.


author: Marquette:

text:
    Appeal of H. B. Wagoner.
    Docket No. 2466.
    Promulgated November 29, 1926.

      W. IV. Spalding, Esq., for the petitioner.

      A. Oalder Maclcay, Esq., for the Commissioner.
   Marquette:

This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $810.57.

FINDINGS OP PACT.

The petitioner was, during the year 1919, a married man residing with his wife at Livermore, Calif. All the property held by him had been acquired by the joint efforts of himself and his wife subsequent to their marriage. In his income-tax return for the year 1919, he reported only one-half of the income from the marital community for that year, claiming that the other one-half of his income should be reported by his wife in a separate return. The Commissioner denied the petitioner’s claim and taxed the entire income of the community to him.

For many years prior to March 1, 1913, and thereafter until some time in the year 1918, the petitioner was engaged in the wine-making business at Livermore, Calif. The wine was made from grapes, almost all of which came from two vineyards owned by the petitioner, one known as the Livermore Vineyard, and the other as the Manteca Vineyard. The former consisted of 180 acres and the latter of 225 acres. The fair market value of these vineyards, exclusive of the land, was $98,250 on March 1, 1913.

In the year 1918, the petitioner, believing that national prohibition was imminent, sold his winery. Under conditions as they then existed and had theretofore existed, the grapes grown in the petitioner’s vineyards were used solely for the purpose of making wine, and at that time no other use had been discovered to which they could be put. The petitioner, therefore, did not cultivate his vineyards during the year 1919, except to run a disc through the Manteca vineyard to keep down grass and weeds. The result was that the amount of grapes produced in the year 1919 was only about 50 per cent or 60 per cent of the amounts produced in prior years. In the year 1920 a new demand for grapes arose and cultivation of the petitioner’s vineyards was resumed, but full production was not again reached until about the year 1922. However, the price of grapes increased so materially in the year 1920 and subsequent years that the value of the grapes produced by the petitioner’s vineyards in each of the years 1920 and 1921 was greater than in any prior year when production was normal. During the year 1919 there was practically no market for vineyards in the district in which the petitioner’s vineyards were located and only a few sales were made. The value of vineyards at that time had decreased so materially that some vineyards were sold at the value of the bare land.

In the year 1916 the Manteca vineyard produced about 1,000 tons of grapes of the value of $15,000; in 1917, 800 tons of the value of from $12,000 to $15,000; in 1918, 800 tons of the value of about $28,-000; in 1919, 600 tons of the value of $12,000; in 1920, 600 tons of the value of from $20,000 to $25,000, and in 1921, 800 tons of the value of about $35,000. In the year 1922, 1,350 tons of grapes were produced by the Manteca vineyard. The value of these grapes per ton is not shown. The evidence does not disclose the amount or the value of the grapes produced by the Livermore vineyard during the years 1916 to 1921, but does show that conditions as to production and values there were substantially the same as those which obtained in those years in regard to the Manteca vineyards.

The petitioner, in his income-tax' return for the year 1919, deducted the amount of $27,066.07 on account of obsolescence of his vineyards claimed by him to have occurred in that year. The Commissioner disallowed the deduction.

The deficiency for the year 1919 is $810.57. Order will be entered accordingly.


text:
    Appeal of Stimpson Computing Scale Co.
    Docket No. 2722.
    Promulgated November 29, 1926.
    Where a taxpayer had a net loss resulting from operations for nine months from incorporation to the end of 1919, it is not entitled to deduct the net loss from net income of 1920, under section 204(b) of the Revenue Act of 1918.

      Harry Friedman, Esq., and Edward McCarthy, Jr., Esq., for the petitioner.

      l/Villis D. Nance, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1920 amounting to $4,419.08. The single issue raised is whether a taxpayer is entitled to deduct from 1920 net income a net loss due to nine months’ operation in 1919.
    FINDINGS OF FACT.
    The petitioner is a Kentucky corporation with its principal office located in Louisville.

      It was incorporated on March 31, 1919, and for business done thereafter during 1919 it took its inventory and closed its books on December 31, 1919. During the period of operation from March 31, 1919, through December 31, 1919, the petitioner suffered a net loss of $33,949.81, which it sought to deduct from its net income of 1920.
    The net loss deduction so claimed by the petitioner was disallowed by the Commissioner, who determined a deficiency in taxes for the year 1920 in the amount of $4,419.08.
    From that determination the petitioner duly appealed to this Board.
   OPINION.

