author: Van Fossan:

text:
    Neusteter Suit Co., Women’s Apparel Co., and Weakley Cloak & Suit Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4001.
    Promulgated October 4, 1927.
    Petitioners’ inventories approved.

      Joseph S. Jaffa, Esq., and R. M. Grane, G. P. A., for the petitioners.

      A. G. Bouchard, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1918 and 1919 in the respective amounts of $7,016.68 and $22,563.80. Three grounds of error are alleged: (1) revision of inventory; (2) disallowance as business expense of certain contributions, and (3) recomputation of invested capital. At the hearing the petitioners conceded the correctness of the Commissioner’s disallowance of the contributions.
    FINDINGS OF FACT.
    The petitioners were affiliated Colorado corporations with principal offices in Denver. In the taxable years 1918 and 1919 they were engaged in the sale at retail of women’s ready-to-wear apparel. The Neusteter Suit Co., the parent company, was organized in 1911. In 1916 it organized the Neusteter Women’s Apparel Co., and in 1917 it organized the Weakley Cloak & Suit Co. Both of the latter companies have since gone out of business.
    For the taxable years petitioners made consolidated income-tax returns, in which inventories of merchandise were included for the purpose of determining income.
    Because of the rapid changes in styles and the brief period of seasonability of much of the merchandise handled by the petitioners there was no stability to the market and in most instances no replacement cost was available. Reorders of identical garments were seldom made, and the same style garments, as a rule, were not available for replacement from manufacturers.
    The petitioners were regularly advised of the New York and general market conditions, prices and styles affecting their merchandise through associations and connections to which they subscribed.
    Petitioners’ opening and closing inventories for the taxable years Avere taken by valuing each article of merchandise separately. The buyer in each department would examine each article and call it to an assistant. The article wras entered upon a form inventory sheet and the retail sale value thereof, determined in the light of special conditions applicable to that article, Avas also entered on the sheets. Articles of a like kind, quality and condition Avere grouped in the inventory. The imrentory valuation thus arrived at represented the retail sale value of the merchandise, when that value Avas less than the cost, or the cost of the merchandise when the retail sale value exceeded the cost. The inventories thus made up were totaled and the totals entered upon the books of the petitioners.
    The inventory sheets for the years 1918 and 1919 Avere lost or destroyed and could not be produced by petitioners at the time of the examination of petitioners’ records by the Government agents in 1923. All of the merchandise listed upon the inventory sheets for the taxable years was disposed of prior to 1923, and could not have been identified in 1923 by such inventory sheets.
    Petitioners have used the same method of inventorying merchandise consistently before, during and after the taxable years. They used the same inventory valuations for all purposes — income-tax returns, financial statements, and credit reports.
    The method of taking and valuing inventories employed by the petitioners is the one used by the leading dealers in women’s ready-to-wear apparel in Denver, and generally in the trade.

      The opening and closing inventories of petitioners as shown by their books for the taxable years were:

    The respondent rejected the inventory valuations of the petitioners and readjusted the inventories for the taxable years upon a percentage basis. The respondent determined the ratio of gross sales to gross profits for the years 1916 to 1919, inclusive, and, applying that ratio to the taxable years, fixed the inventory values for those years. By reason of these adjustments to the inventories, the respondent reduced the invested capital of the petitioners for the taxable years and determined the deficiencies in taxes above set forth.
   OPINION.

Van Fossan:

The sole question for determination is whether or not petitioners complied with the provisions of the law in the matter of inventory valuations for the years 1918 and 1919. The issue relative to the invested capital hinges upon, and is automatically disposed of by a decision of the question of inventories. All other issues were abandoned at the hearing.

Section 203 of the Revenue Act of 1918 provides that in certain events inventories shall be taken “upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.” By this delegation of authority, subject to the two express limitations contained in the statute, the power to choose among the various methods of taking inventories is conferred on the Commissioner. The Commissioner pursuant to the above grant of authority has prescribed two methods for general application, subject to certain specific exceptions not here applicable. These methods are (1) “cost,” or (2) “cost or market, whichever is lower.” If a taxpayer took its inventories in accordance with either method it conforms to the statute and regulations.

In article 1584 of Regulations 45, the Commissioner has defined “ market ” as follows:

Under ordinary circumstances, “ market ” means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which ordinarily purchased by the taxpayer * * *.

That this definition could not have universal application is indicated by the opening clause, under ordinary circumstances.” If extraordinary circumstances exist, we must look beyond the quoted definition. The Commissioner has recognized that the definition is necessarily elastic, and in the saíne regulations it is further provided:

Where no open market quotations are available, the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available * * *. Where, owing to abnormal conditions, the taxpayer has regularly sold such merchandise at prices lower than the current bid price as above defined, the inventory may be valued at such prices * * *.

The essential inquiry in every case involving the use of inventories claimed to have been taken at “ cost or market, whichever is lower,” is to determine whether or not the market value used represents the fair market value of the merchandise under the peculiar facts and circumstances of the particular case. In Appeal of C. Willenborg & Co., 5 B. T. A. 788, we held that the. two bases of valuation announced by the Commissioner are not exclusive of all others, and that a taxpayer may employ any basis (1) that conforms as nearly as may be to the best accounting practice in the trade or business, and (2) that most clearly reflects true income.

The uncontradicted evidence in this case is that the method employed by petitioner was generally used in the trade or business in which petitioner was engaged. There is no evidence before us to dispute the contention that it conformed to the best accounting practice in that trade or business. It was consistently employed by petitioners, before, during, and after the taxable years and the inventory so arrived at was used for all business purposes — income-tax returns, credit statements and financial reports.

This Board has emphasized repeatedly the importance of consistency in the method of inventorying.

However faulty the taxpayer’s inventory method was, we believe that greater weight should be given to consistency than to any particular method of inventorying or basis of valuation so long as the method or basis used substantially reflects the income. This rule has been given great weight both by the Commissioner and the Board. Appeal of The Buss Co., 2 B. T. A. 266, 268.

See also Appeal of Thomas Shoe Co., 1 B. T. A. 124; and Appeal of Boyne City Lumber Co., 7 B. T. A. 36.

In this case the facts establish that there was no replacement market price for much of the petitioners’ merchandise and that reorders could not be made. There was, therefore, no “ market ” in the usual interpretation of that term. In this situation petitioners determined the retail sales value of its merchandise as set forth in the findings of fact and used this, or cost, whichever was lower, as the basis of its inventory. We believe that under all the circumstances there was a substantial compliance with the law.

That “ market value ” for inventory purposes generally means the replacement cost to the taxpayer or the price at which the taxpayer may replace the particular goods by purchase in the open market is not disputed. Where, however, the merchandise is not available for reorders and there is no replacement market, the general rule fails to meet the situation and it becomes necessary to seek another basis for measuring market value. Merchandise such as that here involved is not valueless merely because no market value, in the general sense of that term, is determinable, nor do such facts justify the exclusion of such merchandise from the inventory. Conversely, there is no justification for requiring the inclusion of such merchandise in the inventory at cost, or some theoretical market value, greater than its actual value. To do so would distort income. When petitioners fixed and entered on the inventory sheets the price at which an article of merchandise could be moved, they were in practical effect determining the “market” on that article. The only way, if at all, petitioners could have replaced much of their merchandise was to buy from other retail stores handling the same lines of goods. In such event, obviously, the replacement price to them would be the retail or sales price of his competitor. The result is the same precisely as that arrived at by petitioners’ method.

The Board has heretofore recognized resale or retail sales value as a proper criterion of market value for inventory purposes, in those cases where the goods are obsolete or affected by other conditions so that they are not available in the replacement market. In the case of an automobile dealer who accepted used cars in part payment for new cars and valued such used cars for inventory purposes at their resale value, which was less than the trade-in ” or cost value, the Board held:

The taxpayer took its inventories of new cars, tractors, and implements on the basis of cost or market, whichever was lower. Its inventory of used cars was taken on the basis of market values which were uniformly less than the “ trade-in ” values. In the absence of evidence that the inventories of used cars were taken at more than the market the taxpayer’s determinations of such market values are approved. Appeal of Adams Motor Co., 4 B. T. A. 589, 595.