Marquette:

In Appeal of Butlers Warehouses, Inc., 1 B. T. A. 851, and Appeal of Crowell & Little Construction Co., 3 B. T. A. 829, the Board held that net losses sustained under the circumstances set forth in the findings of fact were not properly deductible from the income of the following year. We find no sufficient reason to change the decisions therein made, and on the authority of those appeals the action of the Commissioner in disallowing such deductions must be sustained.

The deficiency for the year 1920 is $1^19,08. Order will he entered accordingly.


text:
    Rose C. Pickering, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. A. Crothers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Loring Pickering, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5840, 5841, 5908.
    Promulgated November 29, 1926.
    No taxable gain resulted from the exchange for stock of newspaper assets owned by the petitioners.

      Eustace GuTlinam,, Esq., and Marshall P. Madison, Esq., for the petitioners.

      George G. Witter, Esq., for the respondent.
    The Commissioner asserts deficiencies in income taxes for the year 1920 against the estate of Rose C. Pickering, R. A. Crothers, and Loring Pickering, in the respective amounts of $7,999.95, $26,-002.78, $7,999.95, all of which are in controversy. The alleged. deficiencies arise from the Commissioner’s determination that ,a taxable gain was realized upon the transfer of certain tangible newspaper assets by the petitioners to a corporation and the receipt of shares of stock therefor.
    FINDINGS OP PACT.
    Rose C. Pickering, R. A. Crothers, and Loring Pickering were individual citizens of the United States during the taxable year. Rose C. Pickering died subsequent thereto, and this appeal as to her alleged deficiency was taken by the executors of her estate.
    From some time in 1895 until April 8, 1920, the Bulletin, an evening newspaper published in San Francisco, was owned by R. A. Crothers for himself as to an undivided one-half interest, and as trustee for Rose C. Pickering and Loring Pickering, each as to an undivided one-fourth interest. For convenience this newspaper property will be referred to hereinafter as the partnership.
    On April 8,1920, Crothers transferred the Bulletin, effective as of April 1, 1920, to the Bhlletin Publishing Co., a corporation, which for convenience will be hereinafter referred to as the corporation, in exchange for 10,000 shares of stock of the total par value of $1,000,-000 representing all the authorized capital of the said cofporation. All the liabilities of the Bulletin were assumed by the corporation. Crothers retained 5,000 shares of the stock so received as payment for his interest in the Bulletin, and transferred 2,500 shares to each of the other beneficial owners as payment for their respective interests.
    The corporation adopted the books of account of the partnership as its own, except that it changed the investment and surplus account to a corporation stock account showing an issue of 10,000 shares of stock of the total par value of $1,000,000, and made a balancing entry thereon on account of “ Franchises ” in the amount of $367,186.76.
    The tangible property in the nature of plant and equipment, the value of which is in controversy in this proceeding, was carried on the books of the B'ulletin at April 8, 1913, at $272,012.62, which represented the cost of such assets as they had been acquired from time to time over a period of twenty years or more. The Commissioner admits that this figure represents the undepreciated cost of such assets. Against the cost of such tangibles, the Bulletin had accrued a depreciation reserve at April 8, 1920, in the amount of $128,386.63, as to the amount of which there is no dispute.
    On November 15, 1919, the Bulletin made an appraisal of its plant and equipment for insurance and accounting purposes. The appraisal company found that the “new replacement value” of such assets was $367,699.97, and that the “net depreciated value” of the same at that date was $280,062.52. The report of the appraisal company was submitted in evidence by the Commissioner. For accounting purposes the Bulletin accepted the value found by the appraisal company, wrote up the cost of its plant and equipment to $282,446.84, representing the result of the appraisal and the purchase of new equipment at a cost of $2,384.22, and, at the same time, increased its depreciation reserve account in a corresponding amount to $138,820.85.
    Upon the ahdit of the income-tax returns of the petitioners for the year 1920, the Commissioner held that the undepreciated cost of the assets in question was $272,012.62 as of March 1, 1913; that there was no change in such cost account at April 8, 1920;. that the accrued depreciation on the same at April 8, 1920, as shown by the books of the Bulletin, was $128,386.63; and that the net book value or basic cost of such assets at the date of their transfer to the corporation was $143,625.99. In computing the value of the assets transferred to the corporation, the Commissioner accepted the result found by the appraisal company, disallowed any depreciation therefrom as a liability of the corporation and thereby found that assets having a basic value in the amount of $143,625.99 had a fair market value in the amount of $282,446.46 at the date of their transfer to the corporation, and that such transfer resulted in a gain to the petitioners in the amount of $138,820.85. Upon such alleged gain he computed deficiencies as to the returns of each of the petitioners for the year 1920, and issued the notices of such deficiencies that are the bases of these proceedings.
    At March 1, 1913, the Bulletin was in first place in the evening newspaper field in daily circulation and advertising receipts. At April 8, 1920, it was in third or fourth place, and its daily circulation was more than 13,000 less than in 1913. In 1913 the Associated Press franchise owned by the partnership was the only satisfactory agency through which telegraphic news could be secured. In 1920 at least two other press associations had become successful competitors of the Associated Press in the evening newspaper field. The average daily paid circulation of the Bulletin in 1913 was not less than 93,000; in 1920 it was not more than 80,000. The market value per name of the circulation of the Bulletin at March 1, 1913, was not less than $15, and, at April 8, 1920, was not more than $10.
    The stock received by the petitioners in exchange for the tangible and intangible assets of the partnership had no greater value than the fair market value or price of such assets at March 1, 1913.
   OPINION.

Lansdon:

The deficiencies here in question rest solely on the Commissioner’s allegation that in the exchange of certain assets for shares of stock at April 8, 1920, the petitioners realized a taxable gain in the amount of $138,820.85. It is necessary, therefore, to determine 'whether, at the date of the exchange, the stock received had a fair market price or value in excess of the fair market price or value of such assets at March 1, 1913. All the stock was closely held. Ho sales of shares establishing a fair market value or a market for the stock were proved by either party. In the absence of such sales we can determine the fair.market value of the stock only by ascertaining the value of the assets for which it was issued. Walter v. Duffy, 287 Fed. 41; Phillips v. United States, 12 Fed. (2d) 598; Appeal of Wallis Tractor Co., 3 B. T. A. 981.

Although the Commissioner bases his determination on alleged profit resulting from appreciation in market value of certain tangible property owned by the petitioners at March 1, 1913, at the date of the transfer, it is obvious that we can not so restrict our consideration of the issue here involved. We must determine whether the exchange of the assets as a whole, tangible and intangible, for the stock resulted in gain, and, since we must base our decision on the fair market price or value of such assets at March 1, 1913, as compared with the fair market value of the stock measured by the value of the same assets at the date of transfer, it follows that we must ascertain the fair market value at each date of all the assets involved.

The facts relating to the tangible property are not in dispute. The parties agree that the cost of the assets in question was $272,012.62; that such cost is of record on the books of the partnership at March 1, 1913; that as the result of an appraisal and certain additional purchases it was carried on the books of the company at a value of $282,446.46 at the date of the transfer; that the accrued depreciation reserve at April 8, 1920, was $138,820.85; and that the depreciated cost at that date was $143,625.99. The Commissioner asserts that the assets in question had a market value in the amount of $282,446.46 at the date of transfer. Although the burden of proof of a less or different value rests on the petitioners, the Commissioner introduced an appraisal as of November 15, 1919, made by the petitioners for accounting and insurance purposes, in support of his determination. The petitioners introduced a witness who had been employed by them in 1913, and also at a date subsequent to the transaction, who testified that he was thoroughly familiar with the assets, that they were worth less in 1920 than at the basic date, and that, in his judgment, no one in the market for newspaper equipment would have considered their purchase at the book cost as of March 1, 1913. No inventories were introduced. No one made any attempt to fix the market value of the assets at the date of the transfer in dollars and cents. We conclude from the evidence on this point that the tangible assets involved had a value less than the amount of $282,446.46 determined by the Commissioner, but how much less, we are unable to say.