In two earlier cases the Board recognized the propriety under certain circumstances, of measuring market value by retail sales value. Appeals of Summit Wholesale Grocery Co., 1 B. T. A. 1040, and American Mills Co., 2 B. T. A. 460.

In our opinion the sale value of merchandise as determined by the petitioners represented its fair market value and where such value was less than cost it was properly used for inventory purposes. We are further of the opinion that petitioners’ inventories consistently taken upon such basis would most clearly reflect income. The Commissioner erred in rejecting the inventories.

Reviewed by the Board.

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


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    James Duggan, Executor, Estate of Hanna Duggan, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 4706.
    Promulgated October 4, 1927.
    The decedent and her two brothers and a sister each owning one-fourth of the common stock of a coal-mining company, transferred their respective shares of stock to trustees to hold under the terms of a declaration of trust whereby the trustees were to pay the income to the creators of the trust with rights over to the survivors upon the death of any beneficiary. Held that, under the provisions of the Revenue Act of 1921, the value of the interest of the decedent in the trust estate at the time of his death should not be included in the gross estate of the decedent for the purpose of estate tax. Appeal of James Duggan, Executor, 6 B. T. A. 1098, overruled.

      E. Ba/rrett Prettyman, Esq., for the petitioner.

      R. E. Copes, Esq., for the respondent.
   Smith:

The findings of fact and opinion in the above entitled case were promulgated by the Board on April 29, 1927. Appeal of James Duggan, Executor, Estate of Hanna Duggan, 6 B. T. A. 1098. Subsequent to such promulgation and before the entering of an order of redetermination of the deficiency in accordance with the findings of fact and opinion rendered, the Supreme Coijrt handed down its decision in the case of Nichols v. Coolidge, 274 U. S. 531. Upon motion of the petitioner a reargument of the case was allowed upon the basis of such decision of the Supreme Court.

The facts in the case are fully set forth in Appeal of James Duggan., Executor, supra. They are, in short, that on December 31, 1919, the decedent and her two brothers and her sister, each,owning one-fourth of the common stock of a coal-mining company, transferred their respective shares of stock to trustees to hold under a declaration of trust, whereby the trustees were to pay the income to the creators of the trust with rights over to the survivors upon the death of any beneficiary. Haniia Duggan died testate on May 18, 1923.

The Commissioner added to the net estate reported by the executor one-fourth of the value of the trust fund at the date of her death. This addition was made under the provisions of Title IV of the Revenue Act of 1921. Section 402 of that Title provides in part:

Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

There is no question before the Board as to the value of the decedent’s interest in the trust fund at the date of her death. The Board held in view of the specific language of section 402 above quoted that that value was properly included in the gross estate. The decedent had a life interest in the trust fund and under the provisions of the trust instrument the entire corpus of the trust fund could at any time have been distributed to the beneficiaries.

Section 402(c) of the Revenue Act of 1921 is identical with the corresponding section of the Revenue Act of 1918. We held by reason of this fact and also of the fact that the subdivision provides for the inclusion in gross estate of property thus transferred in trust “(whether such transfer or trust is made or created before or after the passage of this Act),” that there was no substantial question of the retroactive operation of the statute.

In Nichols v. Coolidge, supra, the court, commenting upon the provisions of section 402(c) of the Revenue Act of 1918, stated:

The statute requires the executors to pay an excise ostensibly laid upon transfer of property by death from Mrs. Coolidge to them but reckoned upon its value plus the value of other property conveyed- before the enactment in entire good faith and without contemplation of death. Is the statute, thus construed, within the power of Congress?
Undoubtedly, Congress may require that property subsequently transferred in contemplation of death be treated as part of the estate for purposes of taxation. This is necessary to prevent evasion and give practical effect to the exercise of admitted power, but the right is limited by the necessity.
Under the theory advanced for the United States, the arbitrary, whimsical and burdensome character of the challenged tax is plain enough. An excise is prescribed, but the amount of it is made to depend upon past lawful transactions, nof testamentary in character and beyond recall. Property of small value transferred before death may have become immensely valuable, and the estate tax, swollen by tbis, may leave nothing for distribution. Real estate transferred years ago, when of small value, may be worth an enormous sum at the death. If the deceased leaves no estate there can be no tax; if, on the other hand, he leaves ten dollars both that and the real estate become bable. Different estates must bear disproportionate burdens determined by what the deceased did one or twenty years before he died. See Frew v. Bowers, Collector, 12 Fed. (2d) 625.
This court has recognized that a statute purporting to tax may be so arbitrary and capricious as to amount to confiscation and offend the Fifth Amendment. Brushaber v. Union Pacific R. R., 240 U. S. 1, 24 (U. S. Tax Cases 104); Barclay & Co. v. Edwards, 267 U. S. 442, 450. See also Knowlton v. Moore, 178 U. S. 41 [U. S. Tax Cases 289] 77. And we must conclude that Section 402 (c) of the statute here under consideration, in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation. Whether or how far the challenged provision is valid in respect of transfers made subsequent to the enactment, we need not now consider.

The transfer made by Hanna Duggan on December 31, 1919, was made under the provisions of the Revenue Act of 1918.

Title IY of the Revenue Act of 1918 was repealed by section 1400(a) of the Revenue Act of 1921. In Appeal of Charles L. Harris, Administrator, 5 B. T. A. 41, we said:

The death of the decedent on September 11, 1923, was the occasion for the exaction of an estate tax, and the measure of the tax is to be determined in accordance with the statute in force at the date of the death of decedent. That statute was the Revenue Act of 1921. It is contended, however, that, since the decedent changed the beneficiary of his insurance in the year 1920, and the provisions of section 402(f) of the Revenue Acts of 1918 and 1921 were identical, the proceeds of the policy, less the statutory exemption, forms a part of the gross estate. It is not denied that the Revenue Act of 1921 in section 1400(a) does by express provision repeal Title IV of the Revenue Act of 1918, and that section 1400(b) of the Revenue Act of 1921 provides that the parts of the Revenue Act of 1918 repealed shall remain in force for the assessment and collection of all taxes which have accrued under the statute repealed. Here we have a complete repeal of the prior statute with a saving clause as concerns taxes accrued under the same. We can not perceive that any taxes had accrued in this case — the decedent was living at the date of the repeal and certainly the change and the designation of beneficiaries did not cause a tax to accrue. The decedent, while the Revenue Act of 1918 was in force and effect, incurred no liability for taxes of the nature here in question, and no right accrued to the Government in respect to the assessment and collection thereof. As concerns the liability of the decedent for estate taxes under the provisions of the Revenue Act of 1918, he was entirely relieved therefrom by reason of the express repeal of the statute.

Section 402(c) of the Revenue Act of 1921 is identical with section 402(c) of the Revenue Act of 1918, which the Supreme Court has held, insofar as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious, and amounts to confiscation, and to such extent is unconstitutional. We can see no reason for reaching a different conclusion with respect to the 1921 Act from that which was reached with respect to the 1918 Act. Furthermore, we think that the transfer herein involved is of the character of that referred to by the Supreme Court in Nichols v. Coolidge, supra. We are also of the opinion that the principle applied by this Board in Appeal of Charles L. Harris, Administrator, supra, is applicable to this case and that under it we must hold that there is no deficiency. See also Edward H. Alsop, Executor, v. Commissioner, 7 B. T. A. 848.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, wider Bule 50.


author: Love:

text:
    Odell Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8389.
    Promulgated October 4, 1927.
    In January, 1920, petitioner’s directors determined to pay to its employees a bonus as additional compensation for tbe fiscal year ending June 30, 1920, of $25,000 to be distributed to its employees. Tbe amount of $25,000 was credited on the books of petitioner as an accrued liability, in an account styled “ Bonus Account,” monthly from January to June, both inclusive, 1920. Held, that the $25,000 constituted an accrued expense for the fiscal year ending June 30, 1920, and was a proper deduction from gross income for that year.

      H. A. Mihills, C. P. A., for the petitioner.

      T. M. 'Willems, Esq., for the respondent.
    This is a proceeding to redetermine an alleged deficiency in income and profits tax for the fiscal year ended June 30, 1920, in the amount of $6,878.49.
    The only error assigned is that “ The Commissioner has disallowed as a deduction, a bonus provided as additional salaries to its employees for the fiscal year ended June 30, 1920, in the amount of $25,000.”

      FINDINGS OF FACT.
    The petitioner is a North Carolina corporation with its principal office at Greensboro, and operated on a fiscal year basis, ending June 80, of each year. For the years 1918 and 1919, the petitioner had given bonuses to its employees. In January, 1920, J. N. Wills, who was secretary and treasurer of the petitioner, and who owned about one-fifth of the stock, after an informal conference with C. H. Ireland, the president, and P. N. Brooks, vice president, those three persons owning practically all the stock and constituting the board of directors, instructed the accountant for petitioner to set aside $3,000 at the end of each of the remaining six months of the fiscal year, as a bonus fund for employees, and in the event business justified the increase, that said amount be increased to a maximum limit of $25,000.
    The full amount of $25,000 was so set aside, charged and accrued on the books on or before June 30, 1920. That amount so set up on its books was considered and treated by petitioner as a liability, and was so treated by it in its reports and statements to banks and otherwise. That determination and the resultant actions were communicated to and known by at least some of the employees.
    J. N. Wills was made trustee of the bonus fund, and an account with him as trustee was opened on the books, and on December 31, 1920, that account was credited with $25,000 cash. That amount was borrowed by petitioner from a bank, under an agreement that the whole amount would not be drawn on at once. Such agreement being at the instance of the bank on account of the stringency in money conditions at that time.
    In the early part of 1921, a part of the amount allotted to each employee was paid to him, and in this way, $12,880 was appropriated. During the early part of 1921 a plan was formulated by some of the employees, encouraged and assisted by Wills, to establish and equip a country club for the use and benefit of the employees. Some of the employees were not interested in that scheme and it was agreed that those who declined to take stock in it should be paid their full bonus in cash. Finally all employees took stock, and the amount of $12,120 remaining in the treasury with the trustee was so used. That amount not being sufficient to establish and equip the club in the manner desired, the petitioner took a sufficient amount of stock, paying cash therefor, to meet the deficit. The board of directors of the club, after the organization of the club corporation, were selected from the employees and no director of petitioner corporation was on that board. Only employees of petitioner were eligible to membership in the club. If a member left the employ of petitioner lie might retain his stock or assign it to another employee. There were at least two employees, who at the time of the development of the club project were employees, but before its final incorporation left the company, who received their certificates of stock.
    The petitioner kept its books on the accrual basis.
   OPINION.

Love:

A bonus to employees of a corporation properly determined and set aside and accrued as additional compensation for services rendered during the year for which so determined and set aside, is an allowable deduction under section 214 (a) of the Revenue Act of 1918. Appeal of W. H. Harris Grocery Co., 3 B. T. A. 216; Appeal of Josiah Wedgwood & Sons, Ltd., 3 B. T. A. 355.

The petitioner’s board of directors during the taxable year determined (though informally) to pay its employees a bonus of $25,000, which amount was determined and accrued on its books before the final closing of the books for the taxable year. The actual cash to go into this fund was not, however, segregated from the assets of the company and deposited to the credit of this fund until six months after the close of its fiscal year. There was no “ yard stick ” prescribed or provided by which to measure or determine how much of that bonus any given employee would receive. Only the aggregate amount for all the employees was known. Not until after six months, after the close of the year, was there any money stamped or “ earmarked ” as the bonus fund. However, each of the employees had an undivided interest in that bonus fund. The liability was of the same debtor. The fund was dedicated, set aside and accrued, in solido, for all the employees. The fact that no segregation of the total amount of the bonus was made to each of the individual employees upon the books within the taxable year, is not, in the opinion of the Board, controlling. See Appeal of American Express Co., 2 B. T. A. 498. Appeal of Josiah Wedgwood & Sons, Ltd., 3 B. T. A. 355.

The bonus was determined upon by the corporation and the full amount of same was accrued upon the books, and became a fixed, definite and accrued liability during the taxable year, and on and after the close of the taxable year was regarded and treated by the corporation as a fixed, and accrued liability.

Under the facts of this case the full $25,000 was a deductible expense for the year 1920.

Reviewed by the Board.

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


author: Arundell:

text:
    Pioneer Box Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7024.
    Promulgated October 4, 1927.
    Motion of respondent to dismiss for want of jurisdiction on the ground that the notice upon which the petition is based is not a notice of deficiency, granted. Fort Pitt Spring & Manufaottiring Go. v. Commissioner, 5 B. T. A. 1106.

      Frank G. Olive, Esq., and Benjamin H. Saunders, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    At the hearing of this case the respondent entered a general denial to the averments of the amended petition filed with leave granted and further moved to dismiss the proceeding for want of jurisdiction upon the ground that the notice on which the petition is based is not a notice of deficiency. The issue raised in the petition is that the Commissioner used improper comparatives in his determination of the profits tax under section 328 of the Revenue Act of 1918. The motion was taken under advisement and the hearing proceeded on the merits of the case. Only such facts will be found here as relate to the jurisdictional question raised by the respondent’s motion.
    FINDINGS OP PACT.
    The petitioner is an Indiana corporation. In April, 1919, it filed with the collector a tentative return on Form 1031-T for the fiscal year February 1, 1918, to January 31, 1919 (hereinafter called the fiscal year 1919), on which the tax for said fiscal year was estimated at $40,000 and with which the sum of $10,000 was paid. On July 30, 1919, petitioner mailed to the collector its completed return on Form 1120-A showing thereon a net income of $86,309.11 and income and profits taxes amounting to $54,411.95. It filed with its return a number of schedules detailing its items of income, deductions and invested capital and also an application for assessment under section 328 of the Revenue Act of 1918. Petitioner also included' with its completed return its check in the amount of $8,319.18, that amount being 50 per cent of the tax computed, less the amount of $20,000, previously paid thereon ($10,000 with the tentative return and $10,000 on June 16, 1919), and plus the balance of tax due for the preceding year.
    On January 7, 1920, petitioner filed with the collector a claim for abatement of the amount of $13,617.98, said amount being the then unpaid one-fourth of the tax reported in the return for the fiscal year 1919. At that time petitioner had received no word as to the action taken on its application for assessment under section 328.
    In June, 1920, petitioner filed an amended claim for abatement of $13,322.26 (being $295.72 less than the amount previously claimed) of the taxes for the fiscal year 1919.
    By letter of February 7, 1924, the Commissioner advised petitioner that a jeopardy assessment would be made of the amount of $3,085.01 for the fiscal year 1919, computed as follows:
    Corrected tax liability as shown on schedule 13 Revenue Agent’s report dated November 19, 1923-$57, 852. 68
    Previously assessed— April 1919 list, Account #40,008_$10, 000. 00
    “ “ “ “ #40,008_ 44,471.95
    June 1920 “ “ 6-400,004_ 295.72 - 54,767.67
    Additional tax to be assessed- 3, 085. 01
    On February 19,1924, petitioner executed an “ Income and Profits Tax Waiver” extending for the period of one year from that date the time for the determination, assessment and collection of taxes for the years 1918 and 1919-
    On April 8, 1924, petitioner executed and filed a claim for abatement of $5,591.45, which amount included the sum of $3,085.01 for the fiscal year 1919 referred to in Commissioner’s letter of February 7, 1924.
    Conferences relative to petitioner’s tax liability were had by representatives of petitioner with the Commissioner’s office in April, 1923, July, 1924, and March, 1925.
    By letter of January 26, 1925, the Commissioner advised petitioner that the application “ * * * for assessment of your profits tax as prescribed by section 328 of the Revenue Act of 1918 has been allowed,” with a resultant tax liability for the fiscal year 1919 of $53,900.20 and overassessment for that year of $3,952.48. Following the computation the letter contained the following statement:
    In accordance with the above conclusion, your claim in abatement of $5,591.45 covering the years 1918 and 1919 will be rejected for $1,638.97.
    By letter of July 13,1925, the Commissioner, referring to a protest filed by petitioner, advised that as a result of a recomputation on the basis of additional information, the total tax assessable for the year was determined to be $49,801.38 and that as $57,852.68 had been assessed there was an overassessment of $8,051.30. The letter read in part:
    In accordance with the above conclusions, your claim in abatement of $13,617.98 and the 1919 portion of your claim in abatement of $5,591.45, will be rejected for the amount in excess of $8,051.30.
    * * * * * # *
    Your case is therefore deemed closed.