The evidence in support of the petitioners’ contention that the value of the intangible assets declined very materially between the basic date and the transfer in question is much more clear and persuasive. A witness, who" has bought and sold many large newspapers, both before and since 1913, and who qualified as thoroughly competent to give an opinion on the basis for the market value of such properties, testified that the circulation structure of the Bulletin had a fair market value of at least $15 per name at March 1, 1913, and that such value was not more than $10 a name in 1920. He attributed this decline in value to the reduced circulation of the Bulletin and to its decline from first to third or fourth place in circulation and advertising receipts in the evening newspaper field in San Francisco. He also testified that in his opinion, based on the fact that two competing news service associations have successfully invaded the evening news field since the basic date, the Associated Press franchise owned by the partnership at March 1,1913, and, at that date worth $100,000, had declined greatly in value prior to the transfer here involved. The only evidence adduced by the Commissioner was a report of an appraisal of the petitioners’ assets made by an appraisal company as of November 15, 1919, which indicated that assets which had been in use all the way from 7 to 25 years and had cost $272,012.62, then had a fair market value of $282,446.46.

Judgment will be entered after 20 days’ notice, under Rule 50.


text:
    M. H. Mosier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5304.
    Promulgated November 30, 1926.

      Eugene M. Berger, G. P. A., and Eugene A. Ha/whins, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
   Lansdon:

The Commissioner has asserted a deficiency in income tax for the year 1920 in the amount of $18,205.06. The petitioner asserts that the Commissioner erred in disallowing a certain deduction from gross income on account of a loss sustained during the taxable year.

FINDINGS OF FACT.

In May, 1915, the petitioner, who has been an oil producer since 1876, together with J. S. Cosden, F. M. Aiken, M. Y. Y. Franchot, and W. L. Curtis, formed a syndicate and purchased from the Atlantic Petroleum Co. certain oil leases on 27,000 acres of land, located in the Republic of Mexico, at a cost of $44,000. For the purpose of exploring, testing, and developing such leases, the syndicate formed the Oklamex Oil Co., which was chartered in 1916, with an authorized capitalization of $6,000,000. The contract for the purchase of the leases provided that the capital stock of the corporation, to be formed for development and operating purposes, should be issued to the members of the syndicate in the amount of $3,000,000 par value, on account of the $44,000 contributed by them for the purpose of the leases, and in the amount of $1,800,000 par value to the Atlantic Petroleum Co., as additional consideration for such leases, and that the remaining stock, in the amount of $1,200,000, should be disposed of by the members of the syndicate to secure funds for development. The members of the syndicate never offered the retained stock for sale to the public, but absorbed it among themselves at an agreed price of $15 per share, thereby realizing $180,000, all of which was expended in prospecting for oil on the leased lands, together with about $100,000 additional money which was advanced from time to time by members of the syndicate.

The members of the syndicate agreed that they would share the expenses of the corporation and the cost of developing the leases in proportion to their stockholdings in the Oklamex Oil Co. Pursuant to such agreement, Cosden undertook the development work, and, prior to 1920, completed two test wells, both of which were dry holes. The development work and other expenses absorbed the entire amount of $180,000 paid in to the corporation by the syndicate on account of the treasury stock and cost about $100,000 in addition thereto. The cost of such work in excess of receipts on account of sales of stock was paid by the members of the syndicate approximately in proportion to their stockholdings in the Oklamex Oil Co. Such payments were accounted for on the books of the company as assessments.

During the years 1919 and 1920, the petitioner paid in to the company the amount of $15,178.61 as his proportion of the obligation resulting from the agreement of the members of the syndicate to share the expenses of developing the oil leases. In his income-tax return for 1920 he deducted this amount from his gross income, as a bad debt ascertained to be worthless and charged off during such taxable year. Upon audit of this return the Commissioner disallowed the deduction and asserted the deficiency here in controversy.

Prior to the year 1920 the syndicate abandoned further development work. At a meeting of the stockholders of the Oklamex Oil Co., held on July 11, 1919, the officers were authorized to sell the whole or any part of the company’s oil leases or other property in Mexico. In the early part of 1920 a man experienced in the sale of such property was employed for this service. He visited Houston, Tampico, and New York, and spent several months in his search for buyers, but was unable to sell the property, or any part thereof, at any price. The effort to sell was abandoned prior to December 31, 1920. Prior to, or during the year 1920, all the property other than the oil leases was sold. At December 31, 1920, the Oklamex Oil Co. had no assets and its stock was worthless.

Judgment will be entered for the petitioner after £0 days’ notice, under Rule 50.