      In July, 1925, the Commissioner issued a certificate of overassessment, the material part of which is as follows:

      An audit of your income tax return, Form 1120, and a consideration of all tlie claims (if any) filed by you for the fiscal year ended January 31, 1919, indicates that the tax assessed for this year was in excess of the amount due:
    Tax assessed:
    Original, #40008_$54,471.95
    Additional, June 1920, #6-400-004_ 295.72
    Additional, March, 1924, page 24 line 5_ 3, 085. 01
    Total tax assessed_ 57, 852. 68
    Correct tax assessable_ 49,801. 38
    Overassessment- 8, 051. 30
    The petition filed is based on the respondent’s letter of July 13, 1925. •
   OPINION.

Arundell:

The facts in this case relating to the jurisdictional question, it will be readily noted, are on all fours with those in Fort Pitt Spring & Manufacturing Co. v. Commissioner, 5 B. T. A. 1106, in which we found the result of the negotiations between the Commissioner and the petitioner to be that “ * * * the Commissioner has determined the correct amount of the tax to be less than the tax admitted to be due by the petitioner on its return * * * ” and that “ Since no deficiency has been determined the board is without jurisdiction * * In accordance with that decision the present proceeding is

Dismissed.

Reviewed by the Board.


author: Littleton:

text:
    Boston & Maine Railroad, Successor to Boston & Lowell Railroad Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8847, 9102.
    Promulgated October 4, 1927.
    1. Many years prior to tbe taxable year the Boston & Lowell Railroad Corporation leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of fax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      2. No portion of premiums at which bonds were issued, which bonds were outstanding at the close of the taxable year, represented income within the taxable year.

      J. S. Y. Ivins, Esq., and O. B. Folsom-Jones, Esq., for tlie petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined deficiencies in income and profits tax of $9,562.06 for the calendar year 1918 and $62,138.47 for the fiscal period January 1 to November 30, 1919. The issues involved are (1) whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor and (2) whether the premiums received upon the sale of bonds prior to March 1, 1913, should be spread over the life of the bonds and figured as income accrued ratably over that period.
    FINDINGS OF FACT.
    The Boston & Lowell Railroad Corporation was during the taxable periods involved a Massachusetts corporation with its principal office at Boston. It was the owner of a railroad which ■ it leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of petitioner for each year was payable and was paid by its lessee in the following year.
    The Commissioner computed a Federal income tax of $76,017.16 upon the income of the Boston & Lowell Railroad Corporation, as revised by him, for the year 1918 and added the said amount to the lessor’s income for the year 1918. He also computed a tax of $56,489.52 upon income of the Boston & Lowell Railroad Corporation for the period January 1 to November. 30, 1919, and added this amount to the lessor’s taxable income for the period January 1 to November 30, 1919. The income-tax return of the Boston & Lowell Railroad Corporation for the calendar year 1917 showed a tax liability of $37,599.03 computed upon the income of the Boston & Lowell Railroad Corporation for that year without the inclusion therein of any amount on account of tax paid by that company’s lessee and its return for the year 1918 showed a tax liability of $75,645.47 computed upon the income of the Boston & Lowell Railroad Corporation for that year without the inclusion therein of any amount on account of tax paid by the lessee. The aforementioned taxes for the years 1917 and 1918 were paid by the Boston & Maine Railroad, petitioner’s lessee, during the calendar years 1918 and 1919, respectively.

      The Boston & Lowell Railroad Corporation, prior to March 1, 1913, issued bonds in the amount of $3,503,000 and sold them at premiums aggregating $77,521.03. The Commissioner added to the net income of the Boston & Lowell Railroad Corporation $3,605.74 for the year 1918 and $2,139.27 for the period January 1 to November 30, 1919, as being that proportion of the premiums so realized which he claimed to be taxable income for the periods indicated.
    The Boston & Lowell Railroad Corporation kept its books and rendered its .returns upon an accrual basis.
    The Boston & Lowell Railroad Corporation was merged with the Boston & Maine Railroad December 1, 1919.
    By virtue of the lease above mentioned and the subsequent merger, the Boston & Maine Railroad undertook to pay the tax accrued against the Boston & Lowell Railroad Corporation. The Boston & Maine Railroad also kept its books and made its tax returns upon the accrual basis.
   OPINION.

Littleton:

The first issue is controlled by the decision of the Board in Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186. On the authority of that decision it is held that the amount of Federal income tax upon petitioner’s income for 1917 and paid by petitioner’s lessee in 1918 constituted additional income to petitioner in the latter year, that the amount of Federal income tax due upon petitioner’s income for 1918 without the inclusion therein of any amount on account of income tax paid in that year by the lessee as the tax upon the income for the year 1917 constituted additional taxable income in 1919.

The second issue is governed by the decision of the Board in Old Colony Railroad Co., 6 B. T. A. 1025. On the authority of the decision in that proceeding it is held that no portion of the premiums at which bonds which were outstanding at the close of each of the taxable years involved were issued constituted income during the taxable years.

Reviewed by the Board.

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


text:
    Connecticut & Passumpsic Rivers R. R. Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8424, 9100.
    Promulgated October 4, 1927.
    1. Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.
    2. No portion of premiums at which bonds were issued, which bonds were outstanding at the close of the taxable year, represented income within the taxable year.

      J. /S'. Y. Ivins, Esq., and O. B. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined deficiencies in income and profits tax of $2,259 for the calendar year 1918, $1,587.47 for the calendar year 1919, and $100.62 for the calendar year 1920. These proceedings were consolidated for hearing and decision. Proceeding Docket 8424 relates to the deficiency for 1918 and Docket 9100 relates to the deficiencies for the years 1919 and 1920. The questions involved are (1) whether the payment by the lessee, pursuant to the terms of a lease, of Federal income tax of the lessor constitutes additional income to the lessor, (2) whether premiums received upon the sale of bonds prior to March 1, 1913, should be spread over the life of the bonds and treated as taxable income accrued ratably over that period, and (3) whether the petitioner and the Newport & Richford Railroad Co. were affiliated during the taxable years.
    A decision of the last issue becomes necessary only in the event the Board sustains the determination of the Commissioner that bond premiums constitute income ratably over the life of the bonds.
    FINDINGS OP PACT.
    During the taxable years 1918,1919, and 1920 petitioner was a Vermont corporation with principal office at Boston, Mass. It was the owner of a railroad and also of all of the capital stock of the Newport & Richford Railroad Co. All of the property of petitioner Avas leased in June, 1887, by the Boston & Lowell Railroad for a term of 99 years, under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. All the rights of lessee under this lease Avere assigned by the Boston & Lowell Railroad to the Boston & Maine Railroad on December 13, 1892. The income tax of the petitioner for each year was payable and was paid by its lessee in the following year.
    The Commissioner computed a Federal income tax for the years 1918, 1919, and 1920 ijj the amounts of $17,888.25, $14,938.02, and $14,913.86, respectively, which amounts he added to petitioner’s net income for the years 1918, 1919, and 1920, respectively. The income-tax returns filed by petitioner for the calendar years 1917, 1918, and 1919'showed a tax liability of $9,547, $17,775.84, and $14,844.35, respectively, which taxes were not reduced by the Commissioner, and the income upon which such tax was computed did not include any amount as a tax upon petitioner’s income and paid by its lessee. The taxes, $9,547 for 1917, $17,775.84 for 1918, and $14,844.85, were paid by petitioner’s lessee in the years 1918, 1919, and 1920, respectively. Petitioner kept its books and rendered its returns upon an accrual basis.
    By virtue of the lease from the petitioner to the Boston & Lowell Railroad Co., assigned to the Boston & Maine Railroad, all the right, title and interest of the lessor in and to the stock of the Newport & Richford Railroad Co. and the right of voting said stock were vested in the lessee, and the petitioner was prohibited from selling or otherwise disposing of said stock except with the consent of the lessee.
    On January 2,1911, bonds of the Newport & Richford Railroad Co. in the amount of $350,000 were issued and sold at a premium of $28,-101.30. These bonds were outstanding during the taxable years.
    The Commissioner held that the Newport & Richford Railroad Co. was affiliated with the petitioner during all the taxable years under consideration and consolidated the net income and invested capital of the two corporations for the purpose of computing the income and profits tax. The Commissioner included in the net income of the consolidated group the sum of $936.71 for each of the three years, 1918, 1919, and 1920, as being an aliquot part of the premium realized upon the bonds of the Newport & Richford Railroad Co. which he claimed to be taxable income for the periods indicated.
   OPINION.

Littleton:

The first issue is controlled by the decision of the Board in Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186. On the authority of that decision it is held that the amount of Federal income tax upon petitioner’s income for 1917 and paid by petitioner’s lessee in 1918 constituted additional income to petitioner in the latter year; that the amount of Federal income tax due upon petitioner’s income for 1918 without the inclusion therein of any amount on account of income tax paid in that year by the lessee as the tax upon the income for the year 1917 constituted additional taxable income in 1919; and that the amount of Federal income tax due upon petitioner’s income for 1919 without the inclusion therein of any amount on account of income tax paid in that year b3? the lessee as the tax upon the income for the year 1918 constituted additional taxable income in the year 1920.

The second issue is governed by the decision of the Board in Old Colony Railroad Co., 6 B. T. A. 1025. On the authority of the decision in that proceeding it is held that no portion of the premium at which bonds whicñ were outstanding at the close of each of the taxable years involved were issued constituted income during the taxable years.

In view of our decision of the second issue, it is unnecessary to decide whether the petitioner and the Newport & Richford Railroad Co. were affiliated during the taxable year.

Reviewed by the Board.

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


text:
    Fitchburg Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8849.
    Promulgated October 4, 1927.
    1. Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.
    2. No portion of premiums at which bonds were issued, which bonds were outstanding at the close of the taxable year, represented income within the taxable year.

      J. S. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      N. M. Fisher, Esq., and P. J. Rose, Esq., for. the respondent.
    The Commissioner determined a deficiency in income and profits tax of $96,855.82 for the fiscal period January 1 to November 30, 1919. The issues involved are (1) whether the payments, under the term of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor, and (2) whether the premiums received upon the sale of bonds prior to March 1, 1913, should be spread over the life of the bonds and treated as income accrued ratably over that period.
    findings of fact.
    During the taxable period petitioner was a Massachusetts corporation with principal office at Boston. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the petitioner for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $88,050.75 upon petitioner’s income, as revised by him, for the period January 1 to November 30, 1919, and added the said amount of $88,050.75 to petitioner’s taxable income for the said fiscal period.

      The income-tax return of the petitioner for the calendar year 1918 showed a tax liability of $112,910.58, computed upon the income of petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner’s lessee. This tax of $112,910.58 was paid by the Boston & Maine Railroad, petitioner’s lessee, during the year 1919. Petitioner kept its books and rendered its return upon an accrual basis.
    Petitioner was merged with the Boston & Maine Railroad December 1, 1919. Prior to March 1, 1913, petitioner issued bonds in the amount of $9,985,000 and sold them at premiums aggregating $362,207.75. The Commissioner added to petitioner’s net income for the fiscal period January 1 to November 30, 1919, $16,601.18, as being that proportion of the premium so realized which he claimed to be taxable income to the petitioner for said period.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for the fiscal period January 1 to November 30, 1919, should be recomputed by including in income the amount of $112,910.58 representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

The second issue is governed by the decision of the Board in Old Colony Railroad Co., 6 B. T. A. 1025. On the authority of the decision in that proceeding it is held that no portion of the premium at which bonds which were outstanding at the close of each of the taxable years involved were issued constituted income during the taxable years.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, v/rvder Rule 50.


text:
    Nashua & Lowell Railroad Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9494.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to tbe lease. Meld, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. JS. T. Ivins, Esq., and O. B. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the calendar year 1919 in the amount of $1,074.65. He determined an overassessment for the calendar year 1920 of $125.23, not arising from the denial of an abatement claim.
    The issues involved are (1) whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor; (2) whether the Commissioner correctly reduced invested capital for 1919 by the amount of 1918 profits tax prorated from the dates of payment, and (3) whether the Commissioner erred in reducing invested capital for 1919 by a portion of dividends paid in 1919 claimed by the Commissioner to be in excess of available current earnings at the time of payment.
    FINDINGS OP PACT.
    During the taxable year the petitioner was a Massachusetts corporation with principal office at Boston. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the petitioner for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $7,080.68 on the petitioner’s income for the calendar year 1919, as revised by him, and added the said amount of $7,080.68 to petitioner’s taxable income for the year 1919.
    The income-tax return of petitioner for the calendar year 1918 showed a tax liability of $8,425.91, computed upon the income of petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner’s lessee. This tax of $8,425.91 was paid by petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its return on an accrual basis.
    In determining the deficiency the Commissioner reduced petitioner’s invested capital for the year 1919 in the amount of $4,523.83, representing the amount of petitioner’s income and profits tax for 1918 prorated from the dates due and payable in 1919.
    The Commissioner, also, in computing the net earnings of petitioner available for the payment of dividends on each particular date of payment during the year 1919 reduced the taxable year’s book income in the amount of Federal income taxes accrued on the year’s taxable income and treated the income, less taxes, as having been earned ratably throughout the taxable year. The net income however was received from rentals semiannually and dividends were paid semiannually out of such rentals as received. The rentals in each case were sufficient to pay dividends, that is rentals receivable on April 1 and October 1, and dividends not in excess thereof, were paid on May 1 and November 1, 1919.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including in income the amount of $8,425.91 representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

The second issue is governed by the Board’s decision in Russel Wheel & Foundry Co., 3 B. T. A. 1168. The Commissioner’s action in regard to this issue is therefore approved.

The third issue is governed by the decisions of the Board in L. S. Ayers & Co., 1 B. T. A. 1185 and Best Steel Castings Co., 6 B. T. A. 274. The Commissioner’s action in regard to this issue is therefore reversed.

Reviewed by the Board.

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


text:
    Northern Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9110.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. S. Y. Ivins, Esq., and O. B. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax of $1,837.75 for the calendar year 1919.
    The issue involved is whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor.
    FINDINGS OF FACT.
    During the taxable year 1919 petitioner was a New Hampshire corporation with principal office at Boston, Mass. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $18,377.49 on petitioner’s income for the calendar year 1919, as revised by him, and added the said amount of $18,377.49 to petitioner’s taxable income for the year 1919.
    The income-tax return of the petitioner for the calendar year 1918 showed a tax liability of $22,081.77, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid by petitioner’s lessee. This tax of $22,081.77 was paid by petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its returns on an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1180, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by. the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including in income the amount of $22,081.77 representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

Reviewed by the Board.

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


text:
    Vermont & Massachusetts Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8850.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. S. T. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the calendar year 1919 in the amount of $1,956.65. In the same notice he determined an overassessment for the year 1920 of $123.55, such assessment not arising from the denial of an abatement claim.
    The issue presented is whether the payment, under the terms of a lease, by the lessee of the Federal income tax of the lessor, constitutes additional income to the lessor.
    FINDINGS OF FACT.
    During the years 1919 and 1920, and for many years prior thereto, petitioner was a Massachusetts corporation with principal office in Boston. It was the owner of a railroad which it leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $19,013.32 on the petitioner’s income of $192,133.16 for the year 1919, as revised by him, and added the said amount of $19,013.32 to petitioner’s taxable income for the year 1919. The income-tax return of the petitioner for the calendar year 1918 showed a tax liability of $22,149.60, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid in that year by petitioner’s lessee. This tax of $22,749.60 was paid by the Boston & Maine Railroad, petitioner’s lessee, during the calendar year 1919. Petitioner kept its books and rendered its returns upon an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence c& Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of the tax upon the income of the lessor paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was payable by such lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including in income the amount of $22,149.60, representing the tax upon petitioner’s income for the calendar year 1918 paid by the lessee in the year 1919.

The Commissioner determined that the correct tax liability of petitioner for the calendar year 1920 was less than the tax shown by the petitioner upon its return. The Board, therefore, has no jurisdiction of the year 1920. Cornelius Cotton Mills, 4 B. T. A. 255.

Reviewed by the Board.

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


text:
    Lowell & Andover Railroad Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7930.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property íor a term o£ years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Helct, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. /S. 7. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. JV. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax of $5,085.01 for the fiscal period January 1 to November 30,1919, of which amount $478.94 is in controversy. The issues involved are (1) whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor, and (2) whether the allowance by the Commissioner of only eleven-twelfths of $2,000 credit provided in section 236 (c) of the Revenue Act of 1918, is correct, the petitioner claiming that the full $2,000 credit should have been allowed.

      FINDINGS OF FACT.
    During the taxable period the petitioner was a Massachusetts corporation with principal office at Boston. It was the owner of a railroad which it leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax' of the lessor. The income tax of the- petitioner for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $4,622.74 upon petitioner’s income, as revised by him, for the period January 1 to November 30,1919, and added this amount to petitioner’s income for said taxable period.
    The income-tax return of petitioner for the calendar year 1918 disclosed a tax liability of $6,004.63, computed upon the income of petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner’s lessee. This tax of $6,004.63 was paid by the petitioner’s lessee during the year 1919.
    In arriving at the amount of the deficiency for the fiscal period January 1 to November 30, 1919, determined by him, the Commissioner allowed petitioner as a credit against taxable income, under the provisions of section 236 of the Revenue Act of 1918, eleven-twelfths of $2,000 instead of the full amount of $2,000 claimed by the petitioner.
    Petitioner was merged with the Boston & Maine Railroad December 1, 1919.
    The books of petitioner were kept upon an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was payable by such lessee. On the authority of that decision petitioner’s tax for the fiscal period January 1 to November 30, 1919, should be recomputed by including in income the amount of $6,004.63 representing the tax upon petitioner’s income for the year 1918 paid in 1919.

As to the second issue, the petitioner did not change its accounting period from a calendar year to a fiscal year basis, or vice versa, and its return was not made under section 226 of the Revenue Act of 1918. The period January 1 to November 30, 1919, was the petitioner’s taxable year. The reason it filed a return covering only eleven months was that its separate existence ceased when it was absorbed by and merged with the Boston & Maine Railroad on December 1, 1919. The new consolidated corporation was just as much a separate entity from the petitioner as a decedent’s estate is a separate entity from the decedent. The reasoning and conclusion of the court in Bankers' Trust Co. v. Bowers, 295 Fed. 89, and Louis Hymel Planting & Manufacturing Co., 5 B. T. A. 910, apply with equal force in this instance. See also Carroll Chain Co., 1 B. T. A. 38; Lynch Construction Co., 3 B. T. A. 313; Arthur Walker & Co., 4 B. T. A. 151, and Durabilt Steel Locker Co., 5 B. T. A. 239. The Board is of the opinion therefore that the Commissioner erred in this regard and that he should have allowed a credit of the full amount of $2,000.

Reviewed by the Board.

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


text:
    Kennebunk & Kennebunkport Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9108.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay ail Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the'year in which such tax became due and was paid.

      J. S. T. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the fiscal period January 1 to November 30, 1919, in the amount of $25.14.
    The issues involved are (1) whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor, and (2) whether the allowance by the Commissioner of only eleven-twelfths of $2,000 credit provided in section 236 (c) of the Revenue Act of 1918 is correct, the petitioner claiming that the full $2,000 should have been allowed.

      BINDINGS OF FACT.
    During the taxable period petitioner was a Maine corporation with its principal office at Kennebunk. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of petitioner for each year was payable and was paid by its lessee in the following year.
    The Commissioner computed a Federal income tax of $84.79 upon petitioner’s income for the period January 1 to November 30, 1919, as revised by him, and added this amount to petitioner’s taxable income for said fiscal period.
    The income-tax return of the petitioner for the calendar year 1918 disclosed a tax liability of $111, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner’s lessee. This tax of $111 was paid by petitioner’s lessee during the year 1919.
    In arriving at the amount of the deficiency for the fiscal period January 1 to November 30, 1919, the Commissioner allowed petitioner as a credit against taxable income, under the provisions of section 236 of the Revenue Act of 1918, eleven-twelfths of $2,000.
    Petitioner was merged with the Boston & Maine Railroad December 1, 1919.
    Petitioner kept its books and rendered its returns upon an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence c& Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was payable by such lessee. On the authority of that decision petitioner’s tax for the fiscal period January 1 to November 30, 1919, should be recomputed by including in income the amount of $111 representing the tax upon petitioner’s income for the year 1918 paid in 1919.

The second issue involved in this proceeding is the same as that decided by the Board in Lowell & Andover Railroad Co., 8 B. T. A. 501, decided this date. Upon the authority of that decision it is held that the Commissioner erroneously refused to allow petitioner the full $2,000 credit.

Reviewed by the Board.

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


text:
    Concord & Portsmouth Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8848.
    Promulgated October 4, 1927.
    Many years prior to tbe taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Selct, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. S. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the calendar year 1919 in the amount of $288.39. The issue involved is whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor.
    FINDINGS OF FACT.
    During the taxable year petitioner was a New Hampshire corporation with principal office at Manchester. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $2,283.95 on the petitioner’s income of $24,839.46 for the year 1919, as revised by him, and added the said amount of $2,283.95 to petitioner’s income for the year 1919, and computed an additional tax constituting the deficiency involved herein.
    The income-tax return of petitioner for the calendar year 1918 showed a tax liability of $2,165.11, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid by petitioner’s lessee. This tax of $2,765.77 was paid by petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its returns upon an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including therein the amount of $2,765.77, representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

Reviewed by the Board.

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


text:
    Manchester & Lawrence Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9495.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Bold, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. 8. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Bose, Esq., for the respondent.
    The Commissioner determined an overassessment of $408.59 for the calendar1 year 1918 resulting in the denial of a claim for the abatement of a jeopardy assessment; $5,000 of the jeopardy assessment unabated by the Commissioner- for the year 1918 is in controversy.
    For the fiscal period January 1 to November 30,1919, the Commissioner determined a deficiency of $12,260.24.
    The issues aro (1) whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor'; (2) whether the Commissioner erred in reducing invested capital in each of the taxable years by the amount of prior year’s income and profits tax prorated from the date of payment, and (3) whether the Commissioner erred in reducing invested capital for each of the taxable periods by a portion of dividends paid in such period and alleged by the Commissioner to be in excess of available earnings at the time of payment.

      FINDINGS OF FACT.
    During the taxable period the petitioner was a New Hampshire corporation with principal office at Manchester. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia,, that the lessee would pay the Federal income tax of the lessor. The income tax of the petitioner for each year was payable and was paid by its lessee in the following year.
    The Commissioner computed a Federal income tax of $13,445.05 upon petitioner’s income for the calendar year 1918 and added this amount to petitioner’s taxable income for the year 1918. The Commissioner also computed a Federal income tax of $8,945.99 upon petitioner’s income, as revised by him, for the period January 1 to November 30, 1919, and added this amount to petitioner’s taxable income for said period.
    The petitioner’s income-tax returns for 1917 and 1918 showed a tax liability of $6,023.93 and $13,445.05, respectively, which amounts were not reduced by the Commissioner and did not include any amount as a tax of the petitioner to be paid by its lessee.
    The Commissioner reduced petitioner’s invested capital for the year-1918 in the amount of $3,850.47, representing the amount of petitioner’s income and profits tax for the year 1917 prorated from the dates due and payable in 1918. The Commissioner also reduced petitioner’s invested capital for the taxable period January 1 to November 30, 1919, in the amount of $7,799.80, representing the amount of petitioner’s income and profits tax for 1918 prorated from the dates due and payable in 1919.
    The Commissioner computed the net earnings of the petitioner available for the payment of- dividends on each particular date of payment during the year 1918 and the period January 1 to November 30, 1919, by reducing the book income for the particular taxable period in the amount of the Federal income tax accrued on the taxable income for such taxable period and treated the income, less such tax, as having been earned ratably throughout such taxable period. Petitioner’s net income was received from rentals semiannually and dividends were paid semiannually out of such rentals after receipt. The rentals in each case were sufficient to pay dividends, that is rentals receivable on May 1 and November 1 of each year, and dividends not in excess thereof were paid on May 2 and November 2, respectively, in each year. Petitioner kept its books and rendered its returns on an accrual basis.
    Petitioner was merged with the Boston & Maine Railroad December 1, 1919.
   OPINION.

Littleton:

The first issue is controlled by the decision of the Board in Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186. On the authority of that decision it is held that the amount of Federal income tax upon petitioner’s income for 1917 and paid by petitioner’s lessee in 1918 constituted additional income to petitioner in the latter year, that the amount of Federal income tax due upon petitioner’s income for 1918 without the inclusion therein of any amount on account of income tax paid in that year by the lessee as the tax upon the income for the year 1917 constituted additional taxable income in 1919.

The second and third issues are governed by the decisions of the Board in L. S. Ayers & Co., 1 B. T. A. 1135, and Best Steel Castings Co., 6 B. T. A. 274. The Commissioner’s action in regard to these issues is therefore reversed.

Reviewed by the Board.

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


text:
    Peterborough Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9099.
    Promulgated October 4, 1927.
    Many years prior to tbe taxable year petitioner leased its railroad and property for a term of years, tbe lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. 8. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax of $136.52 for the calendar year 1919.
    The issue involved is whether the payment, under the terms of a lease, of the lessor’s income tax by its lessee constitutes additional income to the lessor.
    FINDINGS OP PACT.
    During the taxable year 1919 petitioner was a New Hampshire corporation with its principal office at Nashua. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $1,365.17 on the petitioner’s income for 1919, as revised by him, and added the said amount of $1,365.17 to petitioner’s taxable income for the year 1919. The income-tax return of the petitioner for the calendar year 1918 showed a tax liability of $1,627.66, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid by petitioner’s lessee. This tax of $1,627.66 was paid by the petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its returns upon an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including in income the amount of $1,627.66, representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

Reviewed by the Board.

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


text:
    Concord & Montreal Railroad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9109.
    Promulgated October 4, 1927.
    Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. S. Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.

      The Commissioner determined a deficiency in income and profits tax of $58,605.63 for the fiscal period beginning January 1, 1919, and ending November 30, 1919, of which amount $5,400 is in controversy.
    The issue involved is whether the payment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor.
    BINDINGS OB BACT.
    During the taxable period the petitioner was a New Hampshire corporation with principal office at Concord. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $53,277.84 upon petitioner’s income for the period January 1 to November 30, 1919, as revised by him, and added the said amount of $53,277.84 to petitioner’s taxable income for that period.
    The income-tax return of petitioner for the year 1918 showed a tax liability of $69,475.83 computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner’s lessee. This tax of $69,475.83 was paid by petitioner’s lessee during the calendar year 1919. Petitioner kept its books and rendered its returns on an accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which sjich tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including therein the amount of $69,475.83, representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

Reviewed by the Board.

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


text:
    Stony Brook Railroad Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9101.
    Promulgated October 4, 1927.
    Many years prior to tbe taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid.

      J. ¿S. Y. Ivms, Esq., and O. R. Folsom-Jones, Esq., for the petitioner.

      M. N. Fisher, Esq., and P. J. Rose, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the calendar year 1919 in the sum of $192.50. The issue involved is whether the páyment, under the terms of a lease, of the lessor’s income tax by the lessee constitutes additional income to the lessor.
    FINDINGS OP PACT.
    During the taxable year, and for many years prior thereto, the petitioner was a Massachusetts corporation with principal office at Lowell. It was the owner of a railroad which it leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The tax of the lessor for each year was payable and was paid by the lessee in the following year.
    The Commissioner computed a Federal income tax of $1,925.01 on the petitioner’s income for the year 1919, as revised by him, and added the said amount of $1,925.01 to petitioner’s taxable income for the year 1919.
    The income-tax return of the petitioner for the calendar year 1918 showed a tax liability of $2,313.06, computed upon the income of the petitioner for that year without the inclusion therein of any amount on account of the tax paid by petitioner’s lessee. This tax of $2,313.06 was paid by the Boston & Maine Railroad, petitioner’s lessee, during the calendar year 1919. Petitioner kept its books and rendered its return upon the accrual basis.
   OPINION.

Littleton:

In Appeal of Providence & Worcester Railroad Co., 5 B. T. A. 1186, the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner’s tax for 1919 should be recomputed by including in income the amount of $2,313.06 representing the tax upon petitioner’s income for 1918 and paid by the lessee in 1919.

Reviewed by the Board.

Judgment will be entered on IS days’ notice under Bule SO.


author: Littleton :

text:
    Conrad Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11584.
    Promulgated October 4, 1927.
    Assessment and collection of an alleged deficiency for the fiscal year ending August 81, 1920, is barred by tbe statute of limitation.

      Hubert E. Olive, Esq., for the petitioner.

      A. iS. Lisenby, Esq., for the respondent.
    On December 5, 1925, the Commissioner mailed petitioner a notice of his determination of deficiencies of $1,317.46 for the fiscal year ending August 31, 1920, and $43.19 for the fiscal year ending August 81,1921. Petitioner questions the Commissioner’s determination only as to the fiscal year ending August 31, 1920. In the original petition filed within 60 days after the mailing of the deficiency notice, petitioner claimed that the Commissioner erred in his adjustment of its inventory for 1920 and in refusing to allow a loss on automobiles sold within the year. Subsequent to the filing of the original petition, the petitioner filed an amended petition in which it claimed that the assessment and collection of any additional tax for the fiscal year ending August 31, 1920, was barred by the statute of limitation of five years. The proceeding was heard upon the question whether the alleged deficiency for the fiscal year 1920 was barred at the date of the mailing of the deficiency notice.
    findings of fact.
    Petitioner is a North Carolina corporation with principal office and place of business at Lexington, where it is engaged in the sale of hardware and building material at retail. On October 26, 1920, Gr. W. Miller, vice president and D. F. Conrad, secretary and treasurer of petitioner, signed and swore to an income and profits-tax return, Form 1120 A, for the fiscal year beginning September 1, 1919, and ending August 31, 1920, before A. H. Michael, a notary public of Davidson County, N. C. This return was entitled “ Corporation Income and Profits Tax Return for the fiscal period begun September 1, 1919 and ended August 31, 1920, Conrad Hardware Company, Lexington, North Carolina.” The various items and schedules of this return with the exception of items 17 to 25 inclusive, showing the computation of the income tax upon the net income disclosed, were completely filled in. The gross income, deductions, exemptions, net income and invested capital were all stated in detail in the proper schedules. This return showed gross income of $23,188.27, deductions of $17,115.61, and a net income for the fiscal year of $0,072.66. This return also had attached to it certain separate schedules showing assets and liabilities, and an itemized statement of the expenses for the year. Item 31 of Schedule IV, of this return showed the following: “Tax paid by remittance accompanying this return, $150.00.” This return, accompanied by check #264 on The Bank of Lexington, dated Lexington, North Carolina, October 26, 1920, for $150, payable to the order of the Treasury Department and signed Conrad Hardware Company, Inc., by D. F. Conrad, Secretary and Treasurer, was transmitted to the collector of internal revenue at Raleigh, N. C., for filing. This return bears on the first page thereof the printed stamp, “ Received October 27,1920, Internal Revenue Department, Raleigh, North Carolina.” A schedule headed “ Conrad Hardware Company, year ending August 31, 1920,” showing total gross sales and net sales, inventory at beginning and end of the year, cost of goods sold, expenses for the year, and net profit, together with a statement of the assets and liabilities attached to this return, was separately signed and sworn to by G. W. Miller and D. F. Conrad before A. H. Michael, notary public, on October 26, 1920, and bears the stamp of the collector of internal revenue, “ Received, October 30, 1920, Internal Revenue Department, Raleigh, North Carolina.” This return, together with the schedules attached thereto, but not the check for $150, was returned by the collector of internal revenue at Raleigh, to the petitioner. Another return on Form 1120, entitled “ Corporation Income and Profits Tax Return for the fiscal period begun September 1, 1919 and ended August 81, 1920,” showing the same figures as gross income, deductions, net income, and invested capital of the petitioner, was signed and sworn to by G. W. Miller, vice president and D. F. Conrad, secretary and treasurer on December 30, 1920, before W. H. Mendenhall, notary public of Davidson County, N. C. The same schedule and balance sheets which had been attached to the first return transmitted to the collector for filing, were attached to the subsequent return executed December 30, 1920. The last-mentioned return showed the computation of the income tax, stating a total tax of $407.25. This return and the schedules mentioned were forthwith transmitted to the collector of internal revenue for filing and bears the collector’s stamp, “Received, January 3, 1921, Internal Revenue Department, Raleigh, North Carolina.” This is the same stamp which appears upon the first return above mentioned. The second return transmitted by the petitioner also bears this stamp, “ Received payment, January 8,1921, J. W. Bailey, Collector, Fourth District, North Carolina.” With this second return, petitioner remitted to the collector the amount of $257.27, the remainder of the total tax shown to be due. On the face of the second return is written, “ O.K. Filed on time, J. W. Bailey, collector, 1-3-21.” The petitioner’s check for $150, transmitted to the collector with the first return, was endorsed and deposited by the collector on J anuary 8, 1921, and was paid by the bank on which issued on January 11, 1921.
    On December 5, 1925, the Commissioner mailed to petitioner a notice of his determination of a deficiency of $1,317.46 for the fiscal year ending August 31, 1920. Neither of the returns filed by the petitioner were false or fraudulent with intent to evade the tax. The deficiency of which the Commissioner notified the petitioner has not been assessed or paid. No suit or proceeding for the collection of any additional tax for the fiscal year ending August 31, 1920, has been instituted against the petitioner. The petitioner and the Commissioner have not entered into a consent in writing for the assessment or collection of any additional tax for the fiscal year ending August 31 1920, beyond the statutory period of limitation.
   OPINION.

Littleton :

The Board is of the opinion from the evidence of this proceeding that the assessment and collection of the deficiency of $1,317.46 claimed by the Commissioner for the fiscal year ending August 31, 1920, is barred by the statute of limitation of five years. Section 250, Revenue Act of 1918. Petitioner, on October 26, 1920, prepared an income and profits-tax return, showing specifically the items of its gross income, deductions, net income and invested capital, and this return was duly signed and sworn to by the proper officers of the petitioner and was transmitted to the collector of internal revenue at Raleigh, N. C., for filing, together with petitioner’s check for $150, more than one-fourth of the tax due upon the net income of of $6,072.66, shown. This return, together with proper schedules, was received by the collector October 27, 1920. The Commissioner insists that because the return executed October 26, 1920, and transmitted to the collector for filing and received and stamped by the collector, was not retained by him, it was not filed ” and did not operate to start the running of the statute of limitation within which assessment and collection of any tax for the fiscal year ending August 31, 1920, might be made. He says that this return was not received by him and that he can not be charged with knowledge that it was received by the collector; that he could not examine the return as required by section 250 of the Revenue Act of 1918 because it was never in his custody. The statute, section 239 of the Revenue Act of 1918, provides “ that every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title * * This the petitioner did when it transmitted to the collector the income and profits-tax return executed October 26, 1920, which return was received by the collector on October 27, 1920. Subsections (a) and (b) of section 227 of the Revenue Act of 1918 provide “ that returns shall be made on or before the fifteenth day of the third month following the close of the fiscal year * * *. Returns shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or, if he has no legal residence or principal place of business in the United States, then to the collector at Baltimore, Maryland.” The petitioner complied with this section.. It made a return to the collector of internal revenue for the Fourth District of North Carolina. Section 250(b) of the Revenue Act of 1918 provides that “as soon as practicable after the return is filed, the Commissioner shall examine it.” It was not this petitioner’s fault that the Commissioner did not have an opportunity to examine the return first filed. The petitioner had made a return to the collector and if the collector failed to transmit said return to the Commissioner, that was no fault of the petitioner. The fact that the collector did not retain the return in his files after it had been mailed to and received by him, but instead returned it to the petitioner, can not defeat the rights of the petitioner under the statutes. The petitioner certainly could not be held liable to a penalty for failure to make a return under the statute and if the return which was signed and sworn on October 26, 1920, and transmitted to the collector for filing and received by him in due course had been willfully false and fraudulent with intent to evade the tax and that fact were proved, the petitioner would be liable for the penalty provided in the statute. The petitioner was under no obligation to undertake to induce the collector to retain in his files the return which it had made to him. The collector should not have sent the return back to the petitioner. All that remained to be done upon the return which the petitioner filed was to compute the tax at the rates provided by the Revenue Act of 1918, upon the net income shown in the return. While there is no direct evidence on this point, it would appear probable that the reason the collector sent the first return back to the petitioner was because it had been made on a form which contained in “ Schedule Y — Computation of taxes ” rates to be used in determining the amount of tax for a fiscal year beginning in 1918 and ending in 1919, and that evidently accounts for the fact that petitioner did not make a computation of the tax upon this return. The running of the statute of limitation, however, does not depend upon whether the taxpayer computed the tax upon the income shown on the return made to the collector. The fact that the return is inaccurate or that it is filed on a calendar year instead of a fiscal year basis does not postpone the date on which the statute of limitation begins to run. See Afpeal of Mabel Elevator Co., 2 B. T. A. 517; United States v. Mabel Elevator Co., 17 Fed. (2d) 109. Presumably the collector when he returned the income and profits-tax return to the petitioner, sent it a return, Form 1120, which he desired the petitioner to execute. Just why the first return was sent back by the collector and what occurred in respect of the making of the new return is not disclosed by the evidence, since D. H. Conrad who handled this matter for the petitioner is now deceased. At any rate, the petitioner executed another income and profits-tax return, Form 1120, showing the same gross income, deductions and credits, net income and invested capital as had been shown in the first return made to the collector and attached to this return the same schedules and balance sheets which had been attached to the first return. Petitioner also computed the tax upon this net income in this return and transmitted to the collector $257.27, the balance of its tax for the taxable year. In the opinion of the Board, the first return executed on October 26, 1920, and transmitted to and received by the collector of internal revenue at Raleigh, N. C., on October 27, 1920, was a return under the statute and operated to start the running of the statute of limitation for five years. Since the date on which the Commissioner mailed the petitioner the notice of his determination was more than five years after the filing of this return, the assessment and collection of any additional tax for the fiscal year ending August 31, 1920, is barred.

Reviewed by the Board.

Judgment of no deficiency will be entered accordingly.